In a move that means the United States Supreme Court is considering a request to review a case that could have serious ramifications for many lending models, the court asked the U.S. Solicitor General to file a brief regarding the 2015 Second Circuit Court of Appeals decision in Madden v. Midland Funding, LLC. The Madden case involves Section 85 of the National Bank Act, which allows national banks to export the usury rate in the state where it is located. The Second Circuit held that a national bank transferring a note to a third party does not transfer its authority to charge interest in excess of the state’s usury caps of the state in which the third party is located. Thus, the third party could not charge the contracted rate if it exceeded the usury rate in the state where the borrower was located.
“We believe that the Second Circuit’s decision conflicts with the valid-when-made doctrine,” remarked IBAT Deputy General Counsel Shannon Phillips. “If reviewed and upheld by a majority of the current justices, the decision, which is currently binding in only three northeastern states, would apply nationwide and potentially disrupt online lending and all secondary markets.”
Because the Riegle-Neal Act gave state charters the same preemption authority, this could also affect state charters. Although Supreme Court briefing rules will not likely provide IBAT an opportunity to file a brief with the court, we will follow this case and report on any developments.
Staff contact: Shannon Phillips, email@example.com, 512-275-2221