United States: Second Circuit Holds Application Of State Usury Laws To Third-Party Debt Purchasers Not Preempted By National Bank Act

On May 22, 2015, in Madden v. Midland Funding, LLC1 ("Madden"), the United States Court of Appeals for the Second Circuit held that the application of state usury laws to third-party assignees is not preempted by the National Bank Act (the "NBA") but rather such assignees remain subject to state usury limits.  The Madden decision has potentially far-reaching implications for investors in, and securitizers of, bank-originated loans to the extent that it casts into doubt the ability of an assignee of a bank loan to collect interest at the rate originally provided for in the agreement.


The NBA expressly permits national banks to "charge on any loan ... interest at the rate allowed by the laws of the State, Territory, or District where the bank is located."2  Numerous decisions by the United States Supreme Court have recognized that the NBA "completely preempts ... state-law usury claims" because the NBA "provides the exclusive cause of action" for usury claims against national banks.3  According to the Supreme Court, "[u]niform rules limiting the liability of national banks and prescribing exclusive remedies for their overcharges are an integral part of a banking system that needed protection from possible unfriendly State legislation."4  Thus, as a consequence of the NBA's preemption of state usury laws, "a state in which a national bank makes a loan may not permissibly require the bank to charge an interest rate lower than that allowed by its home state."5

In Madden, the plaintiff, a resident of the State of New York, opened a credit card account with Bank of America, N.A. ("BANA"), a national bank, in 2005.  BANA subsequently transferred the account to FIA Card Services, N.A. ("FIA"), an affiliated national bank headquartered in Delaware.  At the same time, the terms and conditions of the account were amended upon receipt by plaintiff of a contract containing a Delaware choice-of-law provision (the "Amended Terms").  Delaware law permits interest at any rate agreed upon and therefore, under Section 85 of the NBA, FIA could collect from its cardholders any rate of interest set forth in the Amended Terms, notwithstanding usury limits established under the state law where its cardholders reside.

In 2008, after the plaintiff failed to make timely payments on the account, FIA charged off the debt on the account and sold the plaintiff's debt to Midland Funding, LLC ("Midland Funding"), a third-party debt purchaser that is not a national bank.  After Midland Funding acquired plaintiff's debt, neither FIA nor BANA retained an ownership interest in the account.  Under the Amended Terms, the applicable rate of interest was 27%, a rate of interest allowed under Delaware law and, pursuant to the "rate exportation" provisions of the NBA, a permissible rate of interest that could be applied to FIA's borrowers, wherever located.

In November 2010, Midland Credit Management, Inc. ("Midland Credit"), an affiliate servicer of Midland Funding's consumer debt accounts, sent a letter to the plaintiff seeking to collect on the debt and stating that an annual interest rate of 27% applied to the balance due.  While the 27% rate was provided for under the Amended Terms and permissible under Delaware law and the NBA, the rate exceeded the general usury rate under New York law.6

The District Court's Decision

Plaintiff subsequently brought a putative class action against Midland Funding and Midland Credit (collectively, the "defendants") in the United States District Court for the Southern District of New York, alleging that the defendants violated the Fair Debt Collection Practices Act (the "FDCPA") and New York's usury law by collecting an usurious interest rate that was higher than that permitted in New York.  The defendants argued that, as valid assignees of debt originated by a national bank, the plaintiff's account remained subject to the NBA's preemption of state usury laws.  The District Court agreed and entered a stipulated judgment in favor of the defendants, holding that (i) Section 85 of the NBA preempted state law usury claims and (ii) the FDCPA claims failed because the 27% interest rate was permitted under the Amended Terms in accordance with Delaware law. 

The Second Circuit's Decision

On appeal, the Second Circuit reversed, holding that the federal preemption of state usury laws does not extend to non-national bank assignees of national banks, thus subjecting such assignees to state law usury restrictions with respect to interest that accrued after assignment. 

As a preliminary matter, the Second Circuit noted that Section 85 of the NBA expressly permits national banks to charge interest at any rate permitted under the laws of the state in which it is located, and "completely preempts analogous state law usury claims."7  In this regard, the Second Circuit correctly recognized that Section 85 of the NBA expressly provides for complete and unconditional preemption of state restrictions on interest that may be charged.  Nonetheless, the Second Circuit, in a somewhat confusing opinion, then concluded that this federal preemption does not extend to assignees of national banks, i.e., that assignees of national bank loans cannot rely on the rate provided for in the agreement for any interest that accrues after the date of assignment.

