Opposing comments on the Office of the Comptroller of the Currency’s (OCC’s) proposed Madden fix” regulation are in. We boil them down for you here.

What happened

Back in August 2015, the U.S. Court of Appeals for the Second Circuit ruled in Madden v. Midland Funding, LLC that national bank preemption did not extend to the purchaser of debt originated by a national bank, holding instead that a nonbank purchaser of loans made by a national bank may not continue to charge the same rate of interest the bank may charge pursuant to Section 85 of the National Bank Act, at least with respect to closed-end loans (loans where a fixed amount is borrowed and repaid over a specified period).

“In most cases in which NBA preemption has been applied to a non-national bank entity, the entity has exercised the powers of a national bank—i.e., has acted on behalf of a national bank in carrying out the national bank’s business,” the Second Circuit noted. “This is not the case here. The defendants did not act on behalf of [Bank of America] or FIA in attempting to collect on Madden’s debt. The defendants acted solely on their own behalves, as the owners of the debt.” Extension of NBA preemption to third-party debt buyers such as the defendants would be an “overly broad” application of the statute.

To banking practitioners, the Madden decision was illogical. If the loan terms were valid when made, anyone that purchased the debt was entitled to enforce those terms. This was the longstanding view of courts across the nation. Yet, as we previously reported, the U.S. Supreme Court declined to hear the case in 2016.

Both OCC and its counterparts at the Federal Deposit Insurance Corporation (FDIC) have now proposed regulations (the so-called “Madden fix”) to undo the havoc created by the Second Circuit ruling. The proposed regulations would codify the longstanding “valid when made” doctrine but, in an important bow to consumer groups, neither proposed rule would directly address the so-called “true lender” theory, under which the fact that the bank originated the loan is disregarded as a legal fiction.

Still, consumer groups and various state attorneys general are vehemently opposed to the proposed regulations. There were 61 comments filed by the usual suspects: trade and consumer groups, state agencies, state and federal officeholders, political associations, individual companies, academics, and individuals. As expected, industry was generally supportive while states and consumer groups were opposed.

What is notable about the comments are the arguments made by consumer groups, state AGs and state regulatory agencies such as the New York Department of Financial Services. In addition to repeating these groups’ now-familiar positions on why the Madden decision is good for consumers, the comments also preview the claims they will make in litigation challenging the regulation if it is finally adopted. There are three key arguments made by those against the proposed regulations and, we submit, each of them are of questionable validity:

  • First, that the OCC lacks authority to issue the regulation because it is seeking to regulate conduct of nonbanks (i.e., the interest they may charge) and the regulation purportedly conflicts with express language in the National Bank Act.
  • Second, that the OCC failed to comply with applicable procedural requirements under the Administrative Procedure Act and the Dodd-Frank Act, including requirements to consult with other agencies.
  • Third, that the proposed regulation is arbitrary and capricious on various grounds.

For those interested in further detail, we recommend reading comments submitted by a group of state attorneys general and a collection of consumer groups. The deadline for comments on the FDIC’s parallel Madden fix proposal is February 4, 2020.

Why It Matters

The Madden fix regulations proposed by the OCC and FDIC, if finally adopted, should help reduce uncertainty regarding the enforceability of bank loans transferred to nonbanks. While the objections focus very much on high-rate bank partnership lending, the fact is that Madden’s implications are much broader, impacting bank loss mitigation activities such as debt sales as well as secondary markets that drive credit availability by allowing banks to maintain liquidity. We expect the OCC and FDIC ultimately to adopt final regulations to address these serious problems, perhaps with some modifications. However, the comment process confirms that states and others are hell-bent on continuing the fight in court.