Midland Funding, LLC Not Permitted to Violate Usury Laws Under National Bank Act

Usury is defined as an illegally high rate of interest.

In New York, the civil usury rate is 16%[1] and the criminal usury rate is 25%[2].

Banks get around state usury laws through the National Bank Act, a federal law that expressly allows banks to charge the interest rate permissible in the bank's home state. Many times, that home state is Delaware or South Dakota where "exporting" of otherwise usurious interest rates is legally permitted.

Under the Supremacy Clause of the U.S. Constitution, federal law "preempts" any state law that interferes with the federal law at issue. The National Bank Act provides the exclusive cause of action for usury claims against national banks. So banks are essentially shielded from state usury violations through federal preemption.

So the issue in Madden v. Midland Funding, LLC, et al.[3] is whether Midland Funding, LLC, a debt buyer, receives the same preemption benefits as, FIA Card Services, N.A., the assignor national bank, which would enable Midland to charge the usurious rate of 27%, a rate that would clearly violate New York usury ceilings.

Brief Facts Underlying Case

New Yorker Saliha Madden opened up a Bank of America ("BoA") credit card account in 2005. In 2006, Ms. Madden's account was consolidated into another national Bank, FIA Card Services, N.A. resulting in the controlling cardmember agreement agreeing to Delaware law, which permits an interest rate of 27%.

Madden defaulted on her loan in 2008. FIA wrote it off and sold it to third-party debt buyer Midland Funding, LLC, which then attempted to collect it from her – along with 27% interest. Madden responded with a class action lawsuit claiming that Midland Funding had violated the Fair Debt Collection Practices Act (FDCPA) by attempting to collect interest at an illegal rate.

Midland Funding Loses Preemption Argument

As a debt buyer, is Midland Funding entitled to the same preemption benefits that would allow it to violate state usury laws? No, holds the U.S. Court of Appeals, which reversed the District Court.

Midland maintained that, since it purchased the debt from a national bank, it should be able to avail itself to the same exemption – and the high interest rate that went along with it.

The court, however, held that NBA preemption generally does not extend to nonbank entities. While operating subsidiaries of national banks or agents of national banks may enjoy NBA preemption, Midland is a third-party debt buyer that is "distinct from agents or subsidiaries of a national Bank.[4]

Allowing a third-party, nonbank to export usurious interest would amount to an "end run" around state usury law, held the court.

An issue left wide open, however, is whether the parties here agreed to Delaware's interest rate by way of the choice-of-law provision in the card member agreement. Stated another way, the appeals court remanded to District Court to answer the question of whether New York usury laws would apply notwithstanding the parties choosing Delaware law to govern its disputes.

If you've received any communication from Midland Funding, LLC (and reside in New York), feel free to contact our office for a free consultation.



[1] NY Gen. Oblig. Law § 5-501.

[2] NY Penal Law § 190.40.

[3] Madden v. Midland Funding, LLC, et al., 2015 WL 2435657 (2nd Cir.)(Decided May 22, 2015).

[4] see OCC Bulletin 2014–37, Risk Management Guidance (Aug. 4, 2014), available at http://www.occ.gov/news–issuances/bulletins/2014/bulletin–2014–37.html

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