Benjamin Lo

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The Second Circuit’s surprising decision in Madden v. Midland Funding caused consternation within the financial services industry. There, the Madden Court held that the National Bank Act’s pre-emption of state usury law did not apply to consumer debt sold by banks to third parties. Under the Second Circuit’s ruling, third-party buyers could not be certain of loan values, potentially making consumer finance markets less liquid. This decision immediately sparked concerns from the alternative finance industry, which worried that the secondary market for consumer debt would dry up and reduce consumer credit availability. It also alarmed financial technology startups such as online lenders, that originate loans via their bank partners before buying those loans back on their own balance sheets. The Supreme Court recently denied certiorari making Madden good law in the Second Circuit. This Note critiques the Madden court’s reasoning and develops an approach that avoids the pitfalls of the court’s unduly narrow interpretation of the National Bank Act. This Note also distinguishes the relationship between online lenders and banks from that of alternative finance companies and banks, to argue that online lending arrangements should not run afoul of Madden. Finally, this Note proposes several options lenders can take to minimize Madden’s impact.

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