ReedSmith
The business of relationships.SM
FinTech Report:
Summary of Responses to
Treasury RFI on Marketplace Lending
January 14, 2016
David S. Reidy
Nicholas F.B. Smyth
Heather Cantua Phillips
and Tyler M. Layton
Editorial Team:
Drew Amoroso, Roxanne Anderson,
Sean Donoghue, Anthony Ford,
Yvonne Pham, Rachel Naor,
Jaclyn Schwizer, Jamie Wells,
and Molly Zapala.
AM
US_ACTIVE-125155318.5-HCPHILLI 01/14/2016 9:01
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ReedSmith
Table of Contents ..................................................................... page
I.
Introduction..................................................................................................................................... 1
II. Treasury’s RFI on Marketplace Lending .........................................................................................
4
III.
Summary of Responses to the Treasury RFI ........................................................................... 6
A.
Business Models ...................................................................................................................... 6
B.
Expanding Access to Underserved Market Segments .............................................................
8
(1)
Small Business Lending ....................................................................................................... 8
(2)
Underbanked Consumers ................................................................................................... 10
(3)
Micro-Lending .....................................................................................................................
12
C.
Potential Changes to the Financial Regulatory Framework ................................................... 13
(1)
(2)
A Federal Charter for Online Lenders ................................................................................. 16
(3)
A New British Invasion…? ..................................................................................................
17
(4)
Other US Tax Reform ......................................................................................................... 17
(5)
Small Business Borrower’s Bill of Rights ............................................................................ 18
(6)
Data Privacy Protection ......................................................................................................
19
(7)
IV.
Addressing State Laws and Judicial Rulings ...................................................................... 14
Reforms of the Secondary Market ...................................................................................... 19
Conclusion .............................................................................................................................
21
APPENDIX A The Reed Smith Team
APPENDIX B Treasury’s RFI
APPENDIX C List of Comments in Response to RFI
APPENDIX D Madden v. Midland, Case No. 14-2131 (2nd Cir., May 22, 2015)
reedsmith.com
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I.
Introduction
On July 20, 2015, the US Department of the
Treasury issued a Request for Information
entitled “Public Input on Expanding Access
to Credit through Online Marketplace
Lending” (the “Treasury RFI”).1 Just fewer
than 100 comments were submitted by
marketplace lenders and other FinTech
companies, as well as banks, industry and
consumer groups, politicians, agencies and
other concerned parties. This report
provides an overview of the substance of
those responses, and a summary of their
key themes and new ideas.
The RFI poses numerous questions to
industry participants, but its issuance by the
Treasury Department raises its own
questions: Why did Treasury put out the
RFI? What will Treasury do with the
comments it receives? After all, Treasury is
not a regulator. If the Securities and
Exchange Commission (SEC) or Consumer
Financial Protection Bureau (CFPB) had
released a similar RFI, for example, the
purpose and potential resulting regulatory
action might have been easier to predict.
But Treasury’s role suggests a broader
policy initiative than might be expected had
the RFI been issued by a pure industry
regulator.
Based on the office that issued the RFI, we
believe Treasury’s primary goal in releasing
the RFI is to encourage marketplace
1
80 FR 42866.
lenders to continue expanding credit to
small businesses. The RFI cites a 2015
Federal Reserve Survey that found that “a
majority of small firms (under $1 million in
annual revenues) and startups (under 5
years in business) were unable to secure
any credit in the prior year.”2 Treasury
clearly wants to encourage large and small
lenders to increase the availability of credit
by using “technology-enabled credit
provisioning,” which Treasury says “offers
the potential to reduce transaction costs.”3
With Congress at a stand-still, the Obama
administration has made clear that it will
pursue policies through executive actions,
and it may be that the RFI is a first step in
developing executive actions to encourage
such lending without relying on action from
Congress.
The RFI was released by Treasury’s Office
of Small Business, Community
Development, and Housing (part of the
Office of Financial Institutions, within the
Office of the Undersecretary for Domestic
Finance), and responses were directed to
Laura Temel, a Policy Advisor in that office.
According to public sources, Temel is a
successful entrepreneur who has founded
two companies, one of which was selected
to participate in the inaugural class of the
Nike+ Accelerator.
