A group of state attorneys general reached out to congressional leadership, pushing back against the Madden fix legislation pending in the U.S. House of Representatives.

Multiple bills have been introduced to overrule the 2016 U.S. Court of Appeals for the Second Circuit decision in Madden v. Midland Funding LLC, but the bipartisan group of regulators argued the measures would frustrate state law.

What happened

In May 2016, the Second Circuit refused to find that the National Bank Act (NBA) preempted state law usury claims against an assignee of a national bank. The case involved New York resident Saliha Madden, who opened a credit card account with a national bank in 2005. One year later, the credit card program was consolidated into another national bank, which sold Madden’s then-defaulted $5,000 credit card account to Midland Funding LLC, a debt purchaser.

A Midland affiliate sent Madden a letter in November 2010 seeking to collect payment on her debt and stating that an interest rate of 27 percent per year applied. Madden then filed a putative class action against Midland and its affiliate, alleging they had engaged in abusive and unfair debt collection practices in violation of the Fair Debt Collection Practices Act and charged a usurious rate of interest in violation of New York state law, which prohibits licensed lenders from charging rates in excess of 25 percent per year.

The defendants responded with a motion for summary judgment, arguing that because they were assignees of a national bank, the plaintiff’s claims against them were preempted by the NBA, which permits a bank to charge interest at the rate of the state where it is located and provides the exclusive cause of action for usury claims against national banks.

Reversing summary judgment in favor of the defendants, the Second Circuit refused to apply NBA preemption to the third-party debt buyers. “Because neither defendant is a national bank nor a subsidiary or agent of a national bank, or is otherwise acting on behalf of a national bank, and because application of the state law on which Madden’s claims relies would not significantly interfere with any national bank’s ability to exercise its powers under the NBA, we reverse the District Court’s holding that the NBA preempts Madden’s claims,” the panel wrote.

Midland Funding filed a writ of certiorari with the U.S. Supreme Court, but the justices declined to take the case.

Legislators then stepped in to overturn the troubling decision. Most recently, two bills were introduced: H.R. 3299 and H.R. 4439. Both pieces of legislation would ensure that a bank loan is valid as to its maximum rate of interest in accordance with federal law at the time the loan was made and remains valid with respect to that rate, regardless of whether the bank subsequently sells or assigns the loan to a third party.

But a bipartisan group of 20 state attorneys general and a consumer protection office asked congressional leadership to let the Second Circuit decision stand. “The states have long held primary responsibility for protecting American consumers from abuse in the marketplace,” the AGs wrote. “H.R. 3299 and H.R. 4439, if passed, would undermine the states’ ability to enforce our consumer protection laws.”

The legislation would “legitimize the efforts of some non-bank lenders to circumvent state usury law,” said the regulators—representing California, Colorado, the District of Columbia, Hawaii, Illinois, Iowa, Maryland, Massachusetts, Minnesota, Mississippi, New Mexico, New York, North Carolina, Oregon, Pennsylvania, Rhode Island, Tennessee, Vermont, Virginia and Washington, along with the Hawaii Office of Consumer Protection.

“Many of these companies contract with banks to use the banks’ names on loan documents in an attempt to cloak themselves with the banks’ rights to preempt state usury limits,” the AGs wrote. “The loans provided pursuant to these agreements are typically funded and immediately purchased by the non-bank lenders, which conduct all marketing, underwriting and servicing of the loans. The banks do not pay the expenses of the lending program and bear no risk of borrower default. As compensation for their nominal role, the banks receive only a small fee. The lion’s share of profits belong to the non-bank entities that, under these bills, would be exempt from state usury limits.”

Congress did not authorize such arrangements when it created national banks with the NBA, the AGs argued, citing the Office of the Comptroller of the Currency (OCC) for support. Recently, in Bulletin 2018-14, the agency stated that it “views unfavorably an entity that partners with a bank with the sole goal of evading a lower interest rate established under the law of the entity’s licensing state(s).” This position is consistent with the Second Circuit’s opinion in Madden, the letter said.

“By statutorily overriding this authority, H.R. 3299 and H.R. 4439 would constitute a substantial expansion of the existing preemption of state usury laws,” the AGs wrote. “States have, over time, crafted laws that create a careful balance between access to credit and protecting consumers. Both Congress and the Supreme Court have rejected efforts to circumvent those laws and limit enforcement of them, including state actions against national banks. It is even more important to preserve state law and allow enforcement of those laws against non-bank entities, many of which are regulated primarily at the state level. Congress should not now override state-granted protections in this important sphere of state regulation.”

The regulators “respectfully [asked congressional leaders] to work to ensure that H.R. 3299 and H.R. 4439 do not become law.”

To read the letter, click here.

Why it matters

Efforts to reverse the Madden decision have been ongoing for two years since the opinion was released, to little effect. The unusual coalition of bipartisan attorneys general may continue to stall progress given its letter’s emphasis on states’ rights to enforce consumer protection and usury laws, with a cite to the recent OCC bulletin for support.