The OCC, Banks and the Federal Courts
I don't normally blog about court decisions, but in 2015, the United States Court of Appeals, in a case referred to as “Madden,” tossed a monkey wrench into the ability of banks to sell loans. Before Madden, if the interest rate on a loan was valid when it was made, then the interest rate remained valid even after it was sold. Thus, before Madden, if a bank legally made a loan at 12% interest, and then sold it to a non-bank that was not permitted to lend at more than 10%, the 12% rate continued to be valid. Madden ignored this and held that a purchaser of deeply discounted credit card debt was not permitted to enforce the contract interest rate that the national bank lender was permitted to charge.
On November 21, the Office of Comptroller of the Currency proposed a regulation clarifying that a loan that was valid when made by a national bank or federal thrift continued to be valid after it was sold. The FDIC is expected to issue a similar clarification with respect to state-chartered banks.
The right to sell loans without usury worries is obviously important to banks because it facilitates liquidity and can be an important source of noninterest income. Although low-interest rates these days have temporarily consigned usury to the back burner, we remember the early 1980s when the prime rate exceeded 20%, and usury exemptions were important for banks.
Today’s Takeaway? There is a comment period for the OCC proposal. We urge lenders to submit comments in favor of the regulation prior to the January 21, 2020 deadline. Comments may be emailed to firstname.lastname@example.org. You must refer to the OCC and “Docket ID OCC-2019-0027” in your comment letter. Please remember that all comments, without any editing, are made public, so be respectful and do not include any confidential information.