On May 29, 2020, the Office of the Comptroller of the Currency (the “OCC”) issued a final rule to clarify that the interest on a loan originated by a national bank (or a Federal savings association), if permissible when the loan was originated, continues to be permissible after the loan is sold, assigned, or otherwise transferred to a third party. The OCC’s regulation interprets section 85 of the National Bank Act, which prescribes the interest that a national bank may charge a loan, to incorporate the common law “valid-when-made” doctrine.

Section 85 of the National Bank Act, 12 U.S.C. § 85, provides that a national bank may charge interest on a loan in accordance with the law of the state where the national bank is located. National banks frequently sell the loans they originate and, until recently, third party purchasers expected that they could continue to charge the same interest that the national bank had charged so long as the interest was permissible at the time of origination. In 2015, the Second Circuit decided Madden v. Midland Funding LLC (“Madden”), which held that non-national bank entities that purchase loans from national banks are subject to the usury laws of states other than the state where the originating bank is located. In other words, the interest that was permissible for a national bank to charge was not permissible for the third party purchaser to charge. The Madden decision challenged the viability of national bank business strategies that include selling loans into securitization structures or as part of partnership arrangements with third parties, including fintech companies.

The OCC issued the final rule to address the legal uncertainty generated by the Madden decision. Exercising its authority to construe the provisions of the National Bank Act, the OCC interprets section 85 to incorporate the valid-when-made principle. The final rule provides that interest on a loan that is permissible under 12 U.S.C. § 85 “shall not be affected by the sale, assignment, or other transfer of the loan.” An identical provision applies to Federal savings associations, which are subject to an interest rate statute that mirrors section 85. The final rule will become effective 60 days after its publication in the federal register.

In the preamble to the final rule, the OCC stated that “[b]ased on its supervisory experience, the OCC believes that unresolved legal uncertainty about this issue may disrupt banks’ ability to serve consumers, businesses, and the broader economy efficiently and effectively, particularly in times of economic stress. The OCC also believes that enhanced legal certainty may facilitate responsible lending by banks, including in circumstances when access to credit is especially critical.” The OCC further noted empirical studies provided by two commenters to the OCC’s proposed rule, which was released in November 2019. According to the OCC, the studies analyzed “the effects of [Madden], including evidence that Madden restricted access to credit for higher-risk borrowers in states within the Second Circuit and that it caused a rise in personal bankruptcies due to a decline in marketplace lending, especially for low-income households.”

The OCC’s support for its final rule includes a discussion of the key points that commenters opposed to the rule had raised. Among other points, the OCC explains that:

  • The final rule promotes the safe and sound operation of national banks because it enables national banks to access alternative funding sources, manage concentrations, improve financial performance ratios, and efficiently meet customer needs.
  • It is appropriate to use the longstanding common law valid-when-made principle to inform the OCC’s interpretation of section 85 because the principle is part of the legal background against which Congress legislated when it enacted section 85.
  • In this rulemaking, the OCC is not bound by procedural requirements for preemption determination enacted as part of the Dodd-Frank Act because the rulemaking is not a preemption determination but, rather, an interpretation of the scope and meaning of the text of section 85.
  • The OCC’s new regulation can apply to transactions in the Second Circuit notwithstanding the Madden decision because, under the Supreme Court’s holding in National Cable & Telecommunications Ass’n v. Brand X Internet Services, agencies are not bound by lower courts’ interpretation of statutes they administer unless the lower court decision is based on a conclusion that a given statute is unambiguous. Madden did not conclude that section 85 was unambiguous.