January 26, 2021

Volume XI, Number 26

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January 25, 2021

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OCC Promulgates Final Rule on “Valid When Made”

On June 2, the Office of the Comptroller of the Currency (OCC) promulgated its final rule confirming the longstanding banking principle that a loan that is valid when made is enforceable by any subsequent assignee (the Final Rule). The Final Rule applies to national banks and federal savings banks.

The Final Rule concludes that “when a national bank or savings association sells, assigns, or otherwise transfers a loan, interest permissible before the transfer continues to be permissible after the transfer.” The Final Rule notes that the confirmation of this banking principle was necessary in light of the uncertainty created by the Second Circuit in 2015 with the issuance of its decision in Madden v. Midland Funding (786 F.3d 286, 2nd Cir. 2015), which held that a “purchaser of a loan originated by a national bank could not charge interest at the rate permissible for the bank if that rate would be impermissible under the lower usury cap applicable to the purchaser.”

The OCC stated that the promulgation of the Final Rule at this time was necessary to ensure that banks’ ability to serve consumers and businesses would not be hampered at a time “when access to credit is especially critical.”  Additionally, the OCC found that the Final Rule promotes safety and soundness considerations, finding that the legal uncertainty created by the Madden decision impairs many national banks’ ability to rely on loan transfers as a funding source.

The Final Rule becomes effective on August 3. As of the date of this article, the Federal Deposit Insurance Corporation (the FDIC) has not published a final rule addressing this issue with respect to state chartered banks (the FDIC’s proposed rulemaking on this issue was published on November 19, 2019).

More information is available here.

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©2020 Katten Muchin Rosenman LLPNational Law Review, Volume X, Number 164
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About this Author

Christina J. Grigorian, Banking legal Specialist, Katten Muchin Law firm
Special Counsel

Christina J. Grigorian counsels clients in all matters related to banks, bank holding companies, and state and foreign-licensed consumer and commercial lenders. Ms. Grigorian provides advice to the firm’s financial institution clients concerning structural and operational issues, including legislative developments impacting such operations, and has worked with companies and individuals in the establishment of de novo entities, including national banks, federal savings banks and state-chartered institutions, as well as state-licensed lenders. She has also counseled clients with respect to...

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