The Supreme Court on Monday asked the Obama administration to express its views in a case that has raised doubts about the business model used by many online lenders.
The suit, Madden v. Midland Funding, is being watched closely by online lenders that rely on bank partnerships to avoid complying with state-by-state interest rate caps.
In a one-sentence order, the court invited the U.S. Solicitor General’s office to file a brief in the case. The immediate effect of that decision is to extend a period of uncertainty for online lenders, since it delays the court’s ultimate decision on whether to hear the appeal of a May 2015 ruling by the 2nd Circuit Court of Appeals.
That ruling did not directly involve online lending, which is sometimes called marketplace lending or peer-to-peer lending. But its potential ramifications on the nascent sector have made some investors skittish.
The case involves the sale of charged-off credit card debt by a Bank of America subsidiary. The appeals court found that the bank’s legal authority to charge an interest rate in excess of state usury caps did not transfer to the debt buyer.
The fear among many industry participants is that the appeals court’s reasoning, if it is upheld, could eventually force online lenders to comply with state-by-state interest rate caps.
If the Supreme Court does decide to hear the case, some observers believe that the court will likely overturn the 2nd Circuit’s ruling.
But the appeal also carries risks for online lenders. At the moment, the 2nd Circuit’s decision is binding only in New York, Connecticut and Vermont. If the ruling is upheld, it would apply in all 50 states.
There is also the possibility that the Supreme Court, which has only eight members following the death of Justice Antonin Scalia, will split 4-4. In that scenario, the 2nd Circuit’s decision would remain in effect in only three states.
Lending Club and Prosper Marketplace are among the online lenders that are watching the Supreme Court closely.
Last month, San Francisco-based Lending Club
The potential implications of the case go well beyond online lending. The resolution of the case could also affect the private-label credit card industry and the sale of charged-off debt by banks
