Trade Groups Argue for Preemption of State Usury Law to Assignees of Loans Originated by National Banks

The Structured Finance Industry Group, Inc. ("SFIG") and SIFMA filed an amicus brief urging the U.S. Supreme Court to grant certiorari and reverse a Second Circuit ruling that the application of state usury laws to third-party assignees is not preempted by the National Bank Act. In Midland Funding and Midland Credit Management, Inc. v. Saliha Madden, the lead plaintiff defaulted on a credit card loan made by a national bank. The loan was then sold to a collection company that raised the rate on the loan to 27% per annum, which rose above the permitted rate in New York of 25% per annum.

The industry groups asserted that the Second Circuit's opinion "threaten[ed] to upend and substantially impair the secondary loan market and, by extension, the securitizations that form a vital part of the nation's financial system." They reasoned that if state usury laws apply when bank loans are sold to non-banks, then the ability of banks to sell packages of loans into the secondary market will be constricted. The industry groups also argued that, since the decision, some secondary market investors have refused to purchase loans made to borrowers who are located in the Second Circuit. They also asserted that a "uniform rule of usury law is that the purchaser of a loan is entitled to collect the same interest rate that the loan originator was permitted to charge." By departing from this precedent, they said, the Second Circuit threatens to impair secondary loan markets substantially.

Specifically, the industry groups argued that the Second Circuit's decision:

  • has disrupted the sale of loans in the secondary loan market, which sales have included not only credit card loans, as in the matter that was before the Court, but also many other types of consumer and business loans, such as student loans, automobile loans and mortgage loans;
  • creates unwarranted potential liability for market participants that justifiably have relied on well-established principles of preemption;
  • drives up the cost of capital and limits the availability of credit to consumers and small businesses, as non-bank lenders and loan purchasers seek to reduce the impact of the decision by constructing various workarounds; and
  • poses a potential problem for the FDIC, since the ownership risks of loans will remain at federally insured banks instead of being transferred to private investors.

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