New Legislation Reaffirms Longstanding Legal Precedent, Increases Access to Credit for Small Businesses and Consumers
WASHINGTON, DC – Lisa McGreevy, President and CEO of the Online Lenders Alliance today released the following statement in response to recent legislation passed in the U.S. House of Representatives (HR 3299, Protecting Consumers’ Access to Credit Act of 2017) that would give consumers and small businesses more opportunities to access loans through innovative fintech products.
“This legislation clarifies recent legal confusion that has limited the ability of consumers and small businesses to use the convenience and value offered by America’s modern financial services marketplace. We applaud Reps. McHenry and Meeks for introducing this legislation that helps consumers by strengthening capital markets and competition, and we urge the Senate to take up this legislation and pass it immediately.”
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The Online Lenders Alliance (OLA) is the center for lending, technology and innovation, representing the growing industry of companies offering loans online. OLA members abide by a rigorous set of Best Practices and Code of Conduct to ensure their customers are fully informed and fairly treated.
H.R. 3299, the Protecting Consumers’ Access to Credit Act of 2017 reaffirms the longstanding legal precedent under federal banking laws that preempts a loan’s interest as valid when made.
The contractual doctrine of “Valid-When-Made” as applied to lending agreements provides that a loan that is valid at inception cannot become invalid or unenforceable according to its original terms upon its subsequent transfer to another person. This bedrock common law principle has been a cornerstone of U.S. banking law for over 100 years, provides critical legal certainty, and is central in permitting healthy financial markets that are able to supply credit to individuals and small businesses.
The Second Circuit did not specifically analyze this deep-rooted legal principle in the case of Madden v. Midland Funding, LLC, but did indirectly and dangerously undermine the legal conclusion that a loan with an interest rate that complies with applicable state law at the time of its origination remains valid when it is sold, transferred, or assigned to a third-party.
The Obama Administration’s Solicitor General and the Office of the Comptroller of the Currency (OCC) called the decision “incorrect” with “analysis reflect[ing] a misunderstanding” of section 85 of the National Bank Act and relevant Supreme Court precedent. The Solicitor General’s brief further noted the Second Circuit’s failure to properly consider the “Valid-When-Made” doctrine and stated that “a loan that was valid when made will not be rendered usurious by the transfer.”
This previously settled area of law ensures the health and liquidity of credit markets and, consequently, reduces a borrower’s cost of credit while simultaneously increasing access to credit. The Madden case is unusual in the breadth of legal experts (regulatory and industry) challenging the decision. Amicus briefs opposing the Madden decision were also filed by the ICBA, ABA, CBA, The Clearing House, and Financial Services Roundtable.