Previously, she was an
2
See Appendix A, Treasury RFI, p. 5 (citing “The
Joint Small Business Credit Survey, 2014,” a
collaboration among the Federal Reserve Banks of
New York, Atlanta, Cleveland and Philadelphia.
Released February 2015. ).
3
Id., p.
6.
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investment banker. Treasury’s choice to
lead the RFI underscores the business
focus of the project.
The Small Business Office is a policymaking office; its mission is to coordinate
“policy on the following areas: small
business finance and development; housing
policy; community and economic
development; capital access; and issues
related to underserved communities.”4 The
Office also oversees the Small Business
Lending Fund and the State Small Business
Credit Initiative. This office is small but
influential; its alumni include, among others,
Don Graves (now Deputy Assistant to the
President and Counselor to the Vice
President) and Sameera Fazili (now senior
visiting adviser to the Federal Reserve
Bank of Atlanta’s community and economic
development group, formerly senior policy
adviser at the White House’s National
Economic Council).
Given the responsibilities of the Small
Business Office and the entrepreneurial
background of the Treasury official who is
behind the RFI, it seems clear that learning
how the government and marketplace
lenders can work together to further
improve small business credit access, cost,
and speed is the primary focus of the RFI.
However, it likely is not the only focus.
4
https://www.treasury.gov/about/organizationalstructure/offices/Pages/Sm-Business-CommunityDev-Housing-Policy.aspx
A secondary purpose of the RFI may be to
enhance the public conversation with
respect to the potential benefits and risks of
marketplace lending. Treasury no doubt
recognizes that in an industry that is
evolving as rapidly as marketplace lending,
it would be helpful to have a public
repository of data and analysis from
industry actors, consumer advocates, and
others.
This will provide the CFPB or SEC
with a helpful baseline in the event that one
of those agencies decides to promulgate
rules to reduce the potential risks of or
otherwise encourage marketplace lending.
Although we have no reason to expect that
new SEC or CFPB rules are imminent,5
those agencies nonetheless are focused on
FinTech and will be interested in the
industry responses.
The combined 1,000 pages of comments
submitted in response to the RFI provide a
unique insight into the development of
online lending, as well as a range of
proposals and suggestions for its future
growth and regulation. Thus far, the only
comment from Treasury that discusses the
responses to the RFI is an October 2015
speech by Antonio Weiss, Counselor to the
Secretary. His remarks support our
conclusions above:
5
The CFPB is currently working on a proposed rule
that will significantly change the market for online
and brick and mortar payday lending, auto title
lending, and high-cost installment lending, but the
Treasury RFI explicitly excluded these types of loans
– to the extent they are made by marketplace
lenders – from the scope of the RFI.
Treasury RFI,
p. 1.
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At Treasury, we will seek to foster,
not impede, innovation that
increases competition and broadens
access to affordable credit for
creditworthy borrowers and
businesses. But we will also be
vigilant in ensuring that innovation
does not undermine important
privacy and consumer protection
priorities.6
We expect Treasury may soon release a
white paper that summarizes the responses
and possibly makes recommendations for
executive actions or regulatory or legislative
changes to encourage additional small
business lending. Although Treasury cannot
write rules or enact statutes itself, it can
recommend actions for the White House to
implement through executive order or other
executive actions. In addition, a future
Congress or other agency might be
persuaded by a well-researched and
carefully reasoned report from Treasury’s
Small Business Office.
As we await Treasury’s report, Reed
Smith’s FinTech Team thought it would be
helpful to sit down and read the RFI
responses, and to provide our own report
on the themes, arguments and proposals
contained in their pages.
We hope you find
it as interesting to read as it was to write!
6
available at : https://www.treasury.gov/presscenter/press-releases/Pages/jl0238.aspx
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II.
that might allow making loans to
non-prime borrowers at lower rates.7
Treasury’s RFI on
Marketplace Lending
With respect to small businesses, a
number of studies have shown that
these borrowers are more dependent
on community banks for financing
than larger firms. . . .
Small business
lending, however, has high search,
transaction, and underwriting costs
for banks relative to potential
revenue – it costs about the same to
underwrite a $5 million dollar loan as
a $200,000 loan8 – and many small
business owners report they are
unable to access the credit needed
to grow their business. . .
. More than
half of small businesses that applied
for credit in 2014 sought loans of
$100,000 or less. .
