Madden Fix Legislation Moves Forward

Financial Services Law

The House Financial Services Committee, by a vote of 42 to 17, passed a bill that would affect a “Madden fix,” moving the legislation forward to the full House of Representatives for consideration.

What happened

H.R. 3299, the “Protecting Consumers’ Access to Credit Act of 2017,” would amend four federal statutes to explicitly state that bank loans that were valid as to their maximum rate of interest in accordance with federal law at the time the loan was made shall remain valid with respect to that rate—regardless of whether the bank subsequently sells or assigns the loan to a third party.

This language would pre-empt a May 2016 decision from the U.S. Court of Appeals, Second Circuit in Madden v. Midland Funding, LLC, where the court refused to find that the National Bank Act (NBA) pre-empted state law usury claims against an assignee of a national bank.

In that case, New York resident Saliha Madden opened a credit card account with a national bank in 2005. One year later, the credit card program was consolidated into another national bank that 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 filed a putative class action suit 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 a licensed lender from charging interest rates in excess of 25 percent per year.

The defendants responded with a motion for summary judgment, arguing that because they were an assignee of a national bank, the plaintiff’s claims against them were pre-empted by the NBA, which permits banks 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 pre-emption 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 claim 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 Supreme Court, but the justices declined to take the case.

Legislators then stepped in to overturn the troubling decision. This summer, Sen. Mark Warner (D-Va.) introduced a measure that would codify the “valid when made” doctrine; similar language was found in the Financial CHOICE Act.

Most recently, the House bill would have added the following to the NBA: “A loan that is valid when made as to its maximum rate of interest in accordance with this section shall remain valid with respect to such rate regardless of whether the loan is subsequently sold, assigned, or otherwise transferred to a third party, and may be enforced by such third party notwithstanding any State law to the contrary.”

The measure would add identical language to the Home Owners’ Loan Act, the Federal Credit Union Act and the Federal Deposit Insurance Act to cover rate exportation to federal and state savings associations, federal credit unions and state-chartered banks.

Legislators on the House Financial Services Committee considered the measure on Nov. 15. During debate of the proposed legislation, sponsor Rep. Patrick McHenry (R-N.C.) said the bill would restore 200 years of precedent and reverse dropping loan rates. Since the Madden decision, loan volumes have declined, in large part due to consumers with FICO scores below 700 facing more limited access to credit, he said.

Rep. Maxine Waters (D-Calif.) proposed an amendment that would place a maximum cap of 36 percent on all loans in what she argued was a necessary protection against nefarious lenders charging extreme interest rates. The amendment was defeated on voice vote and the Committee approved the bill by a vote of 42 to 17, thereby removing a federal statutory cap on consumer loans. Note that some states allow higher rates to be charged.

Why it matters

Lawmakers continue to push for a Madden fix. With bills pending in both the House and the Senate—and some measure of bipartisan support—passage of the legislation may be possible. It remains to be seen whether this bill will pass the Congress and be signed by the president, and whether it will be part of a larger piece of legislation or a discrete bill.



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