Second Circuit Holds National Bank Act Preemption Inapplicable to Third-Party Assignees of Bank Loans

In Madden v. Midland Funding LLC, No. 14-2131-cv, ECF No. 75 (2d Cir. May 22, 2015) ("slip op."), pet. for reh'g filed, ECF No. 96-1 (2d Cir. June 19, 2015), the United States Court of Appeals for the Second Circuit held that the application of state usury laws to third-party assignees is not preempted by the National Bank Act. Instead, such assignees remain subject to state usury limits.

Prior to Madden, market participants assumed that a fully funded loan that was valid and enforceable when made would remain valid and enforceable (with respect to the rate of interest accruing) regardless of to whom that loan was subsequently assigned. Madden upends this long-standing premise of lending law and accordingly calls into question the enforceability of bank and thrift-originated loans that have been assigned subsequently to non-bank entities such as hedge funds, securitization vehicles, whole-loan purchasers and other investors.

The defendants have filed a petition to the Second Circuit for rehearing en banc.

For more detailed analysis of the case, see Law 360 article by Cadwalader attorneys Scott Cammarnand Nathan Bull available here.