. . Technologyenabled credit provisioning offers the
potential to reduce transaction costs
for these products, while investment
capital may offer a new source of
financing for historically underserved
markets.
The Treasury RFI begins with a 5-page
introduction, which we have abridged here:
The Treasury Department is seeking
public comment through this
Request For Information (RFI) on (i)
the various business models of and
products offered by online
marketplace lenders to small
businesses and consumers; (ii) the
potential for online marketplace
lending to expand access to credit to
historically underserved market
segments; and (iii) how the financial
regulatory framework should evolve
to support the safe growth of this
industry.
. . .
We also seek any additional
information beyond these questions
that market participants believe
would assist in our efforts to become
better informed of the impact of
online marketplace lending on small
businesses, consumers, and the
broader economy.
Historically, many American
households, small businesses, and
promising new enterprises have
faced barriers in accessing
affordable credit from traditional
lenders.
To date, the large majority
of online marketplace consumer
loans have been originated to prime
or near- prime consumers to
refinance existing debt. . .
. Some
online marketplace lenders,
however, are developing product
structures and underwriting models
Online marketplace lending . .
.
initially emerged with companies
giving investors the ability to provide
financing that would be used to fund
individual borrowers through what
became known as a “peer-to-peer”
model. However, it has since
evolved to include a diverse set of
7
As noted elsewhere, the CFPB is contemplating
issuing a rule that would regulate “payday” and
related loans, including loans with terms greater
than 45 days and an APR greater than 36%, if the
loan also provides for repayment directly from a
consumer’s account or paycheck or includes a nonpurchase money security interest in a vehicle. Such
consumer loans are outside the scope of this RFI.
8
“The Future of Finance,” Goldman Sachs Equity
Research, March 3, 2015.
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individual and institutional credit
investors who seek to provide
financing that ultimately is used to
fund small business and consumer
loans of various types to gain access
to additional credit channels and
favorable rates of return.
Treasury posed 14 “Key Questions” (closer
to 40 questions counting subparts) that
explore the three big topic areas framed by
the RFI: business models, expanding
access to credit, and potential regulatory
evolution. We have synthesized some of
the main comments submitted in response
to the RFI.
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Summary of Responses
to the Treasury RFI
A.
ï‚·
Bank-Affiliated lenders – banks originate
and hold, distribute and/or return loans
to the marketplace lenders; and
ï‚·
III.
Bank-Partnership – many marketplace
lenders utilize a bank partnership model,
either in whole or in part, in which loans
are funded by a bank and sold to an
investor or to the marketplace lender.
Business Models
Three of Treasury’s questions focus on the
marketplace business models and
products. See RFI Question 1, 5, and 7.
These questions asked:
ï‚·
How policymakers should be thinking
about different business models and
market segmentation;
ï‚·
What kinds of marketing channels are
used to reach new customers; and
ï‚·
How marketplace lending relies on
services or relationships provided by
traditional lending institutions or insured
depository institutions.
In its comment, the Conference of State
Bank Supervisors provides a helpful
overview of the marketplace lending
business models, organized on the basis of
funding sources:9
ï‚·
Balance Sheet Lenders –lenders that
originate loans and retain credit risk in
their own portfolios;
ï‚·
Online Platforms (peer-to-peer) –
platform lenders utilize a pass-through
securitization structure where loans are
immediately sold to investors, and retain
the credit risk and provide funding;
Many comments acknowledge that
automation and technology have lowered
the operating cost of online lenders, thereby
increasing the likelihood that more
customers can be served.10 The Online
Lenders Alliance (OLA), responding on
behalf of “the growing industry of online
companies offering consumers small-dollar,
short-term loans,” argues that banks have
been slow to adapt to “rapid changes in
technology,” and that marketplace lenders
have been able to “disrupt the traditional
lending industry in a very short period of
time.”11
Nonetheless, as the list above illustrates,
many marketplace lenders work with the
banks cooperatively. For example, Affirm,
Inc., provides point-of-sale financing to
consumers through a partnership with a
state-chartered bank, and states that this
partnership gives the company the benefit
of being able to “export its home-state’s
interest rate on loans.”12 Many other
platform lenders similarly acknowledge
these bank partnerships, and indeed this
9
See Conference of State Bank Supervisors
(CSBS), p. 2.
Readers are encouraged to review the
comment letters and the myriad primary source
materials that the letters cite. We do not cite any of
the primary sources here.
