The valid-when-made doctrine is fundamental to the transfer of certain assets in the structured finance market.


Occasionally judicial rulings have a significant impact on the structured finance market and by direct extension, reduces a portion of the access to credit it supplies. The Madden v Midland Funding case was one of these instances.

The legal doctrine of “valid-when-made” is a long-standing principle in US banking law that has been relied upon for nearly 200 years. The doctrine provides that a loan, if valid at the time of inception, cannot be deemed invalid or its terms determined unenforceable due to its transfer, sale or assignment to another person. This principle has provided certainty to lenders and other market participants who lend to US consumers or supply credit to borrowers via the acquisition or subsequent financing of loans.

However, the “valid-when-made” doctrine has been called into question by the US District Court for the Second Circuit’s decision in the case of Madden v Midland Funding.

Since Madden, a shadow has been cast on the ability to rely on the “valid-when-made” doctrine, and there is a broad-based view that the case was decided incorrectly, both from legal experts in the industry as well as regulators.  There has been a negative impact on the credit markets, demonstrably impacting borrowers in Second Circuit sates of Connecticut, New York, and Vermont. For example, a Columbia-Stanford study shows that borrowers with FICO scores below 625 have seen a 52% reduction in credit availability since the decision.  Further, this decision may affect a bank’s ability to securitize or sell loans.

Due to the significant market disruption raised by the ruling , including, very importantly, the negative impact to certain underserved consumers and small businesses access to, and cost of, credit, the Structured Finance Association has formed a Task Force to advocate for a regulatory and/or legislative action to provide the market with certainty on this issue.

“The Valid-When-Made doctrine is of crucial importance for banks’ ability to engage in consumer lending across all financial products. If banks cannot fund that lending activity by selling such assets to non-bank market participants or securitizing those assets, it will have a massive impact on the availability of credit – especially for borrowers that are at the lower end of the credit spectrum.”


Jennifer Wolfe

Director, ABS and Investor Policy