In the latest development in one of two federal cases examining whether New York usury laws can limit the interest rates charged on credit card debts that are securitized, the Capital One affiliate defendants have moved to dismiss the action brought by plaintiff credit card holders. The plaintiffs alleged that their interest rates, ranging from 22.5 to 27.74 percent, exceed New York’s statutory interest rate limit of 16 percent for civil usury, and even, in some cases, the 25 percent limit for criminal usury. The case is Cohen et al. v. Capital One Funding LLC et al., docket number 19-cv-03479, pending in the U.S. District Court for the Eastern District of New York.
As previously covered on this blog, the U.S. Supreme Court has held that the National Banking Act of 1864 preempts state laws that “significantly interfere” with national bank activities. Marquette Nat. Bank v. First of Omaha Svc. Corp., 439 U.S. 299, 313 (1978). Accordingly, while national banks must comply with the usury laws of the state in which they are located, if a borrower moves to a state with a lower maximum interest rate, the bank need not comply with that state’s lower rate. Barnett Bank of Marion County, N.A. v. Nelson, 517 U.S. 25, 33 (1996).
In 2015, the U.S. Court of Appeals for the Second Circuit examined this National Banking Act preemption when a Delaware bank lent to a New York borrower. Although the loan complied with Delaware usury law, the Delaware bank then sold the loan to an entity that was not a national bank. Because the loan purchaser was not a national bank or acting on behalf of a national bank, the appellate court concluded that New York usury law did not “significantly interfere” with the purchaser and that New York’s maximum interest rate cap applied to the loan. Madden v. Midland Funding, LLC, 786 F.3d 246 (2d Cir. 2015).
In moving to dismiss the Cohen claims, the Capital One defendants argued that the Second Circuit recognized in Madden that usury claims are still federally preempted when there is still substantial connection between a national bank and the debt after it is sold, so that state usury laws would still “significantly interfere” with national banking activities. Because Capital One, N.A. – the ultimate parent entity of the defendants – still retained ownership of the plaintiff’s credit card accounts after selling the credit card receivables to its affiliates to be securitized, the defendants argued that New York’s usury limit would “significantly interfere” with Capital One’s ability to run its credit card business nationwide.
Capital One received support from the Bank Policy Institute and the Structured Finance Association in an amicus brief, urging the court to adopt the defendants’ reading of Madden. Plaintiffs argued in their opposition brief that because defendants are not national banks and do not exercise national banking authority, Madden is dispositive and New York’s usury limits apply to their debts.
The motion was fully briefed on Nov. 1, 2019, and the parties await a decision from Judge Kiyo A. Matsumoto. We will cover the decision when it is published.