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Joint Comment Letter to OCC re Permissible Interest on Loans NPR
To Whom It May Concern:
The Consumer Bankers Association (“CBA”), the Utah Bankers Association (“UBA”), and the National Association of Industrial Bankers (“NAIB” and collectively, the “Associations”)1 appreciate the opportunity to comment on the Office of the Comptroller of the Currency’s (“OCC”) Notice of Proposed Rulemaking (“NPR”) to amend 12 C.F.R. §§ 7.4001 and 160.110 to clarify permissible interest on loans made by national banks and federal savings associations that are sold, assigned, or otherwise transferred.
We applaud the OCC’s efforts to clarify that the power of national banks and federal savings associations to charge interest and make loans under the National Bank Act (“NBA”) and the Home Owners’ Loan Act (“HOLA”), respectively, includes the power to transfer loans, including the agreed-upon interest-rate term of such loans, to bank and non-bank transferees. In light of the significant disruption to the lending market and the reduction to consumers’ access to credit caused by the Second Circuit decision in Madden v. Midland Funding, LLC (“Madden”), it is imperative that the OCC finalize a rulemaking that reaffirms the longstanding “valid-when-made” rule and rejects Madden.
I. OCC’s NPR Would Clarify Long-Standing Law
The valid-when-made rule has been a cardinal rule of lending for the past 200 years that provides that if the interest rate of a bank’s original loan was non-usurious at the time the loan is made, the loan does not become usurious upon transfer, such that the transferee may lawfully charge interest on the loan at the original rate. Madden rejected this fundamental precept of lending based on flawed reasoning in a decision that has been roundly criticized by the current and past Administrations, federal banking agencies, legal scholars, and industry participants.
Madden also conflicts with the long-standing authority of national banks and federal savings associations. National banks and federal savings associations have authority under the NBA and HOLA, respectively, to make loans, to charge interest on such loans at the rate allowed by the laws of the state where the banking organization is located, and to subsequently sell, assign, or otherwise transfer such loans to banks and non-banking entities. As the Solicitor General and the OCC noted in their amicus brief regarding the petition for a writ of certiorari in Madden, “[a] national bank’s power to charge the interest rate authorized by Section 85 [of the NBA] includes the power to transfer a loan, including the agreed-upon interest-rate term, to an entity other than a national bank.” The OCC rightly acknowledges in the NPR that the authority granted to national banks and federal savings associations under federal law, as well as long-standing common law, provide that a transfer of a loan by a bank that complies with section 85 or 1463(g) is by definition not usurious when it is originated, and a subsequent transfer of the loan to a bank or non-bank transferee does not render the loan usurious.