On May 29, 2020, the Office of the Comptroller of the Currency (OCC) issued its final rule affirming the “valid when made” doctrine for national banks and federal savings associations. Adopted as proposed, the final rule amends 12 C.F.R. § 7.4001 and 12 C.F.R. § 160.110 by adding a new paragraph to each, providing that interest on a loan that is permissible under 12 U.S.C. § 85 and 12 U.S.C. § 1463(g)(1), respectively, “shall not be affected by the sale, assignment, or other transfer of the loan.” The regulations will become effective on August 3, 2020.
In a statement releasing the final rule, acting Comptroller of the Currency Brian P. Brooks explained that the Second Circuit’s decision in Madden v. Midland Funding, LLC, 786 F.3d 246 (2d Cir. 2015), “creat[ed] legal uncertainty regarding the centuries old doctrine of valid when made.” Mr. Brooks further stated that the final “rule supports the orderly function of markets and promotes the availability of credit by answering the legal uncertainty created by the ‘Madden’ decision.”
What happened
The OCC considered and rejected several arguments raised by opponents of the proposed rule during the public comment period. First, the OCC denied that it lacks authority to issue the rule. The OCC explained that it has ample authority to interpret the National Bank Act, which permits national banks to make and sell loans. OCC interpretation was necessary due to the legal uncertainty caused by the Madden decision. The OCC also stated that Madden’s holding did not rely on or limit the scope of Section 85 and therefore did foreclose the rulemaking.
Second, the OCC dismissed comments that it failed to comply with the procedural requirements of the Dodd-Frank Act regarding pre-emption. The OCC explained that 12 U.S.C. § 25b is inapplicable for two reasons: (1) Section 25b only applies to pre-emption determinations, but the rulemaking interprets Section 85 and is not a pre-emption determination, and (2) the rulemaking also is outside of the scope of Section 25b, according to the OCC, because it expressly provides that it does not alter the authority conferred by Section 85.
Third, the OCC disposed of arguments the rulemaking was arbitrary or capricious. In response to arguments that the OCC did not provide evidence of the problem, the OCC explained that the problem that it sought to address was the legal uncertainty resulting from the Madden decision, as evidenced by the ongoing cases challenging the interest charges and comments from industry representatives. The OCC also disagreed with comments that the rule is arbitrary and capricious because it allegedly fails to consider the rule’s negative consequences, including the facilitation of predatory lending. The OCC explained that appropriate third-party relationships play an important role in the operations of banks and the economy and highlighted its guidance on managing the risks associated with those relationships. The OCC also explained that any disparity in applicable interest caps stems primarily from differences in state law which the rule does not change.
Additionally, many commenters requested guidance on the “true lender” theory, which has been used to attack bank partnership models by arguing that the nonbank partner, as opposed to the bank originating the loan, is the “true lender.” In response, the OCC stated that the true lender issue is outside the scope of the narrowly tailored rulemaking. However, Mr. Brooks has separately stated that the OCC “will work to clarify what true lender means.”
Why it matters
The final rule should have some immediate positive impact on credit availability, particularly in the Second Circuit, since it undermines the Madden decision. However, it is clear that the rule will be challenged by certain consumer groups, state attorneys general and state regulators, who previewed their litigation strategy in their comments on the proposed rule. Additionally, since the final rule does not directly address the true lender issue, such attacks on bank partnership models are not completely foreclosed.
Still, the promulgation of an unambiguous position on “valid when made” by the OCC after the Madden decision bolsters the bank partnership model and the securitization and debt collection industries. Investors and lenders to the marketplace lending industry will surely take comfort in the final rule, as the plaintiffs’ bar and state regulators now will face an uphill battle in challenging the “valid when made” doctrine.