Madden v. Midland Funding, LLC: A Harbinger of Change
The NBA preempts all state law usury claims against national banks. See, e.g., Beneficial Nat'l Bank v. Anderson, 539 U.S. 1, 11 (2003). Madden involved usury claims; however, it did not directly involve a national bank. Instead, the Madden plaintiff alleged that Midland Funding, a nonbank buyer of defaulted debt, charged excessive interest on a credit card loan originally issued by a national bank. The debt buyer attempted to collect the debt in New York, applying the interest rate originally permitted by the national bank’s charter.
On appeal, the Second Circuit held that the debt buyer, not being a national bank, was not entitled to NBA preemption and so was subject to New York’s usury laws and could not charge the same interest rate as the originating bank. The court reasoned that extending preemption to nonbank entities would create a loophole allowing them to circumvent state usury laws, which it found was a result that Congress did not intend when enacting the NBA.
The Madden decision sent shock waves through the debt-buying industry, as many nonbank entities collect on high-interest loans purchased from national banks. Madden created significant uncertainty regarding the assignability of loans and the applicability of state usury laws to nonbank entities. Many in the financial industry saw Madden as a threat to the free flow of consumer credit. See, e.g., Diego Zuluaga, Invalid When Made: The District Court’s Madden v. Midland Decision, CATO Inst. (Mar. 20, 1018).
The Valid-When-Made Doctrine: A Temporary Shield for Lenders
In direct response to Madden, the OCC issued the “valid-when-made” rule. See In re Rent-Rite SuperKegs W. Ltd., 623 B.R. 335, 340 (D. Colo. 2020) (“The rule is expressly reactionary to ‘the legal uncertainty created by the Madden decision.’”).
The OCC’s valid-when-made rule stated, contrary to Madden, that the interest rate on a loan from a national bank remains valid after transfer, even if the loan is subsequently acquired by a nonbank entity. The OCC argued that this interpretation was necessary to ensure the stability and liquidity of the lending market, as it would allow national banks to readily sell loans without fear of state law challenges. See Permissible Interest on Loans That Are Sold, Assigned, or Otherwise Transferred, 85 Fed. Reg. at 33,532 (“Even in the mid-nineteenth century, the ability to transfer loans was recognized as an important tool to manage liquidity and enhance safety and soundness.”). The OCC’s rationale was at odds with the reasoning of the Madden court, which noted that experts such as Professor Adam J. Levitin of Georgetown University Law Center have pointed out that the valid-when-made rule “is a modern invention that could not have been incorporated into” the NBA when it was enacted. In re Rent-Rite SuperKegs W. Ltd., 623 B.R. at 340.
The valid-when-made rule effectively nullified Madden. Courts questioned the rationale of the OCC’s new rule but were constrained to defer to it, under the Supreme Court’s 1984 decision in Chevron U.S.A. Inc. v. Natural Resources Defense Council, Inc. Chevron, 467 U.S. 837 (1984); see, e.g., In re Rent-Rite SuperKegs W. Ltd., 623 B.R. at 340 (“Although I am convinced by Professor Levitin’s academic analysis and by the Second Circuit’s discussion, the Office of the Comptroller of the Currency (‘OCC’) in the U.S. Department of Treasury recently finalized a rule that upholds the valid-when-made rule in the instant context.”); California v. Off. of Comptroller of Currency, 584 F. Supp. 3d 844, 858 (N.D. Cal. 2022) (“Although Plaintiffs’ argument regarding of the history of the ‘valid-when-made’ principle is persuasive, as is Professor Levitin’s analysis of it, the Court concludes the OCC’s reliance on that principle does not render its interpretation of Section 85 unreasonable.”).
Loper Bright Enterprises v. Raimondo: Reasserting Judicial Independence
The Supreme Court’s June 2024 decision in Loper Bright effectively overruled Chevron and its requirement that courts defer to executive branch agency determinations. Loper Bright emphasized the independence of the judiciary and its “province and duty” to “say what the law is,” instead of deferring to agency interpretations of ambiguous statutes—an approach previously mandated by Chevron. Loper Bright Enters. v. Raimondo, 603 U.S. 369, 430 (2024).
In Loper Bright, the Supreme Court addressed the question of whether the secretary of commerce had the authority to require fishing vessels to pay for at-sea monitors. The Court held that the secretary lacked such authority, overruling the Chevron doctrine’s “Step Two” deference, which had for decades instructed courts to defer to an agency’s reasonable interpretation of ambiguous statutes. Loper Bright eliminated this mandatory deference, holding that courts should not defer to an agency interpretation unless the agency has clearly exercised its statutory authority. The Court emphasized a textualist approach to statutory interpretation, holding that courts should not defer to agency interpretations unless Congress has unambiguously delegated such authority.
Loper Bright’s Potential Impact on the Valid-When-Made Doctrine
Loper Bright effectively removes the shield of Chevron deference that previously protected the valid-when-made doctrine. After all, one court held that it was bound to apply the valid-when-made rule under Chevron, despite being “convinced” by the “counterargument” to it. In re Rent-Rite SuperKegs W. Ltd., 623 B.R. at 340. Without Chevron deference, courts are less likely to uphold the valid-when-made doctrine in the absence of explicit statutory authorization. This shift leaves nonbank entities that purchase loans originated by national banks potentially exposed to state usury claims.
The demise of the valid-when-made doctrine has far-reaching implications. Lenders, particularly nonbank entities, will need to carefully assess the potential impact of state usury laws when purchasing loans originated by national banks. Borrowers may benefit from increased protection against high interest rates. The financial industry as a whole will need to adapt to a new legal landscape, potentially leading to changes in loan pricing, underwriting practices, and the structure of loan transactions.
The combined effect of Madden and Loper Bright has reinforced the importance of state usury laws and may limit the ability of nonbank entities to rely on NBA preemption to avoid state law restrictions. Potential implications include the following:
- Increased Compliance Costs: Nonbank entities must now carefully analyze the interest rates they charge on loans purchased from national banks to ensure compliance with applicable state usury laws. This requires sophisticated compliance programs and legal expertise, increasing operational costs.
- Reduced Loan Purchases: The uncertainty surrounding the applicability of state usury laws may discourage nonbank entities from purchasing loans originated by national banks, potentially reducing the liquidity of the secondary market for loans.
- Increased Litigation: Borrowers are now more likely to challenge high-interest loans, leading to increased litigation and potential liability for nonbank lenders.
- Focus on State Licensing: Nonbank entities may increasingly seek state lending licenses to avoid usury law challenges, subjecting them to state regulatory oversight.
Conclusion: A New Era of Uncertainty
Loper Bright’s rejection of Chevron deference and its emphasis on textualism have resurrected Madden and signaled the possible end of the valid-when-made doctrine. This shift in the legal landscape creates significant uncertainty for the financial industry, requiring lenders to navigate a complex web of federal and state laws. The long-term effects of this change remain to be seen, but it is clear that Loper Bright has ushered in a new era in the relationship between federal and state banking rules.
