OCC Final Rule Clarifies “Valid When Established” Doctrine | Nelson Mullins Riley & Scarborough LLP
The Office of the Comptroller of the Currency (“OCC”) has adopted a final rule June 2, 2020 which specifies that when a bank transfers a loan, the eligible interest before the transfer continues to be so after the transfer of the loan, a doctrine known as “valid when it is made”. This rule codifies a regulation initially proposed in November 2019. The rule will come into force 60 days after its publication in the federal register.
As the OCC explained, national banks have extensive powers to conduct banking activities, in particular, the National Bank Act (“NBA”) gives national banks the capacity to lend money, and “All the ancillary powers necessary to carry out banking activity. 12 USC § 24 and 371. National banks also have the option of transferring their loans. Username. In addition, the NBA allows domestic banks to enter into contracts, and a corollary to this right is the power to assign all or part of the benefits of that contract to a third party. Based on these powers, the OCC concluded that when a bank transfers a loan that it has made, the eligible interest on the loan at the time it was made remains eligible after the transfer.
Regulation by the OCC is a response to the 2015 Madden vs Midland Funding case which called into question the doctrine of “valid once done”. In this case, the Second Circuit determined that buyers of bank loans are not subject to NBA protections and that those buyers would be subject to state usury laws that would otherwise be preempted by the NBA.
The rule (often referred to as the “crazy solution”) is considered successful for investors in the secondary market for bank loans because the rule provides much-needed clarification as to whether a secondary buyer of a bank loan might charge the rates. of authorized interest for the principal. However, the regulations do not address the closely related question of the “real lender” for situations where state attorneys general and other state actors claim that the originating bank is not the “lender”. real lender ”but rather the unlicensed partner who purchases the loan should be treated as the de facto lender. In the context of the “real lender” challenge, the issue of “validity once made” is not at issue because the partner did not in fact receive protection in the first place.
The OCC has received more than sixty comments on the proposed rule, including many from state attorneys general and consumer groups. These commentators have argued and continue to argue that this regulation is inconsistent with the authority of the OCC under the NBA. These ongoing discussions and the continued existence of genuine lender actions provide fertile ground for further litigation regarding this rule and the viability of a secondary market for bank loans.
For now, the rule promotes additional certainty about the legality of certain interest rates following the sale or assignment of bank loans. As Acting Currency Comptroller Brian Brooks explained, “[t]The rule supports the proper functioning of markets and promotes the availability of credit by responding to the legal insecurity created by the Madden decision … “and”[s]This certainty allows secondary markets to function effectively and fulfill their essential role in banking activity and to help banks access liquidity and alternative financing, improve financial performance ratios and meet the needs of banks. clients.
 Madden v. Midland Funding LLC, 786 F.3d 246 (2nd Cir. 2015).