Federal Court Decision Creates Uncertainty for Non-Bank Loan Assignees and Certain Marketplace Lenders Regarding the Scope of Federal Preemption of State Usury Laws
On May 22, 2015 the U.S. Court of Appeals for the Second Circuit issued a significant decision interpreting the scope of federal preemption under the National Bank Act. In Madden v. Midland Funding, LLC, the Second Circuit held that a non-bank assignee of loans originated by a national bank was not entitled to the benefits of NBA preemption as to state law claims of usury. Specifically, the court stated that the NBA preempts the application of state law to non-banks only when application of the state law would “significantly interfere” with a national bank’s ability to exercise its powers under the NBA. Applying this standard to a non-bank assignee which had purchased certain consumer loans from a national bank, the court held that the purchaser did not qualify for federal preemption and would remain subject to New York’s usury laws in enforcing the purchased loans even though preemption had exempted the originating bank from the usury laws when it made the loans.
This Client Alert was republished by The Banking Law Journal in its September 2015 issue. Click here to read the republished article.