The nation’s banking regulator is reviewing a proposed rule that would keep interest rates on loans that are sold or transferred intact; a change that could provide much-needed clarity on competing state laws for the accounts receivable management industry.
According to a news release, “the Office of the Comptroller of the Currency (OCC) is soliciting comments on a proposed rule to clarify that when a national bank or savings association sells, assigns, or otherwise transfers a loan, interest permissible prior to the transfer continues to be permissible following the transfer.”
The proposed rule, which would apply to all national banks and state and federal savings associations, comes after a U.S. Court of Appeals for the 2nd Circuit decision (Madden v. Midland Funding LLC) and “seeks to address confusion about the effect of a transfer on a loan’s valid interest rate,” according to the OCC.
In 2016, the U.S. Supreme Court denied without comment a petition for writ of certiorari (a request to review a lower court’s decision) in Midland Funding, LLC. v. Madden, leaving a ruling from the 2nd Circuit Court of Appeals intact, ACA International previously reported. The issue at hand was whether the federal National Bank Act, which takes precedence over state usury laws regulating loan interest rates, continues to do so after the bank has sold or otherwise assigned the loan to another entity. The 2nd Circuit had said no.
But on appeal, the 2nd Circuit Court of Appeals reversed the district court’s decision. The 2nd Circuit held that a nonbank entity, such as the debt buyer in Madden, taking assignment of debts originated by a national bank is not entitled to protection under the National Bank Act from state-law usury claims. The 2nd found that, although federal law would preempt state usury limits while the loan remained in the hands of the national bank, once sold to a non-bank entity like a debt buyer, preemption was no longer available.
The Supreme Court’s denial to hear the case in 2016 does not mean it agrees with the 2nd Circuit’s decision; rather only that the justices determined that the circumstances described in the Madden petition were not sufficient to warrant review. Therefore, the Second Circuit’s holding in Madden is effective only in the Circuit’s jurisdiction of New York, Connecticut and Vermont.
“This rule would expressly codify what the OCC and the banking industry have always believed and address recent confusion about the impact of an assignment on the permissible interest,” it states. “This rule would not address which entity is the true lender when a bank makes a loan and assigns it to a third party. The true lender issue, which has been considered by courts recently, is outside the scope of this rulemaking.”
The Federal Deposit Insurance Corporation is also issuing a proposal that would address this issue. Comments on the OCC proposal will be accepted for 60 days after publication in the Federal Register.
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