Yesterday, June 25th, the FDIC issued its Final Rule which reaffirms the longstanding “valid when made” doctrine, a nearly 200-year-old principle in contract law. The FDIC took this action in order to alleviate market uncertainty caused by the Second Circuit’s 2015 ruling in the case of Madden v. Midland Funding. The Final Rule provides that the permissibility of interest for the purposes of section 27 would be determined when a loan is made and is not affected by a change in State law, a change in the relevant commercial paper rate, or the sale, assignment, or other transfer of the loan. Further, the rule supports the FDIC broader mission – which includes liquidating failed bank assets – by reaffirming interest rate terms and mitigating the possibility that the FDIC’s ability to sell loans might be impaired. Importantly, staff highlighted that “the Final Rule is consistent with the OCC’s interpretation of the corresponding statutory provisions for national banks and savings associations”.
SFA applauds the comments made by FDIC Chairman Jelena McWilliams relating to the importance of this rule with respect to the secondary market for loans and bank safety and soundness:
“The final rule supports longstanding regulatory safety and soundness principles by ensuring enforceability of the interest rate terms of loans made by state banks following the sale assignment or transfer of the loan. The Madden decision questions this enforceability and created a ripple effect in the secondary market for loan sales within the Second Circuit.” … “Uncertainty raises significant safety and soundness concerns for financial institutions that may be unable to sell loans to manage liquidity and capital on the balance sheet. Moreover, banks and financial institutions rely on a robust secondary market to manage exposure. For example, banks may need increased liquidity to meet unusual deposit demands or to make additional credit available especially in a time of financial stress. If the secondary market is not available, it calls in to question the value of loans on bank balance sheets, and could lead to significant safety and soundness concerns.”
This action by the FDIC to reaffirm and codify in regulation that the permissible interest on a loan is not affected by the sale or assignment of the loan is consistent with the “valid when made” doctrine is welcomed by SFA membership. SFA thanks FDIC leadership and staff for its work to finalize this rule.