Valid-When-Made and True Lender Doctrines: Usury Issues With Partnerships Between Bank and Non-Bank Lenders

Description

In today's banking environment, a non-bank partner often markets loans, processes applications, applies underwriting criteria and services, and collects loans. At the same time, a federal or state-chartered bank originates the loans. The bank can then charge consumers interest rates that exceed many states' usury laws.

States and consumer protection groups have challenged this practice. In Madden v. Midland Funding L.L.C., the Second Circuit held that loans transferred to a third-party debt collector were not entitled to the National Bank Act's preemption protections. In response to Madden, the OCC and the FDIC issued rules in 2020 confirming the principle that a bank loan that is permissible when originated is not affected by the bank's subsequent sale of the loan. Several states unsuccessfully challenged those rules in court.

Non-bank partnerships have also been challenged because the bank that originated the loan was not the "true lender," so the non-bank is not entitled to rely on the interest rate authority available to the bank. The OCC issued a regulation outlining when a national bank would be deemed the true lender. Congress overturned that regulation in 2021 under the Congressional Review Act. The ability of non-bank lenders to team with banks to make loans that exceed state usury limits remains subject to potential challenges.

Listen as our authoritative panel examines the current state of the valid-when-made and true lender doctrines and actions banks and their non-bank partners can take to avoid usury and related claims.