February 19, 2020 - The LSTA last week joined an amicus brief in a Colorado case that is considering the question, “can a loan validly originated become invalid because it is subsequently sold or assigned to another party?” Until very recently, the answer to that questions was emphatically no. But in 2015, in a case called Madden v. Midland Funding, the Second Circuit Court of Appeals ruled that a loan legally made by a bank became usurious when sold to a non-bank. The court held that even though the loan was valid when made under the National Bank Act of 1865 (the “NBA”), which preempts any state usury laws, a purchasing entity that is not a bank cannot rely on that preemption protection. Why do we care? The ability to “export” interest rates is critical for liquidity generally and for securitization markets in particular. A reduction in liquidity would likely spread upstream to the loan origination market, reducing the availability of credit and thereby harming the U.S. financial system and economy. These effects will likely be exacerbated because Madden was decided by the Second Circuit which encompasses New York, the center of the financial markets.
The case in which the LSTA, the Bank Policy Institute and the American Bankers Association filed their brief, Fulford v. Marlette Funding, was brought by the Colorado Administrator of the UCC who is responsible for enforcing Colorado’s lending laws. She alleges that Marlette Funding was charging usurious interest rates and other fees in violation of state law, claiming that Marlette was using its association with Cross River Bank, a New Jersey-chartered bank, to skirt Colorado state caps on interest rates. The amici argue that the Administrator is wrong for three principal reasons. First, courts have long recognized a “cardinal rule” that if a loan was not usurious at the time it was made no “after circumstance” can make it so. Second, the NBA and a similar law, the Federal Insurance Act of 1980 (the “FDIA”), incorporate the “cardinal rule” and preempt state-law usury claims. And, third, as the OCC and the United States Solicitor General have argued, the Second Circuit’s decision in Madden v. Midland was wrong and should not be extended. Amici end by positing that adopting the Madden standard would have substantial negative consequences for the credit markets and for the Colorado and national economies. We will continue to closely monitor this case.