Second Circuit Holds Application Of State Usury Laws To Third-Party Debt Purchasers Not Preempted By National Bank Act

On May 22, 2015, in Madden v. Midland Funding, LLC1 ("Madden"), the United States Court of Appeals for the Second Circuit held that the application of state usury laws to third-party assignees is not preempted by the National Bank Act (the "NBA") but rather such assignees remain subject to state usury limits. The Madden decision has potentially far-reaching implications for investors in, and securitizers of, bank-originated loans to the extent that it casts into doubt the ability of an assignee of a bank loan to collect interest at the rate originally provided for in the agreement.

Background

The NBA expressly permits national banks to "charge on any loan ... interest at the rate allowed by the laws of the State, Territory, or District where the bank is located."2 Numerous decisions by the United States Supreme Court have recognized that the NBA "completely preempts ... state-law usury claims" because the NBA "provides the exclusive cause of action" for usury claims against national banks.3 According to the Supreme Court, "[u]niform rules limiting the liability of national banks and prescribing exclusive remedies for their overcharges are an integral part of a banking system that needed protection from possible unfriendly State legislation."4 Thus, as a consequence of the NBA's preemption of state usury laws, "a state in which a national bank makes a loan may not permissibly require the bank to charge an interest rate lower than that allowed by its home state."5

In Madden, the plaintiff, a resident of the State of New York, opened a credit card account with Bank of America, N.A. ("BANA"), a national bank, in 2005. BANA subsequently transferred the account to FIA Card Services, N.A. ("FIA"), an affiliated national bank headquartered in Delaware. At the same time, the terms and conditions of the account were amended upon receipt by plaintiff of a contract containing a Delaware choice-of-law provision (the "Amended Terms"). Delaware law permits interest at any rate agreed upon and therefore, under Section 85 of the NBA, FIA could collect from its cardholders any rate of interest set forth in the Amended Terms, notwithstanding usury limits established under the state law where its cardholders reside.

In 2008, after the plaintiff failed to make timely payments on the account, FIA charged off the debt on the account and sold the plaintiff's debt to Midland Funding, LLC ("Midland Funding"), a third-party debt purchaser that is not a national bank. After Midland Funding acquired plaintiff's debt, neither FIA nor BANA retained an ownership interest in the account. Under the Amended Terms, the applicable...