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.”