The Obama administration and an independent federal banking agency are advising the Supreme Court not to review a lower-court ruling that has roiled the marketplace lending sector and caused consternation throughout much of the consumer finance industry.
The case hinges on the question of whether nonbanks that buy loans from banks can benefit from a key privilege enjoyed by banks – the right to charge interest rates in excess of state usury caps.
Financial industry officials raised loud objections after the 2nd Circuit Court of Appeals ruled against a debt-collection firm that bought credit card debt from a Bank of America subsidiary and was later sued by the borrower for charging excessive interest.
In a joint brief to the Supreme Court, the U.S. solicitor general and the Office of the Comptroller of the Currency express agreement with numerous objections that financial industry officials have lodged about the lower court's ruling. The administration even goes so far to call the decision, which has implications for banks' preemption authority, incorrect.
Still, the administration officials argue that there is no split between the lower courts on the legal questions raised by the case. And they conclude that the case, Madden v. Midland Funding, would be a poor vehicle for settling those issues.
The New York-based appeals court remanded the suit back to the district court, where Midland Funding could still prevail.
"Because the briefing in the court of appeals failed to address key components of the preemption analysis, this is an unattractive case for further review," administration officials argue in a 25-page legal brief.
Back in March, the Supreme Court asked the Obama administration to offer its advice on whether to take the case.
Court watchers have said that when the solicitor general's office recommends against hearing a case, the Supreme Court follows that advice slightly more often than not.
The appeals court's ruling, issued in May 2015, cast legal doubt on various arrangements in which nonbanks benefit from privileges accorded to banks.
Although the ruling is currently binding only in New York, Connecticut and Vermont, many in the financial industry worry that the same reasoning could eventually be applied nationwide.
The fears are particularly acute inside the online lending sector, where many firms partner with banks to issue their loans in order to avoid complying with state-by-state usury laws. Even though the case does not directly involve online lending, industry lawyers worry that the appeals court's reasoning could be used to force online lenders to comply with state rate caps. Uncertainty about the ruling has contributed to rising skittishness among loan buyers.
Banks are also eager for the Supreme Court to hear the case, in hopes that the lower court's ruling will be reversed.
In a brief filed in December, the American Bankers Association and other industry groups argued that the lower court's decision could discourage banks from selling loans on the secondary market because the loan buyer might then have to lower the borrower's interest rate.
"In today's banking environment, efficient lending requires not only a functioning primary market in which banks make loans to borrowers, but also an efficient secondary market in which banks sell loans to other parties," the trade groups stated.
From a policy standpoint, the Madden case raises two issues that have long been hot buttons in Washington.
The first is consumer protection, an area where the Obama administration has sought to build a legacy with the establishment of the Consumer Financial Protection Bureau. The lower court's ruling was seen as a victory for consumers, and that win may be jeopardized if the Supreme Court decides to take the case.
The second issue is preemption — or the application of federal banking law in a way that preempts state laws — which is a delicate subject for banking agencies like the Federal Reserve Board and the OCC.