July 13, 2020

By: Michael W. Ross, Williams S.C. Goldstein, Amy Egerton-Wiley and Maria E. LaBella

LoanLast month, the Office of the Comptroller of the Currency’s (OCC) adopted a final rule clarifying that the terms of a national bank’s loans remain valid even after such loans are sold or transferred.  The rule was intended to reject the Second Circuit’s decision in Madden v. Midland Funding 786 F.3d 246 (2015).  The Federal Deposit Insurance Corporation (“FDIC”) followed suit later in the month, adopting a rule to clarify that interest rates on state bank-originated loans are not affected when the bank assigns the loan to a nonbank.  These steps do not resolve all of the uncertainty surrounding the decision, as discussed further below.

  1. The Madden v. Midland Funding

In Madden v. Midland Funding, Saliha Madden, a New York resident, contracted with Bank of America for a credit card with a 27% interest rate.  That rate exceeded the 25% usury cap under New York law.  But, as a national bank, Bank of America believed that it was entitled to “export” the interest rate of Delaware, its place of incorporation, under the National Bank Act and attendant principles of federal preemption.  By the time Madden defaulted, the balance had been acquired by Midland Funding, a debt collector headquartered in California.  When Midland Funding tried to collect the debt at the 27% interest rate, Madden sued under New York usury laws.  She argued that Midland could not take advantage of Bank of America’s interest-rate exportation.

The Second Circuit ruled in favor of Madden, holding that the National Bank Act’s preemption of state usury law did not apply to Midland because it is not a national bank.  The decision generated considerable uncertainty in the lending market, which had operated under the assumption that the applicability of the National Bank Act’s preemption of state usury law turned on the identity of the loan originator.  This assumption was rooted in the century-old common law doctrine that a loan which is “valid when made” cannot become usurious by virtue of a subsequent transaction.

  1. The OCC Rule Rejecting Madden.

On June 2, the OCC adopted a final rule rejecting the Madden decision.  See Permissible Interest on Loans That Are Sold, Assigned, or Otherwise Transferred, 85 Fed. Reg. 33,530 (June 2, 2020) (to be codified at 12 C.F.R. pts. 7 & 160).  The rule, which fully adopted the OCC’s November 2019 proposed rule, states that interest rates on a loan issued by a national bank are not affected when the bank assigns the loan to a third party.  In its analysis, the OCC cites “valid when made” principles but notes that it does not do so “as independent authority for this rulemaking but rather as tenets of common law that inform its reasonable interpretation of section 85 [of the National Bank Act.]”  

The OCC rule unmistakably rejects Madden’s holding that a bank’s transfer of a loan can affect the validity of the loan’s interest rate, and reaffirms the “valid when made” doctrine that the Madden court failed to address.

  1. Opposition to the OCC’s Rule.

Commentators raised three main objections to the OCC’s rule.  First, some commentators questioned the OCC’s authority to issue the rule.  The OCC took the position that the Chevron doctrine allows it to interpret the National Bank Act’s silence on the effect of a national bank assigning loans to a third party.  Second, others argued that the rule could promote predatory lending. The OCC rejected this argument as well, affirming its “strong” opposition to predatory lending practices, and pointing to earlier OCC guidance on managing third-party relationships. Third, some argued that the rulemaking did not comply with Administrative Procedure Act requirements.  The OCC disagreed.

Notable among the rule’s opponents were 22 State Attorneys General, who lamented that the rule would “expand the availability of exploitative loans that trap borrowers in a never-ending cycle of debt.” Others voiced support for the rule, applauding the certainty it provides for banks and other loan market participants.

  1. Ambiguities Moving Forward.

The rule does not resolve all of the confusion surrounding Madden. Most notably, it expressly does not address the separate issue of how to determine when a bank is the “true lender” of a loan.  Specifically, in determining whether state usury or consumer protection laws apply to lending decisions involving nonbank entities, some courts have asked whether a bank or a nonbank lender has the “predominant economic interest” in a loan.  If the nonbank has the predominant economic interest in the loan, courts applying this doctrine will treat the nonbank as the “true lender,” even if the loan technically originated on the bank’s balance sheet.  In its notice of proposed rulemaking back in November 2019, the OCC noted simply that “[t]he true lender issue . . . is outside the scope of this rulemaking.”

Additionally, the scope and effect of the OCC’s rule remain uncertain.  As noted, some objectors stated that it did not comply with the Administrative Procedure Act, which could be the subject of future challenges.  And future litigation may be required to resolve the inconsistency between the rule and Madden.[1]  Specifically, courts may be asked to decide whether the OCC is entitled to deference in its interpretation of the National Bank Act, particularly given the Second Circuit’s Madden decision.

  1. An Analogous Move by the FDIC

On June 25, the FDIC took a similar step to clarify that interest rates on state bank-originated loans are not affected when the bank assigns the loan to a nonbank.  It finalized a rule identical to the OCC’s for loans originated and sold by state banks (rather than national ones).  As a result, the “valid when made” doctrine is now codified—at least as an administrative matter—for all state and federally chartered depository institutions.  Whether there will be challenges to these rules remains to be seen.


[1] A Colorado court, for example, recently discounted the OCC’s proposed rule, instead expressly adopting Madden’s analysis. See Fulford v. Marlette Funding, LLC, No. 2017-cv-0376 (Colo. Dist. Ct. June 9, 2020).  However, it is unclear whether the court realized the OCC rule had become final, as it wrote that “the rule proposals are not yet law and the Court is not obligated to follow those proposals.” Id.