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OCC finishes rule meant to sidestep 'Madden' ruling

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WASHINGTON — The Office of the Comptroller of the Currency finalized its workaround of a 2015 court decision that limited banks’ ability to sell off loans, providing new legal certainty for federally chartered institutions.

The new rule seeks to clarify that a loan's interest rate can remain legally intact even after the loan is acquired by a purchaser in a state with a lower rate cap. The final rule, which will go into effect 60 days after being published in the Federal Register, is meant to help institutions avoid legal restrictions imposed by the 2015 Madden v. Midland Funding decision. That ruling threw the longtime legal principle that a loan is “valid when made” into doubt.

The agency's November proposal, which was largely unchanged after being finalized Friday, attempted to circumvent the court decision by clarifying that the permissible interest rate of a loan could not be "affected by the sale, assignment, or other transfer of the loan." But consumer groups blasted the plan along with a similar proposal by the Federal Deposit Insurance Corp., saying they would sanction so-called rent-a-bank schemes by nonbanks and leave borrowers vulnerable to predatory lenders.

“The rule supports the orderly function of markets and promotes the availability of credit by answering the legal uncertainty created by the ‘Madden’ decision,” acting Comptroller of the Currency Brian P. Brooks said on his first day on the job. “Such certainty allows secondary markets to work efficiently and to serve their essential role in the business of banking and helping banks access liquidity and alternative funding, improve financial performance ratios, and meet customer needs.”

The OCC's rule seeks to clarify that a loan's interest rate can remain legally intact even after it is acquired by a purchaser in a state with a lower rate cap.
The OCC's rule seeks to clarify that a loan's interest rate can remain legally intact even after it is acquired by a purchaser in a state with a lower rate cap.

While the OCC wrote in the rule it had received several comments requesting certain clarifications, such as the definition of “true lender,” the role of nonbank third parties, or the applicability of other state law requirements, the agency declined to act on those requests.

“The OCC does not believe any changes to the regulatory text are necessary to address these recommendations because the OCC reads the regulatory text to be consistent with these recommendations,” it wrote in the final rule.

The national bank regulator also acknowledged — and dismissed — concerns from some commenters that its proposal could encourage predatory lending by allowing banks to bypass state interest rate caps.

“The OCC is issuing the rule to clarify its position with regard to the proper interpretation of sections 85 and 1463(g)(1), which relates to a core element of banks’ ability to engage in safe and sound banking: the ability to transfer loans,” the agency wrote in its final rule. “However, the OCC also notes, as many commenters did, that the agency has consistently opposed predatory lending, including through relationships between banks and third parties.”

The OCC is the first federal regulator to issue a final rule to address the Madden decison. The FDIC proposal has yet to be finalized.

In 2015, a federal judge on the 2nd U.S. Circuit Court of Appeals presiding over the Madden case ruled that the usury laws of a debt purchaser’s state could be applied to the transaction.

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OCC Midland Funding v Madden FDIC Regulatory relief State regulators Interest rates Nonbank Marketplace lending Brian Brooks
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