Bank Regulators' Madden Fixes May Not Be Quick Ones

Karen Solomon is quoted in Law360 regarding the Office of the Comptroller of the Currency and Federal Deposit Insurance Corporation’s draft regulations to curb uncertainty in the consumer credit and securitization markets in the wake of the controversial  Madden v. Midland Funding decision. This court decision upset long-standing industry expectations that the legality of the interest rate charged on a bank-originated loan doesn’t change if the bank sells off or securitizes that loan. leading to industry and other secondary market uncertainty. The OCC and FDIC proposals call for codifying regulations that state the validity of a national or state bank loan’s interest rate “shall not be affected” by the loan’s subsequent sale, transfer or assignment. Ms. Solomon commented on the industry’s concerns stemming from the decision’s apparent inconsistency with the “valid-when-made” doctrine, stating, “If you think about it, it’s contract law. The terms of a contract are decided at the time of origination, and it is unusual to say that those terms change because the contract is sold or assigned.” She adds, “There may be pockets of litigation that are going to have to run their course if anybody does in fact challenge either or both of the agencies’ interpretations.”