Madden v. Midland Funding, LLC

In the recent case Madden v. Midland Funding, LLC, the Second Circuit held that state usury laws were not necessarily preempted “where a loan originated by a national bank is subsequently sold to a non-bank purchaser.”

In this case, the dispute arose after a national bank sold a debt collector/buyer the receivables from a New York state resident’s account. The national bank retained no ownership of the account or the receivables. The cardholder was then notified that interest was accruing on the debt at an annual rate of 27%. Even though the interest rate complied with the laws of Delaware, the state in which the national bank was located and the receivables originated, it could be considered a usurious rate under New York State law. The debt collector relied on the National Bank Act to apply the Delaware based interest rate in New York due to the fact that the Delaware-based originator of the receivables was a national bank.

The Second Circuit held that New York’s state usury laws were not preempted because the debt collector owned the receivable rather than the national bank and the debt collector was not “otherwise acting on behalf of a national bank.” The court found that because the application of New York state law “would not significantly interfere with any national bank’s ability to exercise its powers under the National Bank Act,” the provisions that would allow a national bank to lawfully charge the New York cardholder an excessive interest rate did not apply to the debt collector.

This holding may have a significant effect on the debt sale market in the future and market participants must be sure to take into consideration whether they are relying on federal preemption, especially in New York, Connecticut, or Vermont.

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