The Second Circuit reasoned NBA preemption did not extend to the defendants as assignees because they were acting on their own behalf, and not on behalf of BANA or FIA in attempting to collect on plaintiff's debt.  In doing so, the Second Circuit relied on vague guidance from the Office of the Comptroller of the Currency that, according to the court, "made clear that third-party debt buyers are distinct from agents or subsidiaries of a national bank."8  According to the Second Circuit, extending the NBA's preemption to a third party debt purchaser "would create an end-run around usury laws for non-national bank entities that are not acting on behalf of a national bank."9  The Second Circuit did not cite to any precedent construing the express preemption afforded by Section 85, but rather cited precedent relating to other aspects of the NBA.10

The Second Circuit distinguished two seemingly contrary Eighth Circuit decisions relied on by the defendants and the district court.  In Krispin v. May Dep't Stores Co., the court held that the NBA preempted usury claims against a department store that purchased the receivables for accounts held by a national bank, and played a role in account collection:  "it makes sense to look to the originating entity (the bank), and not the ongoing assignee (the store) in determining whether the NBA applies."11  The Second Circuit, distinguished Krispin on the basis that the bank retained ownership of the accounts and thus was the real party in interest.  According to the Second Circuit, that the originating entity was a national bank has no significance.12  In Phipps v. FDIC, the court cited to Krispin in dismissing state usury claims against a national bank and its non-national bank assignees.13  The Second Circuit distinguished Phipps on the basis that the national bank was the entity that charged the challenged interest, whereas in Madden, the challenged interest was accrued after the sale of the account to the defendants.14

Concluding that the defendants were not acting on behalf of BANA or FIA in attempting to collect on plaintiff's debt, the Second Circuit therefore held that the interest rate preemption afforded by Section 85 of the NBA simply did not apply and that the defendants therefore were subject to New York's usury restriction with respect to interest that accrued after assignment. 

The Implications

The Second Circuit's decision in Madden may have far-reaching – and likely unintended – implications for national banks and their assignees if the rate of interest charged by the bank on a loan may be deemed unenforceable (if not illegal) by the assignment of the loan from the national bank to a non-bank entity.  The Second Circuit's decision up-ends a fundamental and longstanding premise of lending law – that a fully-funded loan that is valid and enforceable when made remains valid and enforceable (including with respect to the rate of interest accruing), regardless of to whom that loan is subsequently assigned.  Under Madden, however, the rate of interest that can be collected on a bank-originated loan may vary after assignment, depending on the identity of the assignee and where the assignee resides (given that usury rates vary depending on the type of creditor as well as from state to state).15  The Madden decision thus calls into question the enforceability of bank- and thrift-originated loans that have subsequently been assigned to non-bank entities such as hedge funds, securitization vehicles, whole-loan purchasers, and other investors.

Next Steps

The Defendants have made clear that they intend to petition the Second Circuit for rehearing en banc.  Given the significance of the Second Circuit's decision, we anticipate significant industry efforts to support en banc review and reversal.


1 No. 14-2131-cv, 2015 WL 2435657 (2d Cir. 2015)

2 12. U.S.C. § 85.

3 2015 WL 2435657, at *3 (quoting Beneficial Nat'l Bank v. Anderson, 539 U.S. 1, 11 (2003); Sullivan v. Am. Airlines, Inc., 424 F.3d 267, 275 (2d Cir. 2005)). See, e.g., Smiley v. Citibank (South Dakota), N.A., 517 U.S. 735, 744 (2008) (citing Marquette Nat'l Bank of Minneapolis v. First of Omaha Serv. Corp., 439 U.S. 299 (1978).

4 Beneficial, 539 U.S. at 10 (citation omitted).

5 Pac. Cap. Bank, N.A. v. Conn., 542 F.3d 341, 352 (2d Cir. 2008).

6 See N.Y. Penal Law § 190.40 (McKinney 2010 & Supp. 2015) (proscribing interest from being charged at a rate exceeding 25% per year).

7 2015 WL 2435657, at *3 (quoting Sullivan, 424 F.3d at 275).

8 2015 WL 2435657, at *4 (citing OCC Bulletin 2014-37, Risk Management Guidance (Aug. 4, 2014)).

9 2015 WL 2435657, at *5.

10 The Second Circuit cited exclusively to precedents relying on an entirely separate theory of preemption known as "implied preemption."  The theory of implied preemption is altogether different from the preemption of interest rates provided for in Section 85 of the NBA.  Implied preemption is not derived from a specific, express statutory mandate (such as Section 85 of the NBA), but rather from the idea that national banks are federal instrumentalities – creatures of the federal government – and therefore are not subject to state laws that significantly interfere with their operations.  Barnett Bank of Marion County, N.A., v. Nelson, 517 U.S. 25, 33-34 (1996).  Implied preemption theory is based on the Supremacy Clause of the Constitution and, unlike express preemption, is conditional, i.e., implied preemption overrides only those state laws that significantly interfere with the operations of federal instrumentalities (such as national banks).  Implied preemption has been asserted in matters where Congress has not expressly preempted state law by statute – for example, the ability of a national bank to impose returned check charges or other fees on deposit accounts, or to sell annuities.  Preemption of interest rates under Section 85, by contrast, is materially different.  Section 85 expressly preempts state laws without exception, and does not require a showing of significant interference with the operations of a national bank.

11 218 F.3d 919, 924 (8th Cir. 2000).

12 2015 WL 2435657, at **5-6.

13 417 F.3d 1006, 1013 (8th Cir. 2005).

14 2015 WL 2435657, at *6.

15 Applicable usury rates vary from state to state, depending on the type, size, and purpose of the loan, the nature of the borrower, and the nature of the lender.  For consumer loans, the applicable statute usury limit can be as low as 7%; for commercial loans, the applicable usury limit can be as low as 10%.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
Cadwalader, Wickersham & Taft LLP
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Cadwalader, Wickersham & Taft LLP
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions