A debt collector is asking the Supreme Court to review whether the National Bank Act’s preemption of state law interest rates continued after a credit card account was charged off and transferred to the debt collector for collection. According to the U.S. Court of Appeals for the Second Circuit, the state law usury limit no longer was preempted because after the transfer the national bank had no interest in the account. The state law would no longer interfere with the national bank’s exercise of powers granted by federal law (Madden v. Midland Funding, LLC). The petition was filed as Midland Funding, LLC, v. Madden, No. 15-610.
According to the Second Circuit, the suit over whether the debt collector could rely on the NBA preemption provision turned on conflict preemption—whether allowing the consumer to sue the debt collector for attempting to collect illegal interest under the Fair Debt Collection Practices Act would interfere with a national bank’s exercise of powers granted by federal law.
Preemption for nonbanks. It was true that NBA preemption extended to nonbanks in some situations, the appellate court said. However, that only happened when preemption of a state law was needed to prevent significant interference with a national bank’s exercise of its federally granted powers. A national bank’s operating subsidiaries could benefit from preemption, as could a bank’s agents, the court agreed. However, Midland, as a third-party debt buyer, was neither an operating subsidiary nor an agent. Midland was acting solely on its own behalf.
Neither of the Midland companies was a national bank, neither was a subsidiary or agent of a national bank, and neither was acting on behalf of a national bank, the appellate court said. That meant the application of New York’s usury law would not interfere with any national bank’s exercise of powers granted by federal law. New York’s usury law only would affect Midland’s activities. There was no reason for the state law to be preempted, the court decided.
Debt collector’s argument. In its petition for certiorari, Midland argues that denying it the protection of the NBA’s interest rate preemption would effectively allow a state to regulate national bank interest rates by “imposing interest rate limitations that are triggered as soon as a loan is sold or otherwise assigned.” The Second Circuit decision also ignored “a cardinal rule of usury, dating back centuries, that a loan which is valid when made cannot become usurious by virtue of a subsequent transaction.”
The petition points out that the Second Circuit decision threatens to have unusually significant effect because the circuit, which includes New York, is the home of much of the nation’s financial services industry. It also notes that the decision conflicts with a decision by the Eighth Circuit, Krispin v. May Department Stores, Inc., 218 F.3d 919 (2000), and a decision of the Fifth Circuit, FDIC v. Lattimore Land Corp., 656 F.2d 139 (1981).
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