The House of Representatives recently passed H.R. 3299, the “Protecting Consumers Access to Credit Act of 2017.” This act codifies the “valid-when-made” doctrine and ensures that bank loans that fall within the maximum rate of interest allowable under federal law when made will remain valid regardless of whether a bank subsequently sells or assigns the loan to a third party.
H.R. 3299 essentially overturns the Second Circuit’s ruling in Madden v. Midland Funding, LLC which challenged the longstanding “valid-when-made” doctrine. The “valid-when-made” doctrine provides that a loan that has a non-usurious interest rate when it is made cannot become usurious if the loan or contract is subsequently transferred to a third party, even if the interest rate would have been usurious if the transferee originated the loan.
In Madden, the Second Circuit disregarded the “valid-when-made” doctrine and concluded that a defaulted and uncollected credit card debt originated by a national bank and later sold to a debt collector may have become usurious under the laws of the debtor’s home state or governing law of the state specified in the credit card agreement when the debt collector sought to collect on the debt. The ruling in Madden is contrary to the law in most jurisdictions, but created uncertainty in the reliability of the valid-when-made doctrine in the Second Circuit and impacted the ability to sell debt in the Second Circuit and other jurisdictions. H.R. 3299 eliminates this uncertainty and confirms that loans that are not usurious when made do not become usurious as a result of a transfer to a third party.