FDIC Clarifies Madden Decision
On June 25, 2020, the Federal Deposit Insurance Corporation (FDIC) issued a final rule which attempts to resolve the legal uncertainty created by the 2015 United States Court of Appeals decision for the Second Circuit in Madden Financing v. Midland, SARL, 786 F.3d 246 (2d Cir. 2015). The FDIC’s final rule follows the publication on May 29, 2020, of a similar rule by the Office of the Comptroller of the Currency (OCC).
Madden ruled that a non-bank buyer of a debt written off from a national bank seller could not inherit the interest rate pre-emptive authority enjoyed by national banks under Article 85 of the National Bank Act, 12 USC § 85. In attaining its participation, the Second Circuit held that, rather than significantly interfering with the exercise of its powers by a national bank, the application of laws on the usury by the State to the third party assignee “would limit[ ] only the activities of [a] third parties who are also subject to state control… and which are not protected by federal banking law or subject to supervision by the OCC. »Thus, the decision in Madden questioned the enforceability of the interest rate conditions of loan contracts following the assignment by a national bank of one or more loans to a non-bank assignee.
The OCC’s final rule aimed to resolve the legal uncertainty resulting from Madden by specifying that when “[national] bank transfer a loan, [the] interest eligible before the transfer remains eligible after the transfer. According to the OCC final rule, national banks and savings associations can transfer their loans without affecting the validity or enforceability of the interest term.
In its analysis accompanying the OCC Final Rule, the OCC stated that its interpretation rests on the “cardinal rules of the doctrine of usury” which establish the general proposition that “[t]The usurious or non usurious character of a contract continues by assignment. The OCC also noted that its interpretation is supported by “the capacity of national banks to award contracts and manage loan programs nationally” in accordance with the objectives of Article 85. Further, given that domestic banks continue to depend on loan transfers to access sources and to manage certain operational risks, the OCC believes that its interpretation also promotes security and soundness, which are at the heart of the OCC’s mission as as prudential regulator of national banks.
The FDIC Final Rule provides that the interest rate on a loan is determined when the loan is made and will not be affected by subsequent events such as changes in state law or a sale, assignment. or other subsequent loan transfer. The rule applies to state chartered banks and insured branches of foreign banks. Consistent with the originally proposed rule, the FDIC’s final rule “does not purport to allow state banks to assign the ability to preempt interest rate limits from state law” under federal law. Rather, its final rule simply allows state banks “to grant loans at their contractual interest rates …”
The FDIC and OCC have specifically chosen not to deal with “which entity is the true lender when a bank transfers a loan to a third party.” In adopting its final rule, the OCC refused to include a regulatory text that provides that the final rule does not affect the determination of which entity is the true lender. In addition, since the final rule only applies to bank loans authorized under section 85 or 1463 (g), the OCC also refused to include a provision that the final rule only applies. only when the bank is the real lender.
The OCC Final Rule will be effective August 3, 2020. The FDIC Final Rule will be effective thirty days from the date of publication of its Final Rule in the Federal Register.
© 2021 Greenberg Traurig, LLP. All rights reserved. Revue nationale de droit, volume X, number 189