Second NY federal district court holds NBA preempts application of state usury law to securitized credit card receivables

Ballard Spahr LLP

Ballard Spahr LLP

In Cohen v. Capital One Funding, LLC, the federal district court for the Eastern District of New York  joined the federal district court for the Western District of New York in Petersen v. Chase Card Funding, LLC in holding that the National Bank Act (NBA) preempts claims that the interest charged on credit card receivables assigned to affiliated securitization trusts violated New York usury law.

Cohen and Peterson both involved the securitization of credit card receivables generated on credit card accounts issued by a national bank.  The plaintiffs did not name the national bank credit card issuers as defendants and instead sued various non-bank entities involved in the securitization process (Securitization Defendants) and the trustee of the securitization trust.  Relying on the Second Circuit’s Madden decision, the plaintiffs claimed that NBA preemption only applied directly to the national bank issuers and, accordingly, the Securitization Defendants could not rely on the NBA to preempt the application of New York usury law to the securitized credit card receivables.  In Madden, the Second Circuit held that NBA preemption of New York usury law did not apply to charged-off credit card receivables sold by a national bank to a non-bank. 

In both cases, the Securitization Defendants filed a motion to dismiss, asserting that the plaintiff’s usury claims were preempted by the NBA.  In granting the motion in Cohen, the district court determined that New York usury law was preempted by the NBA because its application “would significantly interfere with [the national bank’s] ability to exercise its power to charge interest on the loans it issues, to sell interests in loan contracts, and to participate in the securitization market.”  It also distinguished Madden, stating that “[i]n contrast to Madden, where plaintiff’s account was sold outright to a non-bank debt collector, [the bank] retains ownership and control of the relevant credit card accounts.”

Like the court in Peterson, the court in Cohen did not rely on the OCC’s “Madden fix” final rule for its conclusion that the plaintiff’s usury claims were preempted by the NBA.  The Madden fix final rule amended the OCC’s regulation at 12 C.F.R. 7.4001 regarding national bank interest rate authority under Section 85 of the NBA.  It codified the OCC’s position under Section 85 that the assignee of a loan made by a national bank can charge the same interest rate that the bank is authorized to charge under federal law.  Oddly, while the court in Cohen cited to the OCC’s Federal Register notice publishing the Madden fix final rule, it only referenced the pre-existing language in Section 7.4001 regarding a national bank’s authority to make loans without regard to various state law limits.  No reference was made to the language added by the Madden fix rule regarding interest on transferred loans.

While we are pleased (but not surprised) by Cohen’s favorable preemption ruling, we are disappointed that, once again, the court did not take the opportunity to simultaneously approve the OCC’s Madden fix.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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