On Monday, November 18, 2019, the Office of the Comptroller of Currency (“OCC”) announced that it is seeking public comment on a proposed rule to clarify the “valid when made” doctrine in the wake of a decision from the United States Court of Appeals for the Second Circuit, Madden v. Midland Funding, that undermined and largely rejected it. The Notice of Proposed Rulemaking (“NPRM”) can be found here. This rulemaking could restore certainty regarding the legality and enforceability of loans that comprise a significant component of lending activity.
The “valid when made” doctrine is a longstanding rule that a loan’s interest rate remains legal and enforceable as long as it was legal when the loan was made, regardless of whether a third party ultimately ends up holding the loan. In Madden, the Second Circuit undermined, and largely rejected, the doctrine and thus called into question the legality and enforceability of a large swath of the consumer debt. The loans challenged in Madden were originated by banks and subsequently sold, assigned, or otherwise transferred to non-bank entities.