OCC, FDIC Propose Madden Fix Regulations

Financial Services Law

In a welcome development for fintechs, lenders and investors, the Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC) separately have proposed regulations to address the substantial uncertainty created by the Second Circuit’s decision in Madden v. Midland Funding, 786 F.3d 246 (2d Cir. 2015). Comments on the OCC’s proposed regulation are due by January 21, 2020, and comments on the FDIC’s proposed regulation are due 60 days after publication in the Federal Register.

In Madden, the Second Circuit held that a nonbank purchaser of loans made by a national bank may not charge the same rate of interest the bank may charge pursuant to Section 85 of the National Bank Act, at least with respect to closed-end loans (loans where a fixed amount is borrowed and repaid over a specified period). The decision has had a significant negative impact on credit availability in the Second Circuit, and created uncertainty in secondary markets for loans as well as with respect to bank-model lending wherein nonbanks market and service loans made by bank originators.

The OCC’s and FDIC’s proposed rules would codify the “valid when made” rule in which an assignee of a bank loan may charge interest at the rate the bank was permitted to charge at the time the loan was originated. However, neither proposed rule would directly address the so-called “true lender” theory, under which the fact that the bank originated the loan is disregarded as a legal fiction. In a statement accompanying the proposed FDIC rule, FDIC Chairman Jelena McWilliams went further and stated that “the FDIC views unfavorably entities that partner with a State bank with the sole goal of evading a lower interest rate established under the law of the entity’s licensing state.” The OCC made a similar statement in a May 23, 2018, bulletin on short-term, small-dollar installment lending.

State regulators and consumer advocates are likely to challenge these rules in court if they become final. Among other things, we expect them to argue that the agencies lack authority to issue such regulations. However, such arguments are contrary to the broad authority of the agencies to address safety and soundness issues, including under Sections 24 (Seventh) and 85 of the National Bank Act and Section 39 of the Federal Deposit Insurance Act. We commend the FDIC for its detailed discussion of how Madden undermines safety and soundness by creating regulatory uncertainty and impairing banks’ ability to maintain adequate capital and liquidity levels by selling loans.

Why It Matters

The proposed OCC and FDIC rules hold the promise of ending the uncertainty created by the Madden decision. We encourage our clients to comment favorably on the regulations, and we stand ready to assist as needed.