FDIC Votes to Codify ‘Valid-When-Made’ Principle

Following action by the OCC yesterday, the FDIC proposed a rule stipulating that interest rates valid when the loan is made by a bank remain valid when the loan is transferred or sold. This action by the agencies is intended to ensure that “valid when made” is codified for both national and state-chartered banks. Under the proposal, federal regulations would provide that interest on permissible loans would “not be affected by subsequent events, such as a change in state law, a change in the relevant commercial paper rate, or the sale, assignment, or other transfer of the loan.” Comments on the proposal are due 60 days after it is published in the Federal Register.

The so-called “Madden fix”—which the American Bankers Association has long urged—addresses a Second Circuit Court of Appeals ruling in Madden v. Midland Funding, which held that a nonbank buyer of a loan issued by a national bank could not export the originated interest rate because it violated state law where the borrower lived. The Supreme Court declined to take up an appeal of Madden, resulting in conflicting precedent around the country and increasing the urgency of regulatory or legislative action.