The Supreme Court’s Most Important Banking Decision
The most important banking decision the Supreme Court made in this year’s term, which ended yesterday, may well be its decision not to take up a case decided by the Court of Appeals for the Second Circuit which oversees New York, Connecticut and Vermont.
First, as a general rule of thumb, The National Bank Act authorizes a nationally chartered bank to export across the country the interest rate it is permitted to charge in its home state. While the NBA doesn’t apply to credit unions, NCUA has taken a similar but narrower approach to regulating federally chartered credit unions. It has opined that “ State law may not prohibit an otherwise permissible activity authorized by federal law.”
MADDEN V. MIDLAND FUNDING, LLC involved a consumer (Madden) who opened up a credit card with Bank Of America which is based in NY which caps interest rates at 25%. (N.Y. Gen. Bus. Law § 349; N.Y. Gen. Oblig. Law § 5–501; N.Y. Penal Law § 190.4). The account was brought by FIA which is incorporated in Delaware. FIA changed the credit card agreement to stipulate that Delaware law, which has no cap, applied. Ms. Madden eventually became delinquent. FIA wrote off the debt and sold it to Midland Funding, a third-party buyer of debt. Keep in mind that whereas BOA and FIA are nationally chartered banks, Midland Funding is not FIA’a agent
When Midland tried to collect on her $5,000 credit card debt charging 27% interest Ms. Madden responded with a class action lawsuit claiming that Midland was violating both the federal Fair Debt Collections Practices Act and, most intriguingly for our purposes, New York’s usury law.
Nonsense said Midland. It made the traditional arguments that state-law usury claims and FDCPA claims predicated on state-law violations against a national bank’s assignees, , are preempted by the National Bank Act (“NBA”), and that the agreement governing Madden’s debt requires the application of Delaware law, under which the interest charged is permissible (Madden v. Midland Funding, LLC, 786 F.3d 246, 247 (2d Cir. 2015). The district court agreed and dismissed the lawsuit but the Second Circuit sided with Madden and revived the class action lawsuit.
According to the court “Because neither defendant is a national bank nor a subsidiary or agent of a national bank, or is otherwise acting on behalf of a national bank, and because application of the state law on which Madden’s claims rely would not significantly interfere with any national bank’s ability to exercise its powers under the NBA, state law applied. 786 F.3d 246, 249 (2d Cir. 2015),
But what state law applies? Midland might still win the case. It now goes back to the trial court to rule on whether or not Delaware law applies. But the outcome of that debate is far from clear and no matter who wins he decision still has the effect of making NY debt more expensive and has sent shivers down the spine of the banking industry which was hoping that the SC would reverse the Second Circuit.
As this morning’s American Banker points out the Court’s decision to take a pass on reviewing Midland leaves several questions unanswered such as “Can marketplace lenders convince investors that loans in excess of state rate caps are safe to buy? Will continued uncertainty impact the market for certain bonds that are backed by consumer loans? And should banks be worried about a potential erosion of their longstanding pre-emption authority?”
Will Dory find her parents?-Just wanted to see if you were still awake.