The next chapter in the Madden vs. Midland drama unfolds, and it may well involve the US Supreme Court.
In August, The Second Circuit Court of Appeal rejected the appeal of Midland Funding to have the ruling of a District Court overturned. That ruling related to a debt owed by one Saliha Madden, the right to which Midland Funding had acquired from Bank of America in 2008. Midland contacted Madden in 2010, informing her that interest was still accruing on the account at a rate of 27% per annum. Madden then filed a class action lawsuit against Midland, arguing that the company had violated state and federal laws by charging interest rates in excess of New York State's usury laws. The Second Circuit Court of Appeal’s decision to side with Madden sent ripples through the marketplace lending space.
The concern, as Lending Club CEO Renaud Laplanche outlined for AltFi News in September, is that US marketplace lenders reply upon what is known as an “exportation model”. This entails funneling investment into loans that have been originated by a bank, but underwritten and approved by a platform. Lending Club is partnered with the Utah based WebBank. The platform buys loans from WebBank for the price of the principal, plus a fee. The state of Utah does not impose caps on the interest rates that borrowers pay to lenders. That means (under the National Bank Act) that WebBank is exempt from interest rate caps in other states. At the moment, Lending Club is also exempt from such caps, owing to its affiliation with WebBank. The ruling that stemmed from the Madden case is currently applied in three states (New York, Vermont and Connecticut). Should it be applied nationwide, the exportation model employed by marketplace lenders may be at risk.
Midland has now appealed the case to the US Supreme Court. Brian Korn, a Capital Markets Partner at New York law firm Manatt, Phelps & Phillips, has shed light on the significance of this development.
Korn warns that the Supreme Court could rule on the motion “at any time”. It’s worth noting, however, that there is no guarantee that the Court will hear the Madden case at all. Broadly speaking, Midland Funding’s attorneys have presented the following arguments in the petition that has been sent to the Supreme Court:
Korn weighed in on the likelihood of the case being heard:
“Cases have poor chances of being heard generally, but with the arguments presented and the buzz the case has received, I give it a 50% chance.”
On the potential impact of the Madden case upon the marketplace lending industry, Korn was clear:
“It is foreseeable that a case could be made that uses Madden as strong persuasive authority to attack the marketplace lending industry.”
There appears to be three eventualities at play here. The first is that the Court does not hear the case, which will serve only as an indication that the Madden case has not been deemed compelling enough to warrant its intervention. The second is that the case is heard and that the Court agrees with the Second Circuit’s ruling, which Korn has suggested will “hasten more Madden cases nationally”. If the case is heard and reversed, then the Madden saga is ended, but that does not necessarily mean that regulators cannot impose additional restrictions.