Madden Fix Bill Passes House, Seeks to Restore Valid When Made Doctrine

Feb 21, 2018 | News

The House this week passed the Protecting Consumers’ Access to Credit Act of 2017 in the hopes of overturning a court decision in the Second Circuit that previously refused to extend the National Bank Act’s rate exporting privileges when a third party debt buyer attempted to collect on what was owed. The bill will now shift to the Senate, where a bipartisan group has advocated for the bill’s language since last summer.

 

At issue in the bill is the restoration of the “valid when made” doctrine that was seemingly overturned in the case Madden v. Midland Funding. In Madden, a bank sold an uncollected credit card debt to a third party. That third party attempted to continue charging an interest rate of 27% on the amount owed- the same rate previously charged by the bank creditor. Madden, a resident of New York, claimed that Midland Funding’s attempt to charge 27% violated New York state’s usury limit of 25%. 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. The companion bills would nullify this decision and reaffirm the doctrine of “valid-when-made,” which transfers loan terms to third party debt purchasers located outside the original creditor’s home state.

 

The Madden case was a hot topic last month at a House Financial Services Committee hearing on the future of FinTech. Panelists and members of the subcommittee tended to agree that the case damaged the abilities of banks to partner with FinTech and a Congressional remedy was needed.

 

Lisa McGreevy of the Online Lenders Alliance, a trade organization involved in online financial services, had this to say of the bill’s passage in the House, “we applaud Reps. McHenry and Meeks for introducing this legislation that helps consumers by strengthening capital markets and competition, and we urge the Senate to take up this legislation and pass it immediately.” Although the Senate bill has been introduced and read at the Banking Committee, it has yet to come up for a vote.

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