On June 12, 2019, three holders of credit cards issued by a national bank brought a putative class action in the Eastern District of New York directly attacking the bank’s securitization of its credit card receivables based on the Second Circuit’s decision in Madden v. Midland Funding, 786 F.3d 246 (2d Cir. 2015). Specifically, the complaint alleges that the defendants improperly charged interest to New York residents in excess of New York’s 16% usury cap, when the Madden case held that “non-banks cannot charge usurious interest rates merely because they purchased or were assigned loans by national banks.” The complaint does not name the national bank itself as a defendant, instead naming three structured finance vehicles affiliated with the bank and two unaffiliated state-chartered banks that act as trustees.

Section 85 of the National Bank Act (NBA) preempts state laws that interfere with a national bank’s power to charge interest at the rates allowed by its home state. However, the Madden case held that a nonbank purchaser of charged-off debts from a national bank does not inherit the national bank’s preemptive interest rate authority, and therefore is subject to state law usury limitations. Madden has been widely criticized as inconsistent with the NBA as well as with the well-settled doctrines that usury must be determined when a loan is made and when an assignee steps into the shoes of the assignor.

Importantly here, the Madden case distinguished the Eighth Circuit’s decision in Krispin v. May Department Stores, 218 F.3d 919 (8th Cir. 2000), which held that a nonbank was entitled to Section 85 preemption with respect to credit card receivables it acquired from its affiliated national bank. Specifically, the Madden court noted that the bank in Krispin, notwithstanding its sale of receivables, “retained substantial interests in the credit card accounts so that application of state law to those accounts would have conflicted with the bank’s powers authorized by the NBA.” In the newly filed class action, it would appear that the national bank sold only receivables into the securitization, as opposed to the accounts themselves, rendering Madden inapplicable.

Why it matters

Although we expect the defendants to prevail, this new case highlights the continuing impact Madden is having on capital markets and credit availability for consumers and small businesses. At least one academic study already has documented Madden’s negative impact on credit availability. Nevertheless, state regulators such as the New York Department of Financial Services and the Colorado Uniform Consumer Credit Code Administrator are continuing to employ Madden as a means of attacking bank-model lending programs. Further attacks appear inevitable. It therefore is imperative for companies acquiring loans or loan receivables to structure their arrangements carefully, with both Madden and “true lender” risk in mind.