FDIC Follows OCC and Clarifies “Valid When Made” Doctrine | Locke Lord LLP
On June 25, 2020, the Federal Deposit Insurance Corporation (the “FDIC”) published its final rule (the “FDIC Rule”) specifying that an assignee of a state chartered bank or insured branch of a foreign bank (a “state bank”) has the right to charge interest at the same rate as the state bank on loans made by that bank. In doing so, the FDIC followed the action of the Bureau of the Comptroller of the Currency (the “OCC”), which on June 2 issued a rule providing a substantially similar safe harbor for domestic banks (the “OCC Rule”). 2020. Our Analysis of the Rule OCC is available here. The FDIC rule, which codifies the common law doctrine of “valid when made,” will come into effect thirty days after its publication in the Federal Register.
The Federal Deposit Insurance Act (“FDIA”) grants state banks the right to grant loans with interest at the maximum rate permitted by the state in which the bank is located, or at one percent at the rate of interest. – above the ninety-day commercial paper rate. , whichever is greater.1 Although the right to assign loans is implicit in the right to make loans, the FDIA does not address the effect of an assignment by a state bank on the allowable interest rate. In this regard, the FDIA suffers from the same statutory loophole as the National Bank Act, which is silent on the effect of a cession by a national bank on the permitted interest rate. The decision of the Second Circuit in Madden v. Midland Funding, LLC, which ruled that a debt collector at a national bank could not charge the higher interest rate charged by the bank, heightened concern over the silence in the two laws.2
The FDIC rule
Just as the OCC rule does for domestic banks, the FDIC rule fills the void for state banks by providing that the assignment of the loan does not affect the interest rate. The FDIC rule deals specifically with state rules that apply to a loan made by a state bank through a branch outside its home state, the categories of loans covered through regulation and effect of state law interest definitions, adopting guidelines similar to those provided by OCC regulations in effect prior to the adoption of the OCC Rule.3 The FDIC rule confirms that the enforceability of loan terms is determined at the time the loan is made and is not affected by a sale, assignment, or subsequent transfer of the loan. In the statement supporting the adoption of the FDIC rule, the FDIC alludes to the OCC rule, believing that the FDIC rule is necessary to promote parity between national banks and state-owned banks with regard to the authority of interest rate. The FDIC also echoes the OCC’s argument that adopting the “valid-when-done” doctrine strengthens the liquidity of the loan market, thereby increasing the lending capacity of state-owned banks and expanding the lending capacity. access to credit for high-risk borrowers.
The unresolved problem of the “real lender”
Like the OCC rule, the FDIC rule does not specify whether a state bank is to be considered the “true lender” in a transaction where the loan is assigned to the assignee shortly after being made pursuant to a agreement between state bank and state bank. assignee. Commentators have called for the FDIC rule to embrace this additional safe harbor, but the FDIC has not followed up on the request. Therefore, we can expect attacks by “real lenders” against specific types of loan transactions to continue.
1 12 USC 1831d.
2 Madden v. Midland Funding, LLC, 786 F.3d 246 (2d Cir. 2015).
3 12 CFR §7.4001.