The defendants in Madden v. Midland Funding, LLC have filed a petition for certiorari with the U.S. Supreme Court, asking the Court to decide whether the preemption of state usury laws under Section 85 of the National Bank Act (NBA) continues to apply to loans made by a national bank after the bank has sold or otherwise transferred the loans to another entity.

The case has significant implications not only for purchasers of charged-off debt from national banks, but also for a wide variety of other lending programs and arrangements that rely on the originating bank’s preemptive authority under federal law to charge interest rates and fees greater than those permitted under otherwise applicable state law.

In Madden, the U.S. Court of Appeals for the Second Circuit ruled that a purchaser of charged-off debts from a national bank was not entitled to the benefits of NBA preemption. The Second Circuit found that application of state usury laws to the loans in question would not “significantly interfere” with the national bank’s exercise of its powers under the NBA, including the right to “take, receive, reserve, and charge” interest under Section 85 and the right to make and sell loans under Section 24 (Seventh).

In their certiorari petition, the defendants assert that the Second Circuit’s decision “upends centuries of settled doctrine and threatens to wreak havoc on the national banking system and the Nation’s credit markets by eviscerating a national bank’s core prerogative to set interest rates unfettered by state regulation.” In addition to arguing that the Second Circuit’s decision is erroneous and presents a question of exceptional importance, the defendants assert that the decision warrants Supreme Court review because it creates a circuit conflict.  More specifically, the defendants argue that the decision conflicts with the Eighth Circuit’s 2000 decision in Krispin v. May Department Stores Co. In Krispin, the Eighth Circuit held that Section 85, and not state law, applied to charges imposed by a non-bank after it acquired credit card receivables from its affiliated national bank.

Absent an extension of time, the plaintiff in Madden has until December 10, 2015 to file a response to the petition. Given the importance of the issues raised in the petition, we expect numerous trade associations and other interested parties to weigh in as amicus curiae in support of the grant of certiorari. The Supreme Court is likely to decide whether or not to grant certiorari sometime in early 2016.

In addition to the risks for marketplace lenders created by Madden and the so-called “true lender” issue, a recent Maryland decision illustrates that licensing issues can also pose problems for the bank partner structure used by many marketplace lenders.

Ballard Spahr’s Marketplace Lending Task Force is nationally recognized for counseling marketplace lending businesses in both the peer-to-peer and small business spaces. We offer soup-to-nuts guidance, working with startup alternative lenders, long-established market leaders, institutional investors, and others. We document and advise on the structure and strategy of bank, platform, and investor relationships, assist in concluding account servicing arrangements, and provide extensive consumer regulatory advice and state licensing guidance.

For more information about this alert, contact Consumer Financial Services Group Practice Leader Alan S. Kaplinsky, Practice Leader Jeremy T. Rosenblum, Marketplace Lending Task Force Leader Scott M. Pearson, or Glen P. Trudel.


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