Locke Lord QuickStudy: FDIC Follows OCC and Clarifies “Valid When Made” Doctrine

On June 25, 2020, the Federal Deposit Insurance Corporation (the “FDIC”) issued its final rule (the “FDIC Rule”) clarifying that an assignee of a state-chartered bank or insured branch of a foreign bank (a “state bank”) has the right to collect interest at the same rate as the state bank on loans made by such bank. In doing so, the FDIC followed the action of the Office of the Comptroller of the Currency (the “OCC”), which published a rule providing for a substantially similar safe harbor for national banks (the “OCC Rule”) on June 2, 2020. Our analysis of the OCC Rule is available here. The FDIC Rule, which codifies the common law doctrine of “valid when made,” will be effective thirty days from publication in the Federal Register.

Background

The Federal Deposit Insurance Act (the “FDIA”) provides state banks with the right to make loans charging interest at the maximum rate permitted by the state where the bank is located, or at one percent in excess of the ninety-day commercial paper rate, whichever is greater.¹ Although the right to assign loans is implicit in the right to make loans, the FDIA does not address the effect of an assignment by a state bank on the permitted interest rate. In this respect, the FDIA suffers from the same statutory gap as the National Bank Act, which is silent as to the effect of an assignment by a national bank on the permitted interest rate. The Second Circuit’s decision in Madden v. Midland Funding, LLC, which held that a debt collector assignee of a national bank could not charge the higher interest rate charged by the bank, heightened the concern over the silence in both statutes.²

The FDIC Rule

Just as the OCC Rule does for national banks, the FDIC Rule fills the gap for state banks by providing that the assignment of the loan does not affect the interest rate. The FDIC Rule addresses with specificity which state rules apply to a loan made by a state bank through a branch outside its home state, the classes of loans covered by the regulation and the effect of state law definitions of interest, adopting guidance similar to that provided by OCC regulations in effect before the adoption of the OCC Rule.³ The FDIC Rule confirms that whether the terms of the loan are enforceable is determined as of the time the loan is made, and is not affected by a subsequent sale, assignment or transfer of the loan. In the release supporting the adoption of the FDIC Rule, the FDIC alludes to the OCC Rule, reasoning that the FDIC Rule is necessary to promote parity between national banks and state banks with respect to interest rate authority. The FDIC also echoes the OCC’s argument that adopting the “valid when made” doctrine bolsters the liquidity of the loan market, thereby increasing the lending capacity of state banks and expanding access to credit for higher-risk borrowers.

The Unresolved “True Lender” Problem

Similar to the OCC Rule, the FDIC Rule does not address whether a state 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 state bank and the assignee. Commenters requested that the FDIC Rule embrace this additional safe harbor, but the FDIC did not act on the request. Consequently, we can expect “true lender” attacks on specific types of loan transactions to continue.

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_{1 12 U.S.C. 1831d.‎
2 Madden v. Midland Funding, LLC, 786 F.3d 246 (2d Cir. 2015).‎
3 12 C.F.R. §7.4001‎.}