Regulator Issues Proposed Rule to Address Madden Fix, Codify ‘Valid When Made’

The Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation — federal regulators that oversee national banks and savings & loans — are issuing a proposed rule that would clarify the “valid when made” doctrine which would ensure the terms of loans would remain valid after they are sold or transferred.

The proposed rule would seek to address the Appeals Court ruling in the case of Madden v. Midland Funding.

In February 2018, the Court of Appeals for the Second Circuit ruled that a debt buyer was not privy to the same pre-emption from state usury laws as a financial institution that originated the loan. In this case, Midland attempted to continue to charge the same interest rate on a credit card that was originally originated by Bank of America. The interest rate on the loan exceeded the amount allowed by New York state law, but BofA was pre-empted from following that law under the National Bank Act. Midland appealed the ruling to the Supreme Court, which declined to hear arguments in the case.

The ruling has led to a decline in credit availability in states that fall within the Second Circuit, including Connecticut, New York, and Vermont, according to the 26 Republican members of the House Financial Services Committee, which sent the OCC a letter earlier this year urging it to rectify the issue.

“Through this rulemaking, the OCC seeks to end this uncertainty by clarifying that when a bank assigns a loan, interest permissible prior to the assignment will continue to be permissible following the assignment,” the OCC wrote in the proposed rule.

Comments on the proposed rule will be accepted for 60 days once the notice is published in the Federal Register.

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