OCC Proposes to Codify ‘Valid-When-Made’ Principle

Providing a long-awaited regulatory solution to court rulings challenging the principle, the OCC today proposed that interest rates valid when the loan is made by a national bank or federal thrift remain valid when the loan is transferred or sold. The FDIC is expected to propose a similar rule at its board meeting tomorrow, ensuring 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 “shall not be affected by the sale, assignment, or other transfer of the loan.” The agency added that the rule “would expressly codify what the OCC and the banking industry have always believed and address recent confusion about the impact of an assignment on the permissible interest.” Comments on the proposal are due 60 days after it is published in the Federal Register.

The so-called “Madden fix”—which ABA 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.