H.R. 3299 amends the Revised Statutes, the Home Owners’ Loan Act, the Federal Credit Union Act, and the Federal Deposit Insurance Act to require the rate of interest on certain loans remain unchanged regardless of whether a bank has subsequently sold or assigned the loan to a third party.
In 2015, the United States Court of Appeals for the Second Circuit (Second Circuit) decided in Madden v. Midland Funding, LLC (Madden) that while the National Bank Act (NBA) allowed a federally chartered bank to charge interest under the laws of its home state on loans it makes nationwide, non-banks that bought those loans could not continue to collect that interest because non-banks are generally subject to the limits of the borrower’s state. The Second Circuit did not apply the “valid when made” doctrine and held that the NBA did not preempt state usury laws because Midland was not a national bank, or a subsidiary or agent of a national bank, but rather was a “third party”.
The Madden decision has created market uncertainty and risk for many bank lending programs, including “bank model” marketplace lending where national banks originate loans and then transfer then to nonbank third parties. Being able to offer consistent terms nationwide is vital to scale the marketplace lending business, which in turn allows lenders to access cheaper investment capital and pass along those savings to borrowers. In addition, the Madden ruling threatens access to traditional bank credit. Selling debt to non-bank entities in the secondary loan market is a significant part of how banks hedge risk, preserve balance-sheet capacity and maintain liquidity in the loan market. Jeopardizing this common practice of selling debt could force banks to become more restrictive as to whom they offer credit, as well as increase interest rates to compensate for the lost revenue and diminished liquidity.