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Court Rejects Challenge to Long-Standing “Valid-When-Made” Doctrine

Pursuant to the National Bank Act, the Home Owners’ Loan Act, and the Federal Deposit Insurance Act, the “Valid-When-Made” doctrine has provided that if a loan is valid when it is made it cannot later become invalid or unenforceable because it is sold or assigned to a nonbank entity. Because national banks are not required to comply with state laws that cap interest rates (also known as usury laws), pursuant to the doctrine, when a national bank sells or assigns a loan to a nonbank third-party, the loan does not become subject to the state usury laws. In 2015, however, the Second Circuit declined to recognize the long-standing doctrine in the now-famous Madden v. Midland Funding, LLC. decision thereby creating immense legal uncertainty.

In 2020, to remedy that uncertainty, the Office of the Comptroller of the Currency (OCC) the Federal Deposit Insurance Corporation (FDIC) each issued a rule codifying the Valid-When-Made doctrine. Shortly thereafter, several State Attorneys General sued the OCC and the FDIC seeking to invalidate the rules. Many of the same Attorneys General filed a similar suit in 2021 seeking to invalidate the OCC’s related “True Lender” rule.  We discuss the True Lender rule and the controversy surrounding it in previous blogs.

Earlier this month, however, the U.S. District Court for the Northern District of California rejected three State Attorneys General challenges to the rules and instead, granted summary judgment for the OCC and FDIC. The following day, the OCC Acting Comptroller Michael Hsu stated that the OCC rule remains in place and expressed the OCC’s stance that “predatory lending has no place in the federal banking system.” He also expressed the OCC’s commitment to ensuring that banks are not used for “rent-a-charter” arrangements. Pursuant to such arrangements, third-party lenders “rent” a national bank’s charter for a fee, which in turn enables the third-party lender to avoid certain state usury limits.

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