Valid when made

Valid when made (also sometimes valid-when-made) is a United States legal doctrine that holds that the terms of a loan, if legally valid at the time of its creation, remain valid after the loan is sold or assigned to a third party. Historically, the doctrine has often been applied to loans made by national banks and then transferred to secondary lenders. Under this doctrine, debt buyers may purchase loans from national banks and collect interest on them at the same rate as the original lender, without being prevented by their state's usury laws.

The doctrine entered common law during the 19th century and was codified in a final rule by the Office of the Comptroller of the Currency in 2020.[1]

History

The valid-when-made doctrine is held to have originated with Nichols v. Fearson, an 1833 case, which found that "a contract, which, in its inception, is unaffected by usury can never be invalidated by any subsequent usurious transaction."[2] The doctrine became a part of common law after the National Bank Act was passed in 1864.[3] The act maintained, among other things, that national banks could only be held to the usury laws in their charter state, rather than the home state of a borrower.[4] Because of ambiguities in the language of the act, the courts generally treated the transfer of loans like the transfer of any other contract, allowing interest rates to remain fixed on loans that were sold or transferred. Under this model, protection from out-of-state usury laws was transferred with the loan.[5][6]

The valid-when-made doctrine was partly upheld in the landmark 1978 case Marquette National Bank of Minneapolis v. First of Omaha Service Corp.[7] In Marquette v. Omaha, the Supreme Court ruled that a nationally chartered bank could offer loans with the maximum interest rate allowed in its charter state to consumers in any other state, without being subject to another state's usury laws.[6] This ruling led many large national banks to move to states with high-interest rates.[6] After the ruling, courts generally held that debt buyers could collect interest at the rate originally set, despite not being subject to the same protections as national banks.[8] This dynamic became a major component of the "rate exportation model" of lending, under which national banks sold or transferred loans.[9]

Madden v. Midland Funding, LLC (2015–2019)

The case of Madden v. Midland Funding LLC in 2015 challenged the basic premise of valid when made doctrine. Regarding Madden, the U.S. Court of Appeals for the Second Circuit ruled that Midland Funding, LLC, a third-party debt buyer, could be subject to state usury laws after purchasing a loan from Bank of America, a protected national bank.[10] The Solicitor General of the United States submitted a brief that argued that the court's finding had been in error and was neither in keeping with the valid-when-made doctrine nor with the position of other circuit courts. However, Midland was denied certiorari by the Supreme Court in 2016.[11][12]

The Madden ruling immediately caused widespread uncertainty about the ability of banks to sell or transfer loans to third parties.[5] In particular, it was criticized for making it more difficult for high-risk, disadvantaged borrowers to obtain personal or business loans.[13][14] The ruling also prompted concerns that loans that had previously been legally valid might become usurious, opening up secondary lenders to civil and criminal charges.[13]

At the time of the decision, many legal and financial experts predicted that Madden would be limited in scope by subsequent rulings,[15] including the American Bankers Association who urged the creation of a "Madden fix" law to protect valid when made.[16] Multiple bills were proposed to implement a "Madden fix" law, including the Protecting Consumers’ Access to Credit Act 2017, which was passed by the U.S. House Of Representatives.[8] Opponents of the "Madden fix" laws argued that the valid when-made doctrine violated states' rights.[17]

OCC and FDIC decisions (2019–present)

In 2019, the Office of the Comptroller of the Currency (OCC) announced its intentions to reinforce valid when made. The OCC clarified that the interest rate of loans can remain intact after being sold to a secondary lender.[1] The Federal Deposit Insurance Corporation (FDIC) also reaffirmed and codified valid when made doctrine, arguing that Madden was a "deviation from longstanding notions of contract law" and had created market instability.[18]

On May 29, 2020, the OCC issued a final rule that was codified and valid when made. The rule was intended to address the legal ramifications of Madden and mitigate the damage to the secondary loan market. It stated that a loan that was not subject to a state usury law at the time of creation cannot subsequently become subject to it after being sold, transferred, or assigned in any way.[19]

