Buying Notes from Banks and Think You’re Okay From Usury? Think Again.

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Madden v. Midland Funding, LLC, a case before the Second Circuit Court of Appeals held that a non-bank entity is not entitled to protections from usury claims under the National Bank Act (“NBA”) after taking assignment of debt that was originated by a national bank. Last week, the Supreme Court chose not to review a Second Circuit Court of Appeals decision. What does this mean? This means the Supreme Court impliedly acknowledged that usury laws still apply to debt purchased from a bank even though a bank, if they owned the note, would be exempt from those laws.

The Case

In late 2015, Midland was accused of violating New York’s usury law. The company purchased debt that had interest rates higher than acceptable under the law. Midland Funding, a division of Encore Capital Group, is facing a class action suit alleging a violation of the law.

The case addressed the rights of purchasers of debt from a national bank and their ability to collect interest above that restricted by individual state usury laws. Under the case, the credit was originated by a national bank and later assigned to a non-bank debt purchaser. The interest rate being charged by the debt buyer, Midland Funding, exceeded the debtor’s home state of New York usury rate.

Saliha Madden sued Midland for charging 27 percent interest on credit card debt that the company bought from Bank of America and the federal government. SCOTUS decided with the plaintiff in that case and rejected Midland’s request to have the decision reviewed.

Encore Capital believes that the Second Circuit misinterpreted established law in making their decision in the original case. They stated that their actions “complied with state law” and continue to maintain their innocence.

Encore issued a statement that said the inability of the high court to reach a decision is evidence that the lower court’s decision was misinterpreted, and that they still are unsure of how these rules should apply.

It is not clear how Midland will proceed with regards to the decision, but at this time, the Supreme Court decided that they should step aside and allow the lower court’s decision to prevail.

The Bottom Line

If you buy notes from banks and you charge interest and penalties under those notes and those charges are greater than the applicable state’s usury law allows, you could be subject to a lawsuit or, even more significant, state or federal regulators trying to fine you.

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