Knowing When to Walk Away
Still Not Valid When Made
Last year, we posted about Madden v. Midland Funding, LLC, 786 F.3d 246 (2d Cir. 2015), where the Second Circuit Court of Appeals decided to ignore the "Valid When Made" doctrine. This is the established common law doctrine that if a loan is non-usurious when made, it remains non-usurious when assigned to another creditor, even when the new creditor would not qualify for the lending authority exercised by the loan originator. In its decision, the Second Circuit departed from precedent in the Fifth, Seventh, and Eighth Circuit Courts of Appeal. Financial institutions buying and selling debt on the secondary market hoped that the United States Supreme Court would step in, reverse the Second Circuit, and endorse the "Valid When Made" doctrine.
The Supreme Court asked the Solicitor General to weigh in, which it did, in unusual fashion. It strongly criticized the Second Circuit decision as incorrectâbut then recommended that the Court deny the petition. It pointed to the cases from the Fifth, Seventh and Eighth Circuits as correct interpretations of Section 85 of the National Banking Act, and relied on 1828 and 1833 Supreme Court cases confirming the "Valid When Made" doctrine. But the Solicitor General said that there was no circuit split, because the Second Circuit decision was only interlocutory and could be corrected on remand!
Ultimately, the Supreme Court denied Midland's petition, without comment. Midland Funding, LLC v. Madden, 136 S. Ct. 2505 (2016). This result apparently leaves the Madden decision as binding precedent on federal courts that sit in New York, Connecticut, and Vermont. In addition, a district court in the Third Circuit has apparently followed Madden in a "rent-a-bank" case brought by the Pennsylvania attorney general. Pennsylvania v. Think Finance, Inc., 2016 U.S. Dist. LEXIS 4649 (E.D. Pa. Jan. 14, 2016). Besides the Fifth, Seventh, and Eighth Circuits, other courts of appeal have yet to weigh in. The Solicitor General's recommendation notwithstanding, it would have been desirable for the Court to correct the Second Circuit.
In July, Representative Patrick McHenry (R-NC) introduced a bill in Congress to address the uncertainty. The Protecting Consumers' Access to Credit Act of 2016, H.R. 5724, would amend the National Bank Act and the Federal Deposit Insurance Act to provide that federal interest rate preemption applies "regardless of whether the loan is subsequently sold, assigned, or otherwise transferred to a third party." However, no congressional action has been reported on the bill since then.