The Second Circuit Court of Appeals’ May 22, 2015, decision in Madden v. Midland Funding, LLC held that a nonbank entity taking assignment of debts originated by a national bank is not entitled to protection under the National Bank Act (NBA) from state law usury claims. (Madden v. Midland Funding, LLC, No. 14-2131-cv, 2015 WL 2435657, at *1, *8 (2d Cir. May 22, 2015.)) The Second Circuit and the Southern District of New York both appear to have not considered the “Valid-When-Made Doctrine” – a longstanding principle of usury law that if a loan is not usurious when made, then it does not become usurious when assigned to another party.

The Madden holding could significantly disrupt secondary markets for consumer and commercial credit, impacting a broad cross section of financial services providers and other businesses that rely on the availability and post-sale validity of loans originated by national or state-chartered depository institutions. However, until the case on remand and the potential appeal play themselves out, the marketplace must deal with the uncertainties of the Second Circuit opinion and decide what actions to take, or not take, depending upon their business models. During this period of uncertainty (which could last up to a year), marketplace participants must also address what, if anything, to do about existing loans made in the Second Circuit (Connecticut, New York and Vermont) that are directly impacted by the holding.