10
See e.g., Kabbage, p. 2.
11
OLA, pp.
1, 3.
12
See Affirm, p. 2-3.
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tension between competition and
cooperation has, inevitably, gained a label:
“coopetition.”
“Coopetition”
Several comments discussed the notion of
“coopetition” between traditional banks and
marketplace lenders. GLI Finance, an
investment company, emphasized the
cooperative nature of the relationship since
traditional banks are “a source of capital, a
repository for funds, and a source of new
customers.”13 Godolphin Capital
Management noted that “[s]everal platforms
have entered into alliances with banks and
other institutions such as accounting
software providers to both provide leads as
well as ‘white-label’ the intellectual property
on behalf of these institutions. This
“coopetition” model is likely to grow further
as smaller regional banks can use
marketplace lending platforms with a
national footprint to diversify both regionally
and across asset classes.”14
The bank partnership model has proven
attractive to bigger players like Lending
Club and Prosper. However, it has not been
a good fit for some small-dollar lenders
because of issues that come with a bank
charter.
According to Opportun, a
marketplace lender that targets the
Hispanic market, “prudential regulation and
legal risk management often create
profitability challenges when considering
the traditionally underserved consumer’s
need for non-traditional underwriting and
13
14
credit models, and a retail-based channel
option.”15
Other comments view the industry business
models in terms of the different markets
served by marketplace lending products.
PeerIQ, an information services company,
describes the business models as
differentiated primarily by:
ï‚·
Market segments (i.e.) consumer, small
business, commercial loans;
ï‚·
Products (e.g.) installment loans, lines
of credit, merchant cash advances;
ï‚·
Origination channels (e.g.) direct mail,
online, partner affiliate, branch, and paid
search;
ï‚·
Credit risk (i.e.) prime, near-prime, subprime, thin-file;
ï‚·
Funding mechanisms (i.e.) balance
sheet, marketplace, hybrid, bankaffiliated16
PeerIQ goes on to point out the “diversity of
value propositions and business models” in
each borrower segment:
“. . .
Lending Club has established
partnerships with data companies to
improve customer acquisition and
underwriting. Prosper has recently
acquired a spending-and-tracking
app company, to improve customer
engagement. Lenddo is using social
media criteria to assess
creditworthiness.
Upstart factors in
education and experience in
determining creditworthiness for thin-
GLI Finance, p. 3.
15
Opportun, p. 13.
Godolphin, pp.
2-3.
16
PeerIQ, p. 2.
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has completed an investment-grade small
business loan securitization in which it
retained a 5% first loss risk position.20
file borrowers. Affirm is creating
speedy point-of-sale algorithms as
an alternative to credit cards. As for
small business lending, PayPal is
relying on its merchant payment data
to extend credit to small business;
Amazon offers lending services to
“help sellers grow”; and Dealstruck
provides lending tools for the midprime market, which includes [small
and midsize businesses] who are not
eligible for traditional bank
financing.”17
Another example of coopetition is offered
by Income& Technologies, Inc., a
marketplace lending platform focusing on
high credit-quality 1-4 family residential
mortgages that do not meet the definition of
a Qualified Mortgage. Income& does not
originate loans but partners with institutions
originating high-quality non-QM mortgages
(mostly small banks and credit unions) and
sells investors the cash flow from those
mortgages with the goal of expanding
available credit for the small banks and
credit unions to make more loans.18
OnDeck, a marketplace lender focused on
small business lending, relies on a
diversified model that includes large bank
credit facilities “which allow OnDeck to hold
the majority of our loans on our balance
sheet” and to “retain the first loss position”
on those facilities.19 The company also sells
whole loans to institutional investors, and it
The collective comments on the industry
business models therefore create a more
nuanced picture than the “fintech v.
banks”
headlines sometimes suggest. Many
commenters, and Treasury itself, recognize
that marketplace lending—and technology
generally—provides a promising array of
tools with which to provide access to credit
in underserved markets. This broad policy
goal is at the heart of the RFI, and
addresses challenges faced specifically by
small businesses and the underbanked.
B.
