On February 8, a Northern District of California judge ruled on cross motions for summary judgment filed by the states of California, Illinois, and New York (plaintiffs) and the Office of the Comptroller of the Currency and Michael Hsu in his capacity as acting comptroller of the currency (collectively, the OCC) on the validity of the “valid when made” rule.
In 2020, the OCC and Federal Deposit Insurance Corporation (FDIC) created parallel valid when made rules, providing that a bank can transfer its loan to a third party without risk of lower state-law interest rate caps applying to the loan after the transfer. In this situation, the bank originates the loan in question but subsequently transfers the loan to the third party. That third party will continue to charge the bank’s interest rate, even if that rate exceeds an interest rate cap in the state where the third party is located.
The valid when made rules address the uncertainty from the Second Circuit ruling in Madden v. Midland Funding, LLC on the interest rate cap that applies after a bank sells or transfers a loan. Madden concluded that when the originating bank does not maintain any interest or control over the debt, state usury laws would apply to the third party. As such, the rules were promulgated to clarify that the interest rate on a loan will not be affected by a bank’s subsequent sale or transfer of a loan.
The plaintiffs argued that the OCC violated the Administrative Procedures Act when it established the rule. The court concluded that the OCC did not exceed its statutory authority in creating the valid when made rule nor did the OCC violate the procedural statutory requirements in the National Bank Act. The court also determined the valid when made rule may be upheld despite the ruling in Madden. Lastly, the court found the rule is not unreasonable or arbitrary and capricious under Chevron analysis.
Our Take. The valid when made rule has been a contested topic and will likely continue to be one. Consumer law groups argue that the rule circumvents state usury laws and allows predatory lending, while banks and banking regulators have said that Madden created regulatory uncertainty, and after an informed and reasoned decision, federal regulators promulgated the rules to eliminate such uncertainty. The rules were promulgated by Trump-appointed regulators that have since departed, and there is some risk that Biden-appointed regulators may attempt to change the industry-favored rules.