FDIC and OCC Weigh in on Madden Decision

There were some new developments in the Madden case, something we have been following for many years here on Lend Academy (see here, here and here).

Law360 is reporting (subscription required) about a bankruptcy case in Colorado that involved a high interest small business loan that was originated by a bank in Wisconsin and then acquired by New Jersey-based World Business Lenders LLC. The Colorado company that is currently in bankruptcy proceedings claimed the loan was no longer valid because the interest rate exceeded Colorado usury laws. The judge disagreed and disallowed the exclusion of the loan stating that the loan’s interest rate was “permissible as a matter of federal law.”

What is most interesting about this case is that the FDIC and OCC jointly filed a 34-page amicus brief with the court. It contains some pretty damning language about the Second Circuit 2015 decision in the Madden case. Here is an excerpt from the brief:

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. Madden’s disregard of two centuries of established law — without even addressing such law — is not just wrong: it is unfathomable. And it is doubly disconcerting given its negative impact on the credit markets and the banking system.

This is pretty damning language from the two banking regulators. They make it crystal clear that the Madden decision was wrongfully decided in their opinion and should be overturned. Last year there was a “Madden Fix” bill that passed the house with bipartisan support but it failed to progress in the senate.

I reached out to Nat Hoopes of the Marketplace Lending Association and this is what he had to say about this news from Colorado:

There is near total consensus in the legal and regulatory community that the original Madden case was wrongly decided. The FDIC-OCC joint brief in Colorado this week is a key development – it rebuffs Madden as precedent and again confirms the sanctity of the 200-year-old valid when made doctrine. But there is a human element here as well. Research produced by multiple independent academics has documented the many harms Madden produced – including a rise in personal bankruptcies and a sharp decline in available credit in the 2nd Circuit states. So the FDIC – OCC amicus brief in Colorado is also a strong defense of consumers and small businesses that seek to access more transparent, affordable credit options.

This last point that Nat makes is something that does not get enough attention. Because few lenders want to lend in second circuit states above the state usury rates (for consumers it is 12% in CT, 16% in NY and 12% in VT) many consumers find themselves unable to get a loan. So, they resort to payday loans or another form of expensive credit and fall into a debt trap that often leads to bankruptcy.

A legislative fix is still needed and the MLA as well as many other organizations are still pushing hard for it. This amicus brief should make the argument for this fix a little stronger now.

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