Legislation Would Legalize ‘Valid When Made’ Rule

Financial Services Law

A new bill introduced by Sen. Mark Warner (D-Va.) would overrule the U.S. Court of Appeals, Second Circuit, decision in Madden v. Midland Funding and legalize the “valid when made” rule.

What happened

The legislation can be traced back to a May 2016 decision by a three-judge panel of the Second Circuit, which refused to find that the National Bank Act (NBA) pre-empted state law usury claims against an assignee of a national bank.

New York resident Saliha Madden originally opened a credit card account with a national bank, Bank of America. In 2006, the credit card program was consolidated into another national bank that later sold Madden’s $5,000 debt on the account to Midland Funding LLC, a debt purchaser. Affiliate Midland Credit Management handled collection efforts and sent Madden a letter in November 2010 seeking to collect payment on her debt and stating that an interest rate of 27 percent per year applied.

Madden filed a putative class action suit alleging that Midland Funding had engaged in abusive and unfair debt collection practices in violation of the Fair Debt Collection Practices Act and charged a usurious rate of interest in violation of New York state law, which caps rates at 25 percent.

The defendants responded with a motion for summary judgment, arguing that because they were an assignee of a national bank, the plaintiff’s claims against them were pre-empted by the NBA, which permits a bank to charge interest at the rate of the state where it is located and provides the exclusive cause of action for usury claims against national banks. Delaware—where Bank of America is incorporated—allows banks to charge interest above 25 percent, so the defendants’ rate was legal, they told the court.

A district court judge agreed that the NBA pre-empted any state law usury claims, but the Second Circuit reversed. Madden filed a writ of certiorari with the Supreme Court, but the justices declined to take the case.

Legislators have stepped in to overturn the troubling decision. Sen. Warner’s measure would add the following language to Section 85 of the NBA: “A loan that is valid when made as to its maximum rate of interest in accordance with this section shall remain valid with respect to such rate regardless of whether the loan is subsequently sold, assigned, or otherwise transferred to a third party, and may be enforced by such third party notwithstanding any State law to the contrary.”

The bill would add the same “valid when made” principle to the Home Owners’ Loan Act, the Federal Credit Union Act and the Federal Deposit Insurance Act.

Similar language appears in the Financial CHOICE Act, although Senate Bill 1642 also includes findings about the importance of the “valid when made” doctrine, stating it is an “important and longstanding principle [that] derives from the common law and its application has been a cornerstone of United States banking law for nearly 200 years.”

After being introduced, the bill was referred to the Senate Committee on Banking, Housing, and Urban Affairs.

To read Senate Bill 1642, click here.

Why it matters

  • The legislation would overturn the much-criticized Second Circuit decision in Madden, permitting lenders to return to the “valid when made” principle in Connecticut, New York and Vermont, as well as deterring other courts from taking a similar position.
  • In recent months, a few states (Colorado most notably) have attempted to nationalize the Madden decision by asserting that state usury laws trump federal law pre-emption when asserted by a nonbank. This legislation would also resolve ambiguity and confusion regarding whether Madden applies to state-bank-originated loans, the majority of loans sold in the marketplace lending industry, and securitization transactions, which suffered from uncertainty regarding whether loans above the state usury rate would eventually be deemed “uncollectible” by a court.
  • In the Madden case itself, the district court upon remand certified that a class action be approved to proceed. Ms. Madden has dropped out as lead plaintiff for reasons unknown, and therefore the case is now known as In re Midland Funding LLC Interest Rate Litigation.


pursuant to New York DR 2-101(f)

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