The states of California, Illinois, and New York challenged the issuance of the rule, contending that the OCC had not considered the consequences of its ruling. This challenge was rejected by the U.S. District Court for the Northern District of California, which ruled in favor of the OCC on February 8, 2022.[20][19]

See also

References
  1. "OCC offers road map for banks to bypass 'Madden' ruling". American Banker. 2019-11-18. Retrieved 2022-07-02.
  2. Munger, Jayne (March 2019). "Crossing State Lines: The Trojan Horse Invasion of Rent-a-Bank and Rent-a-Tribe Schemes in Modern Usury Law" (PDF). The George Washington Law Review. 87 (2): 488.
  3. "Spurious Pedigree of the "Valid-When-Made" Doctrine | Duke Law Journal". dlj.law.duke.edu. Retrieved 2022-07-02.
  4. "Midland Funding v. Madden: Supreme Court Denies Certiorari in Debt-Purchase Usury Case | Practical Law". content.next.westlaw.com. Retrieved 2022-07-02.
  5. "New OCC Regulations Clarifying The Enforceability Of Interest Terms Should Be Entitled To Judicial Deference". www.wiley.law. Retrieved 2022-07-02.
  6. "The "Valid-When-Made" Doctrine Survives its First Significant Legal Challenge". Wake Forest Law Review. 2022-03-03. Retrieved 2022-07-02.
  7. Levitin, Adam J. (2018-09-14). Consumer Finance Law: Markets and Regulation. Wolters Kluwer. pp. 463–464. ISBN 978-1-5438-0133-0.
  8. Atkinson, Abbye (May 2019). "Rethinking Credit as Social Provision" (PDF). Stanford Law Review. 71: 1093–1162.
  9. Chiu, Iris H.-Y.; MacNeil, Iain G. Research Handbook on Shadow Banking: Legal and Regulatory Aspects. Edward Elgar Publishing. p. 266. ISBN 978-1-78536-263-7.
  10. Brown, Sarah (2019). The Regulation of Consumer Credit: A Transatlantic Analysis. Edward Elgar Publishing. p. 171. ISBN 978-1-78471-249-5.
  11. "MADDEN v. MIDLAND FUNDING, LLC, 786 F.3d 246 (2d Cir. 2015): The Second Circuit Threatens to Disrupt Capital Markets (White Paper) | Nebraska Law Review | Nebraska". lawreview.unl.edu. Retrieved 2022-07-02.
  12. Arnholz, John; Auerbach, Reed D.; Gainor, Edward E. (2016-01-01). Offerings of Asset-backed Securities. Wolters Kluwer. p. 55. ISBN 978-1-4548-7420-1.
  13. Silvia, Andrew (October 30, 2017). "Madden v. Midland Funding LLC: Uprooting the National Bank". Chicago-Kent Law Review. 92 (2): 653–677.
  14. Thessin, Jonathan; Published February 4, 2020. "Letter to FDIC on "valid-when-made" Doctrine". www.aba.com. Retrieved 2022-07-02.{{cite web}}: CS1 maint: numeric names: authors list (link)
  15. Horn, Charles; Hall, Melissa (2017-03-01). "The Curious Case of Madden v. Midland Funding and the Survival of the Valid-When-Made Doctrine". North Carolina Banking Institute. 21 (1): 1.
  16. "Federal District Court Upholds OCC, FDIC's 'Valid-When-Made' Rules". ABA Banking Journal. 2022-02-09. Retrieved 2022-07-02.
  17. Rau, Raghavendra; Wardrop, Robert; Zingales, Luigi (2021-09-09). The Palgrave Handbook of Technological Finance. Springer Nature. p. 451. ISBN 978-3-030-65117-6.
  18. "Statement by FDIC Chairman Jelena McWilliams on the Notice of Proposed Rulemaking: Federal Interest Rate Authority" (PDF). fdic.gov. November 19, 2019.{{cite web}}: CS1 maint: url-status (link)
  19. "Defending the Valid-When-Made Doctrine: District Court Victories for OCC and FDIC Regulations Signal Appeals and Amicus Opportunities". www.wiley.law. Retrieved 2022-07-02.
  20. "OCC Prevails in Challenge to "Valid When Made" Rule". The National Law Review. Retrieved 2022-07-02.
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