As expected following yesterday’s action by the US Office of the Comptroller of the Currency,1 at today’s board meeting2 of the Federal Deposit Insurance Corporation (FDIC), the board proposed a rule to clarify Federal interest rate authority to address marketplace uncertainty regarding the enforceability of the interest rate terms of loan agreements following a bank’s assignment of a loan to a non-bank, including confusion resulting from a recent decision from the US Court of Appeals for the Second Circuit (Madden v. Midland Funding, LLC).3 The FDIC's proposal would codify legal guidance on which the agency has relied for more than 20 years regarding interest rates that may be charged by State-chartered banks and insured branches of foreign banks.

The proposed rule implements sections 27 and 24(j) of the Federal Deposit Insurance Act and seeks to reaffirm and codify this “valid-when-made” doctrine and would provide that whether interest on a loan is permissible under Section 27 would be determined at the time the loan is made and that interest on a loan permissible under Section 27 would not be affected by subsequent events, such as a change in state law; a change in the relevant commercial paper rate; or the sale, assignment or other transfer of the loan.

However, the FDIC notes that the proposed rule does not address which entity is the "true lender" when a State bank makes a loan and assigns it to a third party. The proposal states that the FDIC views unfavorably entities that partner with a State bank with the sole goal of evading a lower interest rate established under the law of the entity's licensing state.

The FDIC is soliciting comments on the proposed rule. Comments will be accepted for 60 days after publication in the Federal Register.

1 See our related In Brief, “OCC Proposes Clarification of ‘Valid When Made’ in Response to Madden Case,” at: https://www.mayerbrown.com/en/perspectives-events/publications/2019/11/occ-proposes-clarification-of-valid-when-made-in-response-to-madden-case

2 Additional board materials are available, including a fact sheet at: https://www.fdic.gov/news/fedintrate.pdf?source=govdelivery&utm_medium=email&utm_source=govdelivery and statements by the FDIC Chair McWilliams and FDIC Director Gruenberg at: https://www.fdic.gov/news/news/speeches/spnov1919.pdf?source=govdelivery&utm_medium=email&utm_source=govdelivery and https://www.fdic.gov/news/news/speeches/spnov1919d.pdf?source=govdelivery&utm_medium=email&utm_source=govdelivery, respectively

3 Madden v. Midland Funding, LLC, 786 F.3d 246 (2nd Cir. 2015).