In a blow to banks and the marketplace lending industry, on June 27, 2016, the U.S. Supreme Court denied the petition by Midland Funding to hear the case Midland Funding, LLC v. Madden (No. 15-610). That case involves a debt-collection firm that bought charged-off credit card debt from a national bank. The borrower’s legal team argued that a buyer of the debt was subject to New York interest rate caps even though the seller of the debt, a national bank, was exempt from those state law rate caps due to preemption under Section 85 the National Bank Act. The borrower won on this startling argument and the debt collector appealed to the Supreme Court. The Office of the Comptroller of the Currency (the regulator for national banks), the U.S. Solicitor General and various stakeholders in the banking and lending industries vigorously argued that the 2nd Circuit’s decision contravened established law. The fear was that, if preemption strips loans of their usury-exempt status when the loans are sold, then banks’ ability to sell consumer loans, including the common practice of banks originating and quickly selling those loans to investors and marketplace lenders, would be significantly limited, if not curtailed.
The Supreme Court denied the debt collector’s appeal without explanation, which means the 2nd Circuit’s ruling is binding law in that Circuit, which includes New York, Connecticut and Vermont. However, the 2nd Circuit’s ruling is not the law outside of the 2nd Circuit.