With the Supreme Court in flux, the highest authority in U.S. law has punted a landmark case over to the executive branch, effectively asking it to decide whether debt collectors can charge interest rates so high they’re deemed illegal in some states.
In Madden v. Midland Funding, LLC., a debt collection company purchased the plaintiff’s charged-off debt, but the plaintiff resided in New York state where the usury limit is 25% annually. The complaint was simple. Midland had tried to collect 27%, two points more than the state usury laws allowed. The U.S. Court of Appeals for the 2nd Circuit decided in the plaintiff’s favor, taking the view that the two percentage points over the state usury limit violated the Fair Debt Collection Practices Act.
The question answered by the 2nd Circuit had nothing to do with whether or not debt collectors should be allowed to hunt and potentially mortally wound those who are not financially strong — but more simply what sort of weaponry they should be able to use to do so.
Bazooka or Pellet Gun: The Problem
Madden v. Midland Funding LLC is a classic manifestation of our nation’s often rudderless approach to consumer financial safeguards.
For those who follow these things, it won’t be news that the lack of steerage has absolutely nothing to do with any inherent design flaw. The basics of the banking system’s ability to extend loans and charge interest on them established by Alexander Hamilton still works fine. Having said this, that system has sustained damage on the many rocks and reefs of patchwork legislation over the years, laws and regulations aimed specifically at empowering the lender—with the exception of extreme cases like loan sharking and other RICO offenses—over the interests of the borrower.
A 1978 Supreme Court case, Marquette Nat. Bank of Minneapolis v. First of Omaha Service Corp., decided that the National Banking Act of 1863 allowed a national bank to charge the interest rate of the state in which it was headquartered, regardless the rates applicable in the state where a borrower resides.
In 1980, Congress passed the Depository Institutions Deregulation and Monetary Control Act, which exempted federally chartered installment plan lenders from state usury limits. This is the underlying reason so many lenders scurried to set up shop in states like South Dakota and Delaware. They offer the most bank-favorable terms.
Now, under the post-Marquette reading of the National Banking Act, any nationally chartered bank could charge 27% interest, so long as it wasn’t headquartered in New York State, but that “professional courtesy” proffered by various lender-friendly generations of lawmakers could not be extended to Midland Funding. The reason: It is a non-bank. Therefore, the decision found, state usury laws applied.
The decision created quite a stir, because if upheld, many folks in the financial world argued, it would create Byzantine layers of complication since states have different applicable rates. First of all: this is ridiculous. There are already countless state and local laws that govern how debt collectors, banks and non-banks operate. One more is meaningless.
Meanwhile, the fate of countless consumers in the sights of debt collectors will be decided by the Obama administration, which has been asked to file a brief “expressing the views of the United States” in the matter of Madden v. Midland Funding LLC.
Pending Justice Antonin Scalia’s replacement, four votes are needed to get the case heard before the Supreme Court. Clearly, they don’t have the votes, and they are looking for some guidance on the matter from the president, or more precisely, from Obama’s Solicitor General Donald Verrilli.
What Should the Solicitor General Do?
Is it too blunt to say merely, “Duh?” There will always be a hunter-hunted component in the world of consumer debt collection. At issue is to what extent that will be allowed. Depending on the Solicitor General’s decision on behalf of this Administration, non-bank entities will either have to fish using the catch-and-release method, or they’ll get to use dynamite.
Right now, with Madden in the balance, the prevailing interpretation of the law allows abuses to occur. The 2nd Circuit decision suggests a new, more consumer-friendly chapter in consumer financial protections. Hopefully, Mr. Verrilli will decide that the 2nd Circuit got it right.