Office of the Comptroller of the Currency Adopts Final Rule Addressing Madden

4 minute read | June.03.2020

On Acting Comptroller of the Currency Brian Brooks’ first day in that role, the OCC issued a final rule designed to effectively reverse the Second Circuit’s 2015 Madden v. Midland Funding decision.[1] As published in yesterday’s Federal Register, the rule, titled “Permissible Interest on Loans that are Sold, Assigned, or Otherwise Transferred,” provides that “[i]nterest on a loan that is permissible under [12 U.S.C. 85 for national bank or 12 U.S.C 1463(g)(1) for federal thrifts] shall not be affected by the sale, assignment, or other transfer of the loan.” This rule contrasts with the Madden decision’s conclusion that a purchaser of a loan originated by a national bank could not charge interest at the rate permissible for the bank if that rate would be impermissible under the lower usury cap applicable to the purchaser. More specifically, the Madden court found that subjecting assignees to state usury law under these circumstances does not “significantly interfere” with the exercise of national bank powers -- the general preemption standard set forth in the Dodd Frank Act.[2]  

The OCC adopted the rule as initially proposed, notwithstanding some substantial opposition during the public comment period, including from a bipartisan coalition of 22 attorneys general. In one pivotal respect, the OCC disagreed with a common theme of those commenting against the proposed rule, and with Madden itself, that the rule is subject to the substantive and procedural limitations on preemption imposed by the Dodd-Frank Act, including the significant interference test and the requirement that OCC preemption determinations be made on a case-by-case basis. Instead, the OCC noted that the rule is simply an interpretation of the substantive scope of national banks’ section 85 rate authority (and by extension 12 U.S.C 1463(g)(1) for federal thrifts), and that Dodd-Frank itself specifies that “[n]o provision of [the preemption limits] shall be construed as altering or otherwise affecting the authority conferred by section 85.”[3] In interpreting section 85, the OCC relied on the long-standing “valid-when-made” doctrine and similar principals “as tenets of common law that inform its reasonable interpretation of section 85” and which are consistent with the statute’s purpose to facilitate national banks’ ability to operate lending programs on a nationwide basis, a characteristic fundamental to national banks since their inception.

The OCC likewise found the rule supported by the fact that national banks have express authority to enter into loan contracts pursuant to 12 U.S.C. 24 (Third) and that this necessarily includes the authority to assign such loan contracts because all ordinary business contracts, including loan contracts, are assignable. Some commenters argued that the interest term on a loan should be treated differently from other loan terms because it derives from a national bank’s unique status under federal law. The OCC disagreed that this was a relevant distinction and concluded that, to effectively assign a loan contract, a permissible interest term must remain permissible and enforceable notwithstanding the assignment.

The OCC likewise addressed comments grounded in public policy that the rule would facilitate predatory lending through “rent-a-charter relationships.” The agency stated that it “has consistently opposed predatory lending, including through relationships between banks and third parties.” While it acknowledged that “appropriate third-party relationships play an important role in banks’ operations and the economy,” the OCC reiterated what was made clear in the proposed rule – that this rule does not address which entity is the true lender when a bank transfers a loan to a third party – and expressly declined the request by some commenters to establish in this rulemaking a test for determining when the bank is the true lender.

The OCC’s issuance of this rule is an important and welcomed step in blunting the pernicious effects of Madden, which continues to impede credit markets and instigate litigation.[4] Unfortunately, there are several reasons to suspect that it is premature to view the rule as Madden’s immediate death knell. First, at the time of the OCC’s proposal, the FDIC issued a similar proposal, though based largely on separately legal authority governing state chartered banks. That rulemaking remains outstanding. Second, those that commented against the rule, particularly state actors, may be inclined to challenge the rule in court. If so, there is likely to be a question of the deference that will be afforded the OCC in any court challenge. If a reviewing court views the rule as a preemption determination rather than merely an explication of national banks’ longstanding rate exportation authority pursuant to section 85, then the standard of review prescribed by Dodd-Frank may apply, which is less deferential than has historically been the case for OCC rulemakings: “A court reviewing any determinations made by the Comptroller regarding preemption of a State law … shall assess the validity of such determinations, depending upon the thoroughness evident in the consideration of the agency, the validity of the reasoning of the agency, the consistency with other valid determinations made by the agency, and other factors which the court finds persuasive and relevant to its decision.”[5] The rule also could be reviewed in connection with private litigation relying on Madden. Accordingly, how reviewing courts assess the OCC’s rule likely will determine whether it is effective in addressing Madden.

If you have any questions about Madden or other related issues, please visit our Fintech practice page or contact an Orrick attorney with whom you have worked in the past.

[1] 786 F.3d 246 (2d Cir. 2015).

[2] See Walter E. Zalenski, Jeffrey P. Naimon, & John P. Kromer, Special Alert: Second Circuit Decision Threatens to Upset Secondary Credit Markets, Buckley LLP, June 12, 2015, available here; Walter E. Zalenski, Jeffrey P. Naimon, & John P. Kromer, Special Alert: Second Circuit Will Not Rehear Madden Decision That Threatens to Upset Secondary Credit Markets, Buckley LLP, Aug. 14 2015, available here.

[3] 12 U.S.C 25b(f).

[4] See Honigsberg, Colleen and Jackson, Jr., Robert J. and Squire, Richard C., How Does Legal Enforceability Affect Consumer Lending? Evidence from a Natural Experiment (August 2, 2017). The Journal of Law and Economics, Forthcoming. Available at SSRN: or and Danisewicz, Piotr and Elard, Ilaf, The Real Effects of Financial Technology: Marketplace Lending and Personal Bankruptcy (July 5, 2018). Available at SSRN: or

[5] 12 U.S.C. § 25b(b)(5)(A).