If you’ve ever had an unpaid debt sent to a collections agency, a recent decision by the Supreme Court may be of interest to you.
The decision concerned the case of Midland Funding, LLC v. Madden. You’ve probably heard of Midland Funding – they’re the parent company of Midland Credit Management (MCM) and one of the country’s largest debt collection companies. In 2006, Saliha Madden opened a credit card with Bank of America, which she later defaulted on. Her debt (approximately $5,000) was charged off by Bank of America and sold to Midland Funding.
When Midland Funding acquired Madden’s debt, they began charging her a 27 percent interest rate. That’s where the conflict began.
Usury is the act of lending money with unfair terms. Individual states retain the right to set their own usury laws which dictate how much a lender is able to charge in interest on a loan. In New York, where Madden resides, the maximum permissible interest rate is 16 percent. Additionally, New York’s penal code states that charging an interest rate above 25 percent is a criminal offense.
Madden, therefore, sued Midland Funding on the grounds that their 27 percent interest rate violated both civil and criminal usury laws.
The National Bank Act
Midland Funding countered, claiming that they were granted the right to charge the higher interest rate by the National Bank Act, which supersedes local usury laws.
The National Bank Act (NBA) was drafted in 1863 to help establish a stable, national banking system. One provision of the NBA states that a national bank has the right to charge interest based on the laws of its own home state, regardless of the laws in an individual consumer’s state.
Bank of America is based in Delaware, so the usury limit on their loans is based on Delaware law (where it currently stands at 5 percent above the Federal Reserve Discount Rate). As the debt came from Bank of America, Midland Funding argued that they should be able to set rates under the same rules as Bank of America.
The district court ruled in favor of Midland. The appeals court ruled in favor of Madden. And now the Supreme Court has declined to hear Midland’s last appeal, effectively upholding the decision of the appeals court, stating that Midland Funding and other, similar companies are not national banks and are therefore not eligible for protection under the National Bank Act.
For the time being, this simply means that Madden’s class action lawsuit against Midland Funding will go forward. It seems likely, however, that this decision will have additional ramifications, specifically for anyone being charged excessive interest on a collection debt.
It’s also a good time to familiarize yourself with the usury limits in your home state. (Just remember – these limits usually pertain to loans only, not revolving credit, such as a credit card.)