The madness of Madden

We live in a world gone Madden. No, I don’t mean the videogame, I mean the decision from the United States Court of Appeals for the Second…

The Madden cover curse strikes again

We live in a world gone Madden. No, I don’t mean the videogame, I mean the decision from the United States Court of Appeals for the Second Circuit that held that a loan validly made by a bank can become usurious if it is sold to a non-bank. This decision contravenes a longstanding rule that a loan that is valid when it is made cannot become usurious due to a subsequent transaction. This decision, which the Office of the Comptroller of the Currency (OCC) and U.S. Solicitor General (SG) stated was wrongly decided in a brief to the Supreme Court, unfortunately remains good law in the Second Circuit, where it has been demonstrated to have cut access to credit for at least some borrowers.

Perhaps worse yet, the case’s reach has metastasized outside the Second Circuit, with other regulators adopting its reasoning to attack the bank-partnership model for innovative lenders. This risks further restriction of credit access and undue curtailing of lawful banking.

What can be done? There remains the possibility that the Supreme Court will reverse the Second Circuit. While the SG and OCC argued to the Supreme Court that the Second Circuit got it wrong, they also argued that the Court shouldn’t take up the case yet since it was procedurally unripe. Eventually, like a foul smelling cheese, the case will be fully ripe and the Court can take it up. There is also the possibility a case in a different circuit will emerge, for example the case between Colorado, two marketplace lenders, and their bank partners, that will present the Court with an opportunity.

But litigation takes a long time, and the case and its effects are harming people now. So what can be done on a timeline less glacial than the one the courts operate on? Congress could act. Section 581 of the Financial CHOICE Act contains a Madden fix. Whether that provision becomes law, whether through the CHOICE Act or as a stand-alone bill remains to be seen, but it could potentially address the issue.

Another avenue would be for the regulators themselves to act. In his written testimony to the Senate Banking Committee Acting Comptroller Keith Noreika called for a Madden fix. While this request appears to be aimed at Congress, the OCC and FDIC likely also have the inherent authority to clarify via rule that, consistent with the OCC’s argument to the Supreme Court, that the power of a bank to lend includes the power to sell the loan to a non-bank and have it remain valid. The regulators acting via rulemaking, something I and others have noted as a possible solution, would foreclose efforts to interfere with the lawful powers of a bank. While this would obviously be good for banks and the innovative credit providers who partner with them, it would more importantly be good for the customers who would enjoy more options and the benefits of competition.

While pushed as a pro-consumer decision Madden is anything but. You don’t protect people by denying them choices, you force them into their next worst option. This mistaken decision should be corrected soon.