The Structured Finance Association (SFA) today released the following statement after the Federal Deposit Insurance Corporation (FDIC) issued its final rule affirming the “valid-when-made” doctrine, a nearly 200-year-old principle in contract law. Action today by the FDIC follows a final rule from the Office of the Comptroller of the Currency (OCC) last month clarifying permissible interest on transferred loans. The rule provides that the interest rate for a loan is determined when the loan is made and will be not affected by a subsequent sale, assignment, or other transfer of the loan.

“With both the FDIC and OCC issuing final rules, we can now move beyond the uncertainty caused by the Madden case,” said Michael Bright, CEO of the Structured Finance Association. “SFA and its membership have long advocated for clarification that a loan’s interest rate remains enforceable if the loan is sold, so we welcome this important action by the FDIC to reaffirm and codify this concept which is consistent with the ‘valid-when-made’ doctrine.”

SFA applauded 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 concerns:

“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.”

In February, SFA and BPI submitted a joint letter to the FDIC supporting its efforts to address marketing uncertainty due to the Madden ruling. In 2019, SFA and BPI filed amicus briefs in support of association members Chase and Capital One highlighting the potential negative impact on lending markets and the cost and availability of credit for U.S. consumers and businesses.