Federal Regulators Criticize Madden Decision
In an amicus brief submitted on September 10, the Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC) heavily criticized the 2015 Second Circuit decision in Madden v. Midland Funding that seemed to overturn the “valid-when-made” doctrine.
For some historical context, Madden v. Midland Funding originated in 2011. At that time, a bank sold an uncollected credit card debt to a third party. That third party was Midland Funding, which attempted to continue charging an interest rate of 27 percent on the amount owed, which was the same rate previously charged by the bank creditor. Madden, a resident of New York, claimed that Midland Funding’s attempt to charge 27 percent violated New York state’s usury limit of 25 percent. The court ultimately determined that the rate exporting permission for banks under the National Bank Act did not extend to third-party purchasers of debt.
This decision has been heavily criticized by the financial services sector and the Department of Treasury. It is now receiving criticism from two federal regulators of financial services, the FDIC and the OCC. Their amicus brief argued for the valid-when-made doctrine, which deems that a loan’s interest rate is legal as long as the loan’s interest rate was legal (i.e. valid) when made.
“The valid-when-made rule has withstood the test of time because it is compelled by commercial needs, fundamental fairness, and general principles of contract law,” said the FDIC and the OCC. “Lenders often need to transfer loans, and as the Supreme Court explained in allowing an assignee to enforce a valid-when-made rate, a debtor should not be allowed to ‘be discharged of a debt which he justly owes to someone’ simply because the maker of the loan had to sell it.”
The federal regulators also argued for the stand-in-the-shoes rule, which derives from contract law. It means that the assignee of a loan stands in the shoes of the original assignor. “The assignee is merely enforcing the rights of the assignor, and the law ‘conceptualizes the matter’ as if the assignor, not the assignee, ‘stands before the court.’”
Despite courts adhering to the valid-when-made doctrine and the stand-in-the shoes rule for centuries, the Second Circuit failed to even mention them in their 2015 decision. “Madden failed to consider the valid-when-made rule and the stand-in-the-shoes rule, either of which defeats the debtor’s usury claim,” said the federal agencies. “Madden’s disregard of two centuries of established law – without even addressing such law – is not just wrong: it is unfathomable.”
Although Madden v. Midland Funding has been settled, there is current litigation dealing with similar issues. Time will tell whether the judges presiding over these cases will adhere to the Second Circuit’s 2015 decision or be persuaded by the arguments put forth by the FDIC and the OCC.