The Supreme Court has denied the petition to review the Madden vs. Midland Funding case, it was announced yesterday. The denial leaves intact the Second Circuit Court of Appeals ruling that a non-bank lender is to adhere to state usury laws when capping interest rates on loans.
The case has been closely watched by the financial sector, particularly due to its implications for the marketplace lending industry. The rejection by the Supreme Court may prevent marketplace lenders that use bank partners from bypassing usury laws when originating loans.
The auto finance industry has seen a number of new entrants that use a marketplace lending model, such as AutoFi, which uses a bank partner model to originate loans, and Avant Inc., which uses a hybrid model where half of its loans are originated through a bank partner. Currently, Avant only offers direct-to-consumer auto refinance loans, but plans to launch new and used car purchase financing later this year as well, Adam Hughes, Avant’s chief executive, previously told AFN.
The original ruling adds to the risk that courts could deem some marketplace loans void or unenforceable, or could lower the interest rates on them, according to a 2016 Marketplace Lending Outlook report from Moody’s Investor Services. Although the ruling is binding only in the Second Circuit states of New York, Connecticut, and Vermont, “it could have ramifications nationwide if other courts adopt a similar legal approach,” the report reads.
In the case, Midland, a debt collection firm, purchased the plaintiff’s charged-off account from a bank, and then attempted to collect the debt with 27% interest included. New York State’s usury law caps annual interest at 25%. In 2015, the Second Circuit Court of Appeals held that Midland, which is neither a bank nor acting on behalf of a bank, was not entitled to the benefit of the preemption provisions of the National Bank Act.
