FDIC Issues Rule to Codify Permissible Interest on Transferred Loans

The Federal Deposit Insurance Corporation (FDIC) recently issued a final rule to codify guidance that accurate interest rates are determined when loans are made, and not affected by any loan transfers, to reestablish the 200-year-old ‘valid when made’ principle in contract law.

“The final rule accomplishes three important safeguards for the stability of our financial system by promoting safety and soundness, solidifying the functioning of a robust secondary market, and enabling the FDIC to fulfill its statutory mandate to minimize risk to the Deposit Insurance Fund,” said Jelena McWilliams, FDIC Chair, in a statement following the enactment of the rule.

Congress authorized the Depository Institutions Deregulation and Monetary Control Act in 1980, which allowed state banks to charge permissible interest rates according to the state where it is located. The FDIC has applied this law to state banks, but has not enacted reciprocal regulations until the present.

In 2015, Madden v. Midland Funding, LLC raised uncertainty about the longstanding application of the 1980 rule. The U.S. Court of Appeals for the Second Circuit questioned the ability to implement interest rate terms of loan agreements to non-banks, which significantly reduce credit availability for borrowers with low credit scores.

By providing certainty around loans in the secondary market, the FDIC’s final regulation supports safety and stability within the banking system. It also ensures “the enforceability of the interest rate terms of loans made by state banks following the sale, assignment, or transfer of the loans,” McWilliams said.

The FDIC’s rule is reminiscent of the final rule enacted by the Office of the Comptroller of the Currency applied to national banks on May 29, 2020.