On June 27, 2016, the US Supreme Court denied a debt purchaser’s petition for certiorari in Midland Funding, LLC v. Madden preserving the Second Circuit's holding that the National Bank Act (NBA) does not provide protection from state law usury claims when a non-national bank entity purchases debt from a national bank (786 F.3d 246 (2nd Cir. 2015)).

The Supreme Court's denial of review causes uncertainty for the secondary loan markets, and for securitization in the Second Circuit, because it questions the scope of federal preemption under the NBA as well as the doctrine of "valid-when-made," which provides that a loan that is valid when originated will not be rendered usurious by a subsequent transaction.

The case is currently on remand to the United States District Court for the Southern District of New York (SDNY).

Midland Funding, LLC, a debt purchaser, purchased Madden's unpaid credit card debt from Bank of America, N.A., a national bank, with an interest rate that was set under the original terms of the loan. The interest rate on the credit card debt was 27%, which is higher than New York's civil and criminal usury caps. New York's civil cap is 16% and its criminal cap is 25% interest. Madden sued Midland when it attempted to collect the 27% in interest, alleging that this interest rate violated New York's criminal and civil usury laws.

Usury laws vary considerably in different states. To ease the burden of these conflicting laws, Section 85 of the NBA, a preemption provision, allows national banks to charge interest at the rates permitted in the states in which the bank is located, regardless of the usury laws of the state where the borrower is located (12 U.S.C. § 85) (see Federal Preemption Issues in Banking: Interest Rate Exportation).

Midland argued that:

The SDNY entered judgment for Midland, holding that the NBA preempted state law claims against the assignee of a national bank. The Second Circuit vacated the judgment. It held that the NBA ceased to have preemptive effect once the national bank assigned the loan to another entity.

The Second Circuit reasoned that the assignee, Midland, was not acting on the national bank's behalf and was therefore beyond the scope of the federal preemption. Midland submitted a petition for certiorari to the Supreme Court, which the Supreme Court denied. The Supreme Court's denial of review preserves the holding of the Second Circuit.

The case is on remand to the district court to consider choice of law questions as well as Madden's claims under the Fair Debt Collection Practices Act.

This case has implications for the secondary loan markets, in which debt is purchased by a variety of businesses, many of which are not national banks.

The case also has implications for securitizations in the Second Circuit. The possibility that a non-national bank loan purchaser might not have the protection of the Section 85 federal usury preemption could provide additional risks for purchasers of debt that are not national banks.

In securitization transactions, special purpose vehicles (SPVs) purchase and pool debt and issue asset-backed securities (ABS) based on the pool’s debt service cash flows. SPVs are not national banks, and if these vehicles could face usury claims for the debt they have purchased, which is included in securitized asset pools, the cash flows of many US securitizations could be at risk.

This is especially the case considering many US securitization transactions are governed by New York law, and therefore would be subject to the Second Circuit ruling.

For more detail on the issues discussed in this case, see:

Practice Note, Interest Rate Issues for Bank Lenders and the Most Favored Lender Doctrine.

Practice Note, Federal Preemption Issues in Banking: Preemption Standards for National Banks.