Bill to unwind Madden ruling clears House, but Senate is question mark
WASHINGTON — The House passed a bill Wednesday that would allow debt buyers, including fintech firms, to bypass state interest rate caps.
The bill would define a loan and the interest rate set by the lender as “valid when made,” regardless of whether the loan is later sold to a nonbank, such as a marketplace lender, in a different state. Such a definition was long assumed for years, with debt buyers operating as if they enjoyed the same preemption powers as national banks to avoid state interest caps.
A court ruling in 2015 by the U.S. Court of Appeals for the Second Circuit said such loans in fact did not enjoy such favorable treatment, calling into question transactions that fell under the laws of Connecticut, New York and Vermont.
The legislation, which passed 245 to 171 and was introduced by Rep. Patrick McHenry, R-N.C., would essentially reverse the Madden v. Midland decision. Supporters argue the court ruling has since thwarted marketplace lenders from buying debt from banks and ultimately, prevented companies from offering more credit to consumers.
“The Second Circuit decision has caused considerable uncertainty and risk for many types of bank lending programs,” House Financial Services Chairman Jeb Hensarling, R-Texas, said during a House floor debate Wednesday. “Being able to offer consistent terms nationwide is vital to scaling the marketplace lending business, which in turn allows lenders to access cheaper investment capital and then pass the savings on to the borrowers.”
McHenry put forward the bill in mid-2016 after the Supreme Court had declined to hear the case. The appeals court had determined that a debt buyer, Midland Funding LLC, could not charge a consumer an interest rate that was higher than New York’s usury cap after buying debt from a Bank of America unit.
“If we’re serious about financial inclusion for all Americans, we need this bill today,” said McHenry. “And if we’re serious about modernizing our financial system, we need this bill passed into law.”
But the House Financial Services Committee's top Democrat, Rep. Maxine Waters of California, said lenders' claims that they cannot make loans because of the Second Circuit decision have “not been substantiated.”
Although the bill enjoys some Democratic support in the House, it faces an uphill battle in the Senate, which requires a 60-vote threshold but where the GOP holds just a 51-49 vote majority. (Sixteen House Democrats voted for the bill Wednesday.)
Democrats and consumer groups opposed to the bill say it is too broad and would open the door to predatory lenders charging interest rates higher than state limits.
“I do not doubt the sincerity of the good actors that may be trying to navigate difficulty the Madden ruling potentially caused,” Waters said. But this bill “will go much further to allow other parties, including payday lenders, to evade or outright disregard state-level laws.”
The Senate has yet to consider a proposal to address the Madden case. The Senate Banking Committee's focus of late has been on a bipartisan bill sponsored by Chairman Mike Crapo to make targeted reforms to the Dodd-Frank Act. A Madden fix is unlikely to be attached to that bill, sources said. However, they added that the Madden bill could get support from moderate Democrats if language is added to prevent certain payday lenders from abusing the federal preemption of state interest rate caps.
If the bill instead “focuses on online lenders and fintech firms providing credit to people left behind, then that is something that could clear the Democratic side,” said Isaac Boltansky, an analyst at Compass Point Research & Trading.
The financial and fintech industries are largely in favor of McHenry’s bill. However, many banks and debt buyers have already adjusted their purchase agreements to conform to the Second Circuit decision by having the banks retain a portion of the debt sold, Boltansky said.
The bill, if passed, would “still have a meaningful impact, but a lot of the bigger lenders have already shifted to a different structure,” he said.