Rejecting calls from across the financial-services industry, the U.S. Supreme Court let stand a ruling that gives borrowers more power to enforce state limits on interest rates.
The justices turned away a company's effort to avoid a class-action lawsuit over its efforts to collect credit-card debt from New York consumers.
The rebuff leaves intact a federal appeals court ruling that lenders say is already having far-reaching effects by undercutting the burgeoning internet lending business and raising questions about debt-backed securities that contain high-interest loans.
The practical effects "are difficult to overstate," the debt collector, Encore Capital Group Inc.'s Midland unit, argued in the appeal.
The 2nd U.S. Circuit Court of Appeals in New York said borrowers in some circumstances can invoke their state's usury laws, as the interest-rate caps are known, even if the loan originates elsewhere.
The ruling gave new life to a lawsuit by Saliha Madden, a New York woman who says she shouldn't have to pay the 27 percent interest Midland says she owes on credit-card debt. New York caps rates at 25 percent.
Midland argued that the U.S. National Bank Act blocked New York's usury law because the debt collector bought the lead plaintiff's loan from a Bank of America Corp. unit that is regulated under the federal law. The appeals court said the federal statute didn't apply because Midland isn't a national bank itself and wasn't acting on behalf of one.
The appeals court decision was a blow to LendingClub Corp., Prosper Marketplace Inc. and other companies that arrange consumer loans online. It may prevent those marketplace lenders from bypassing usury laws by originating loans in states without rate caps.
Some marketplace lenders have already stopped lending above state rate caps, though LendingClub has tried to circumvent the ruling by changing its relationship with its issuing bank. Marketplace lenders, also known as peer-to-peer lenders, match up people seeking consumer or small-business loans with investors such as hedge funds.
The lawyers pressing Madden's suit told the Supreme Court that critics of the ruling were exaggerating its significance. They called marketplace lending "a new and narrow segment of the lending industry that has nothing to do with this case."
"The decision below will not have a substantial impact on secondary markets going forward — and certainly will not impede national banks' ability to issue credit," Midland argued.
The Obama administration took a middle position, urging the Supreme Court not to hear the Midland appeal even while saying the 2nd Circuit decision was wrong.
Almost a dozen business trade associations joined Midland in urging Supreme Court review. Five groups led by the Clearing House Association pointed to the longstanding "cardinal rule" that a legal loan doesn't become illegal because of a sale.
"The cardinal rule is critically important to the functioning of the multitrillion-dollar U.S. credit markets," the trade associations argued.
The case is Midland Funding v. Madden, 15-610.