The parties in Madden v. Midland Funding, LLC. have filed a joint motion with the New York federal district court seeking preliminary approval of a class settlement.

The plaintiffs’ class action complaint in Madden alleged that a debt buyer, which had purchased the plaintiffs’ charged-off credit card debt from a national bank, violated the Fair Debt Collection Practices Act (FDCPA) by falsely representing the amount of interest it was entitled to collect.  The complaint also alleged violations of New York usury law.  In an unexpected outcome, the Second Circuit held that the purchaser of charged-off debt from a national bank does not inherit the preemptive interest rate authority of the national bank under Section 85 of the National Bank Act (NBA).  Accordingly, the debt buyer could be subject to the usury limitations provided by state law.  In June 2016, the U.S. Supreme Court denied the defendants’ petition for certiorari.

The proposed Settlement Class would be defined as:

All persons residing in New York who were sent a letter by Defendants attempting to collect interest in excess of 25% per annum regarding debts incurred for personal, family, or household purposes, whose cardholder agreements: (i) purport to be governed by the law of a state that, like Delaware’s, provides no usury cap; or (ii) select no law other than New York.  This class comprises two subclasses [with one subclass for claims arising out of New York usury law violations during a specified period and the other subclass for claims arising out of FDCPA violations during a specified period.]

The settlement provides for three main forms of relief:

• $555,000 in monetary relief
• $9,250,000 in balance reduction relief/credits
• Ongoing compliance of defendants’ policies and practices with applicable law regarding collection of interest on settlement class member accounts

We continue to urge the OCC to confront true lender and Madden risks directly.  This could (and should) be accomplished through adoption of a rule: (1) providing that loans funded by a bank in its own name as creditor are fully subject to Section 85 and other provisions of the National Bank Act for their entire term; and (2) emphasizing that banks that make loans are expected to manage and supervise the lending process in accordance with OCC guidance and will be subject to regulatory consequences if and to the extent that loan programs are unsafe or unsound or fail to comply with applicable law.  (The rule should apply in the same way to federal savings banks and their governing statute, the Home Owners’ Loan Act.)  In other words, it is the origination of the loan by a supervised bank (and the attendant legal consequences if the loans are improperly originated), and not whether the bank retains the predominant economic interest in the loan, that should govern the regulatory treatment of the loan under federal law.