OCC Issues Rule Clarifying Permissible Interest on Loans that Are Sold, Assigned, or Transferred
- Source: occ.treas.gov
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On May 29, 2020, the Office of the Comptroller of the Currency (OCC) issued a final rule clarifying the ongoing permissibility of interest charged by a national bank following the sale, assignment, or transfer of a loan. Under preemption, 12 USC § 85 authorizes national banks to charge interest at the rate permitted by the law of the state in which the bank is located, regardless of other states’ interest rate restrictions. Historically, this preemption had been interpreted to hold after assignment of a loan to a non-bank under the common law “valid when made” doctrine.
In 2015, the decision by U. S. Court of Appeals for the Second Circuit’s in Madden v. Midland Funding, LLC created uncertainty whether “valid when made” held after the transfer of a loan to a non-bank. Following the Madden decision, many industry participants expressed concern regarding the impact on loan sales, securitizations, and other aspects of the secondary lending market.
The new rule clarifies that when a national bank or federal savings association transfers a loan, the interest rate permissible before the transfer remains permissible after the transfer. The OCC amends 12 CFR 7.4001 and 12 CFR 160.110 to add a paragraph addressing transferred loans, which states that “Interest on a loan that is permissible . . . shall not be affected by the sale, assignment, or other transfer of the loan.”