June 4, 2020: In 2015, in the matter of Madden v. Midland Funding, LLC, the Second Circuit made news in the lending and debt buying industries when it held a non-bank purchaser of bank-originated credit card debt was subject to New York State’s usury laws. See, Madden v. Midland Funding, LLC., 786 F.3d 246, 250-51 (2d Cir. 2015). Prior to Madden, lenders and debt buyers had assumed nationally chartered and FDIC insured banks were exempt under federal law from various state and local regulations—including state usury limits that are lower than those of the bank’s home state. But the Second Circuit disrupted this long-held belief by holding to the contrary. In response, RMAI sought clarity in the law in order to stabilize the orderly function of markets and promote the availability of credit. Specifically, RMAI’s Comments advocated for a final rule that would make clear a bank may transfer a loan without affecting the legally permissible interest term.
On Friday, May 29, 2020, RMAI’s advocacy efforts were rewarded. On this date, the Office of the Comptroller of the Currency, ended the debate over whether the sale, assignment or transfer of a loan includes the transfer of a loan’s permissible interest rate, by ruling that when a national bank or savings association sells, assigns, or otherwise transfers a loan, interest permissible before the transfer continues to be permissible after the transfer. For more information about the new rule, click here.
The rule applies to all national banks and state and federal savings associations and takes effect on August 3, 2020, 60 days after publication in the Federal Register. This is a very meaningful win for the members of RMAI and brings five years of uncertainty, litigation and risk to a final close.
So, what does this mean? Members of RMAI who purchase debt from national banks or savings and loan associations may want to share a copy of the new rule with their upstream sellers and their downstream collection agencies. Click here to review a copy of the Federal Register Notice.
The uncertainly caused by the Madden decision is over. Loan portfolios should be combed for interest rate provisions and consumers should be notified of any changes in terms as may be required by the loan agreement or state law. Collector scripts, payment portals and consumer communications should be reviewed to determine whether interest rate information must be updated. Finally, as new portfolios are presented for sale, both sellers and buyers should address whether interest has accrued on the balance and whether interest will continue to accrue after the sale, assignment or transfer of the loan.
Your dues dollars and Legislative Fund contributions resulted in RMAI’s successful lobbying efforts to assure the sale, assignment or transfer of contract rights includes permissible interest. That is a big deal! Every day, RMAI’s advocacy efforts take on federal and state issues like this one that affect your ability to do business and your bottom line. Thank you for your membership.
This alert is intended for members of the Receivables Management Association International and is for informational purposes only and is in no way intended to provide legal advice. Members are encouraged to consult with an attorney of their choice for legal advice concerning this matter.