The 2015 decision by the Second Circuit Court of Appeals in Madden v. Midland Funding, LLC precipitated uncertainty among financial services providers and the secondary market. Many legal experts believed the decision cast doubt on and generally ignored the longstanding legal principle of “valid-when-made.” That is, a loan or contract that was non-usurious when it was made remain non-usurious when it is subsequently transferred to another person. In Madden, however, the decision found that the sale and assignment of a loan to a non-bank by a national bank did not necessarily transfer to the loan purchaser the right to charge interest at the rate allowed by the national bank and specified in the loan contract. Critics of the decision (including President Obama’s US Solicitor General) claim the court’s conclusion is wrong and violates contractual principles of assignment as well as the long standing legal precedent that loans are “valid-when-made.”
The potential effects of this decision may be ameliorated if some current efforts in Congress come to fruition. A bipartisan array of senators and congressmen, understanding the harmful effects of the uncertainty caused by this decision, have introduced legislation that would generally restore matters to where they stood prior to the unwise Madden decision. It is important to note that this coalition is not only bipartisan it also runs the gamut from progressives to conservatives. Now, in an era of divisiveness, that’s something worth applauding.
On July 27, 2017 senators from both sides of the aisle introduced S. 1642 which would mandate that bank loans that are sold or transferred retain the original rates and terms of the originating bank. This proposal is similar to one already introduced in the House of Representatives earlier in July, H.R. 3299. It is also possible that these or similar proposals could be considered and enacted as part of the appropriations process that will be occurring later this year. These standalone efforts are in addition to the same provision being included in the Financial Choice Act passed by the House in June, but whose future is uncertain in the Senate.
The bill was introduced by Democratic Senator Mark Warner – and some of the language is identical to the language in the Financial CHOICE Act proposed by Republican Congressman Jeb Hensarling. A copy of the text of S. 1642 can be found here.