FDIC Follows OCC’s Lead, Enacts ‘Valid When Made’ Rule

Following the lead of its fellow regulator, the Federal Deposit Insurance Corporation yesterday announced a rule that ensures the terms of loans remain valid after they are sold or transferred, a provision that is critical to sales of loan portfolios in the secondary market.

The rule, which follows what the Office of the Comptroller of the Currency did earlier this month, codifies what is known as the “valid when made” doctrine, which dates back more than 200 years and states that the terms of a loan, if valid when the loan is originated, continues to be valid when that loan is transferred or sold to someone else.

The doctrine was called into question following an Appeals Court ruling in 2015 in the case of Madden v. Midland Funding. 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 lawmakers had called on regulators to issue a rule codifying the “valid when made” doctrine, because there was evidence that lending volume within the region affected by the Madden decision had slowed because banks were unwilling to originate loans if they were not going to be able to sell them in the future.

“In codifying the longstanding FDIC guidance, the final rule addresses marketplace uncertainty regarding the enforceability of the interest rate terms of a loan agreement following a bank’s assignment of a loan to a non-bank,” the FDIC said in a release announcing the enactment of the rule. “It also promotes safety and soundness in the banking system by giving certainty around loans into the secondary market.”

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