In Madden v. Midland Funding, LLC, the Second Circuit refused to rule that the National Bank Act (NBA) pre-empted state law usury claims against an assignee of a national bank.
In so doing, the Second Circuit created uncertainty over the long-standing “valid when made” doctrine under which the validity of a loan is unaffected by assignment. The rule cuts both ways: That is, if the loan is usurious when made, the assignment to a national bank does not render the loan valid even if the loan would have been proper if originated by the assignee.
The putative class action involved allegations that Midland Funding violated both the Fair Debt Collection Practices Act and New York’s usury law by charging interest at a rate of 27 percent per annum, higher than that permitted by New York law.
Midland filed a motion to dismiss, arguing that because it purchased the debt from a national bank, the suit was pre-empted by the NBA. A district court judge granted the motion, but the federal appellate panel reversed, ruling that because Midland was not itself a national bank—or a subsidiary or agent of a national bank, or even otherwise acting on behalf of a national bank—the protection of the federal statute did not apply.
Although Midland filed a petition for writ of certiorari to the Supreme Court, the justices declined to take the case, leaving the Second Circuit decision in effect.
The district court granted approval for a settlement between the parties earlier this year, with Midland agreeing to pay $555,000 in monetary relief to class members, provide $9.2 million in credit balance reductions, and comply with all applicable laws, regulations and case law regarding the imposition and collection of interest, including usury limits.
Despite the settlement, Madden continues to generate substantial interest from a variety of constituencies. Legislators have introduced bills that would codify the “valid when made” doctrine rejected by the Second Circuit, and last month, the OCC and the Federal Deposit Insurance Corporation (FDIC) filed an amicus brief to support the doctrine in a Colorado federal court case.
But a new letter from 26 members of the House Financial Services Committee seeks another route to overturning Madden: formal rulemaking by the OCC. The 26 Republicans wrote to OCC comptroller Joseph Otting that, since the 2015 decision “deviated from the legal precedent of the ‘valid when made’ doctrine,” it has “caused significant uncertainty and disruption in many types of lending programs.”
The OCC “has the authority to update its interpretation of the definition of ‘interest’ under the [NBA] to ensure that our nation’s policies governing usury laws are applied on a clear, consistent basis nationwide,” the lawmakers wrote, noting that evidence exists that credit availability has declined in states directly impacted by Madden, “with a particularly severe reduction in credit to borrowers with lower credit scores who may lack access to traditional lending sources.”
“The Madden decision has resulted in a fragmented interpretation of banking law in our country, which threatens bank-fintech partnerships that can often provide small businesses and consumers with better access to capital and financing alternatives,” the Republican legislators said. “This outcome has the potential to affect all types of securitized debt, which impacts access to credit and lenders’ risk and liquidity management activities.”
Bank-fintech relationships have been challenged by parties relying on Madden, the letter added, “which presents the possibility that other federal circuits could adopt a similar ruling.”
“This uncertainty hinders the efficient and effective operation of credit markets and impedes fintech innovation, because non-bank third parties, such as marketplace lenders, may be discouraged from purchasing, servicing or securitizing loans originated by banks and credit unions because of the risk of litigation,” the lawmakers wrote. “At a time when policymakers are working to sustain economic growth and prosperity over the long term, we believe it is unwise to artificially limit access to credit in this manner.”
To read the letter, click here.
Why it matters
A Madden fix is indeed a good plan. It makes sense that administrative solutions should be “a priority on the OCC’s rulemaking agenda,” since “valid when made” has been, as they emphasize, a principle “central to U.S. banking law for more than a century,” and which was regrettably “abandoned” by the Second Circuit, resulting in “significant uncertainty and disruption.”