Trade Groups Applaud Bipartisan Action to Codify ‘Valid-When-Made’ Doctrine

The American Bankers Association and 10 other banking, business and online lending trade associations today wrote to members of the House and Senate commending lawmakers’ efforts to codify “valid-when-made” doctrine, which states that legally made bank loans may be resold and collected by nonbank entities at the same interest rate.

The Protecting Consumers’ Access to Credit Act of 2017 — which  was introduced in the Senate by Sens. Mark Warner (D-Va.) and Pat Toomey (R-Pa.) and in the House by Reps. Patrick McHenry (R-N.C) and Gregory Meeks (D-N.Y.) — would reaffirm this longstanding legal principle, which was thrown into question following the 2015 case of Madden v. Midland Funding. In that case, the Second Circuit court of Appeals ruled that exporting the originated interest rate violated state usury law in the state where the borrower lived, because the loan buyer was neither a bank nor acting on behalf of the bank.

The groups pointed out that the Madden decision “has injected uncertainty into the secondary markets for consumer and commercial credit, resulting in increased costs and decreased competition,” and cited data from a recent study that showed its negative effect on credit availability for certain borrowers. The groups added that reaffirming the “valid-when-made” doctrine could help to encourage innovative partnerships between banks and fintech companies that purchase bank loans or loan securitizations.