Debt buyers cannot rely on National Bank Act thanks to Madden V. Midland Funding LLC decision
In Madden, the Plaintiff, a New York resident, opened a credit card account with a national bank. The credit card agreement was later amended by a subsequent national bank based in Delaware to permit the bank to charge an interest rate of 27 percent. While this interest rate was permissible under Delaware law, the rate exceeded New York’s interest rate cap of 25 percent. After the Plaintiff defaulted, the account was charged off and sold to the defendant, Midland Funding, LLC (“Midland”). Midland, which is not a national bank, thereafter attempted to collect on the account in New York, applying the 27 percent interest rate provided for in the credit card agreement.
The Plaintiff did not pay the debt and instead instituted a class action lawsuit against Midland, alleging that Midland had engaged in abusive and unfair debt collection practices in violation of the Fair Debt Collection Practice Act, 15 U.S.C. §§ 1692, et seq. (“FDCPA”), when it attempting to collect a debt with a usurious interest rate (i.e. in excess of New York’s 25 percent).
Midland denied liability under the FDCPA, arguing that the National Bank Act protected them from a claim of usury under New York Law because the National Bank Act preempted the Plaintiff’s claim and thus the application of a rate in line with Delaware’s usury laws, but in excess of New York’s, was entirely permissible.
While the District Court agreed with Midland, the Second Circuit reversed, holding that the National Bank Act did not extend to Midland because Midland was not a nationally charted bank and, because it had purchased the charged-off account, was not acting on behalf of a national bank. The case was then remanded to the District Court for further consideration.
In light of this decision, it is clear, at least within the Second Circuit, that buyers of charged-off debt from nationally chartered banks must be particularly careful when determining what interest rate to apply when attempted to collect on these accounts.