The Office of the Comptroller of the Currency — which regulates national banks — on Friday issued a final rule that clarifies a key component of the debt buying transaction, a concept known as the “valid when made” doctrine, which ensures the terms of loans remain valid after they are sold or transferred.
A copy of the final rule, which goes into effect 60 days after it is published in the Federal Register, can be accessed by clicking here.
The rule became necessary after the Second Circuit Court of Appeals in Madden v. Midland Funding 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 the 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.
A number of individuals and organizations called on the OCC to address the issue, which it did by issuing its rule on Friday. Under the rule, entities which purchase contracts and assets from a national bank may continue to charge the same interest rate, even if the purchaser is not a national bank. The expectation is that the release of the rule will undo a decline in credit availability, especially in the states within the Second Circuit.
“One of President Lincoln’s goals in creating a system of national banks 157 years ago was to enable interstate commerce by ensuring the efficient and consistent exchange of value,” said Brian Brooks, the acting Comptroller of the Currency, in a statement. “The decision the U.S. Court of Appeals for the Second Circuit in Madden v. Midland Funding, LLC., undermined that legacy by creating legal uncertainty regarding the centuries old doctrine of valid when made.
“Today, as one of my first acts as Acting Comptroller of the Currency, I signed a final rule to protect Lincoln’s vision and to clarify that a bank may transfer a loan without affecting the legally permissible interest term. The rule supports the orderly function of markets and promotes the availability of credit by answering the legal uncertainty created by the ‘Madden’ decision. Such certainty allows secondary markets to work efficiently and to serve their essential role in the business of banking and helping banks access liquidity and alternative funding, improve financial performance ratios, and meet customer needs.”