Democratic Senator Mark Warner has introduced a bill, S.1642, that would override the Second Circuit’s decision in Madden v. Midland Funding. (In Madden, the Second Circuit ruled that a nonbank that purchases loans from a national bank could not charge the same rate of interest on the loan that Section 85 of the National Bank Act allows the national bank to charge.) The bill would add the following language to Section 85 of the National Bank Act: “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.”
This language is identical to language in the Financial CHOICE Act and the Appropriations Bill that is also intended to override Madden. Like the Financial CHOICE Act and Appropriations Bill, the Senate bill would add the same language (with the word “section” changed to “subsection” when appropriate) to the provisions in the Home Owners’ Loan Act, the Federal Credit Union Act, and the Federal Deposit Insurance Act that provide rate exportation authority to, respectively, federal savings associations, federal credit unions, and state-chartered banks.
Unlike the CHOICE Act and Appropriations Bill, however, the Senate bill includes “findings” that appear intended to avoid the bill from being characterized as a change in the law. The findings state that the valid-when-made doctrine 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.” They also explain why there is a need for the doctrine to be “reaffirmed soon by Congress.”
Like the adoption of the OCC’s proposal to create a fintech charter, the enactment of legislation reaffirming the valid-when-made doctrine would help some companies avoid Madden’s negative impact. However, it would not help fintech companies deal with the risk of a court or enforcement authority concluding that the fintech company, and not its bank partner, is the “true lender.” Treating a nonbank as the “true lender” would subject the nonbank to usury, licensing, and other limits to which its bank partner would not otherwise be subject.
As a result, even if “valid-when-made” legislation is enacted, there would still be a need for the OCC to confront the true lender risk directly, something we have previously urged it to do. This could (and should) be accomplished through adoption of a rule: (1) providing that loans funded by a bank in its own name as creditor are fully subject to Section 85 and other provisions of the National Bank Act for their entire term; and (2) emphasizing that banks that make loans are expected to manage and supervise the lending process in accordance with OCC guidance and will be subject to regulatory consequences if and to the extent that loan programs are unsafe or unsound or fail to comply with applicable law. (The rule should apply in the same way to federal savings banks and their governing statute, the Home Owners’ Loan Act.) In other words, it is the origination of the loan by a supervised bank (and the attendant legal consequences if the loans are improperly originated), and not whether the bank retains the predominant economic interest in the loan, that should govern the regulatory treatment of the loan under federal law.