Locke Lord QuickStudy: OCC Issues Final Rule Clarifying the “Valid When Made” Doctrine

On June 2, 2020, the Office of the Comptroller of the Currency (the “OCC”) published its final ‎rule (the “Rule”), clarifying that an assignee of a national bank has the right to collect interest at the ‎same rate as the national bank on loans made by the national bank.‎¹ The Rule, which codifies the ‎common law doctrine of “valid when made,” will be effective August 1, 2020.‎

Background

The National Bank Act (the “NBA”) provides national banks with various powers, including the ‎power to lend money, transfer loans, and enter into contracts.‎²‎ In the release announcing the  Rule, ‎the OCC has determined that implied in the power of a national bank to enter into contracts is the ‎right to assign part or all of the benefits of a contract to a third party. The NBA also authorizes the ‎bank to charge interest at the highest rate permitted by the state in which the bank is located.‎³‎ Thus, ‎a national bank possesses the authority to enter into a loan contract with an interest rate consistent ‎with the laws of the state in which it is located, and to assign that loan contract at any time ‎thereafter. The NBA is silent, however, as to the effect of the assignment on the permitted interest ‎rate.‎

The Final Rule

The Rule fills the gap by providing that the interest rate is unaffected by the assignment of the loan ‎contract. In doing so, the Rule follows the “valid when made doctrine,” which holds that a loan that ‎was valid when made will not be rendered usurious by a subsequent transfer.  In addition to ‎national banks, the Rule applies to federal savings associations.⁴

The Rule is intended to address the legal uncertainty created by the Second Circuit’s decision is ‎Madden v. Midland Funding, LLC.‎^5‎ In Madden, the plaintiff argued that a debt collector violated ‎New York usury law by charging and then attempting to collect interest at a rate higher than ‎permitted under New York law.⁶‎ The debt collector had purchased the plaintiff’s debt from a ‎national bank located in Delaware, which allows a creditor to charge a higher interest rate than does ‎New York.‎^{7 ‎} In reversing the District Court’s dismissal of the case, the Second Circuit held that the ‎debt collector could not rely on the protections afforded by the NBA because it was neither a ‎national bank nor an agent of a national bank.‎⁸ ‎ During the comment period on what would become ‎the Rule, numerous commenters criticized Madden, arguing that it resulted in negative effects on ‎the primary and secondary markets for bank loans. In promulgating the Rule, the OCC responded ‎to this argument, stating that the Rule will help banks to manage their liquidity, thereby promoting ‎safe and sound banking practices in the market.‎

Still, some commenters questioned whether the OCC possessed the legal authority to issue the Rule. ‎In doing so, they echoed recent U.S. Supreme Court rulings that call into question the level of ‎deference federal courts should give to regulatory interpretations.⁹‎ ‎ Considering the vigorous ‎litigation regarding this issue of agency deference, it is possible that an aggrieved debtor will ‎challenge the Rule, contending that it exceeds the OCC’s authority. Anticipating such an attack, the ‎release includes a detailed discussion of the OCC’s legal justification for its authority, together with ‎the basis for its determination that the Rule reasonably interprets the NBA.‎

Unresolved Questions

While the Rule provides needed clarification for participants in the loan markets, it does leave ‎unanswered questions. Because it applies only to national banks and federal savings associations, ‎the Rule does not cover other federally insured banks. The Federal Deposit Insurance Corporation ‎‎(the “FDIC”) is considering a similar rule, which if adopted in substantially the same form, would ‎apply the “valid when made” doctrine to assignees of state-chartered banks insured by the FDIC. ‎The FDIC first announced its proposed rule on November 19, 2019, but has not yet acted on it. ‎Consequently, assignees of state-chartered banks insured by the FDIC do not yet have the benefit ‎of a specific federal regulation confirming the “valid when made” doctrine.‎

The Rule also does not address whether a national bank should be considered the “true lender” in a ‎transaction where the loan is assigned to the assignee soon after it is made pursuant to an agreement ‎between the national bank and the assignee. Commenters requested that the Rule create that ‎additional safe harbor, but the OCC declined to act on the request. Therefore, we may reasonably ‎expect “true lender” attacks on specific types of loan transactions to continue.‎

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_{1 Permissible Interest on Loans That Are Sold, Assigned, or Otherwise Transferred, 85 Fed. Reg. 33,530 (Jun. 2, ‎‎2020).‎
2 12 U.S.C. 24 (Seventh) and 371.‎
3 12 U.S.C. 85.‎
4 12 C.F.R. 7.4001 (national banks); 12 C.F.R. 160.110 (savings associations).‎
5 Madden v. Midland Funding, LLC, 786 F.3d 246 (2d Cir. 2015).‎
6 Id. at 248.‎
7 Id. at 250.‎
8 Id. at 249.‎
9 See Smith v. Berryhill, 139 S. Ct. 1765 (2019) (refusing to defer to an agency’s interpretation of the relevant ‎statute); cf. Kisor v. Wilkie, 139 S. Ct. 2400 (2019) (significantly reducing the amount of deference given to an ‎agency’s interpretation of its own regulations).‎}