Expanding Access to
Underserved Market
Segments
(1) Small Business Lending
In its RFI, Treasury states that while many
small businesses rely on community banks
for financing, small business lending has
“high search, transaction, and underwriting
costs” that make it difficult for banks to
serve small business needs in a profitable
way—noting that “it costs about the same to
underwrite a $5 million dollar loan as a
$200,000 loan.21 The RFI recognizes that
“technology-enabled credit provisioning
offers the potential to reduce transaction
costs for these products, while investment
17
Id., p.4 (footnotes and citations omitted).
20
18
Income&, p.
2.
21
19
OnDeck, p. 5.
Id.
Treasury RFI, p. 5, citing “The Future of Finance,”
Goldman Sachs Equity Research, March 3, 2015.
Page 8 of 22
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capital may offer a new source of financing
for historically underserved markets,” and
notes that the “2014 Small Business Credit
Survey indicated that almost 20 percent of
applicants sought credit from an online
lender.”22
Many commenters agreed, observing that
large financial institutions operate within a
cost structure that may preclude them from
making loans below a certain size to small
businesses. Kabbage comments that big
banks arguably could benefit from
deploying the technologies utilized by
marketplace lenders, and that policymakers
therefore may want to investigate ways to
encourage collaboration between banks
and new lenders that possess such
technologies.23
LendingTree, a marketplace of online
lenders, states that FinTech is filling an
important need particularly for small
business owners. In a survey conducted by
LendingTree in February through March of
2015 (involving 155 small business owners
who had applied for loans within the past
year), the most frequently cited struggles
were:
(i) gathering required documentation;
(ii) long application process; and
(iii) speed of approval.24
22
23
24
RFI, p. 6.
See Kabbage, pp.
1, 6.
LendingTree, p. 3.
LendingTree claims that increased
automation will alleviate these issues,
allowing for faster application-to-funding
cycles without an inherent reduction in
underwriting quality or consumer protection:
In turn, borrowers who are able to
experience more efficient application
processes are more likely to have
access to credit when they need it,
and less likely to abandon the credit
markets due to burdensome
processes that leave them
discouraged with their chances of
obtaining funding.25
Marketplace lenders in the small business
space claim to provide better matching
between a loan term and expected
payback: for example, a higher-interest rate
short term loan may end up costing less in
total interest and fees than a lower-interest
loan with a longer term.26
Many other FinTech companies voiced a
similar need being fulfilled by FinTech.
OnDeck claims that by offering loans with
shorter terms, it can decrease credit risk
and provide capital to “otherwise nonbankable small businesses,” with
repayments structured on a daily or weekly
basis.27 OnDeck has made more than $3
billion in loans to small businesses to date,
and it cites post-financial crisis data that
shows only 36% of small business
borrowers have been able to get all the
25
Id.
26
See OnDeck, p. 3.
27
OnDeck, p.
4.
Page 9 of 22
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financing they sought, leaving $80-$120
billion in unmet demand for small business
lines of credit.28
A series of RFI questions focused on the
theme of expanding access to credit to
historically underserved market segments.29
Many of the comments in response take the
position that FinTech companies are
serving the underbanked consumer market
despite the fact that, as the RFI points out,
most online lending to date has been to
“prime or near-prime consumers to
refinance existing debt.”
In its comment, LendAcademy lists several
lending platforms focused on expanding
access to consumer credit:
ï‚·
Upstart is a lender focused on young
people with a good education who are
starting out and have little or no credit
history.
ï‚·
Avant targets the “middle class”
borrower who has fewer options than
prime borrowers.
ï‚·
Freedom Financial works with borrowers
who have experienced financial distress,
a group that many platforms ignore.
ï‚·
Opportun, formerly Progresso
Financiero, targets the Hispanic market,
a market that has historically been
underserved.
ï‚·
LendUp helps sub-prime borrowers
transition from payday lending through
Id., pp. 1, 2, 5.
29
See RFI Questions 2, 3, 4, and 6.
ï‚·
Lenddo is working to establishing an
alternative credit scoring system for
people without a credit score.
ï‚·
(2) Underbanked Consumers
28
education and a system designed to
improve borrowers’ credit scores.
Kiva Zip is an impact investment
platform to help customers and brand
ambassadors support their local
business.30
Indeed, because both traditional lenders
and many larger marketplace lenders rely
on a minimum FICO score, marketplace
lenders such as Opportun who are focused
on small-dollar lending to traditionally
underserved communities state that “many
of the 64 million credit-eligible borrowers
who are unscoreable or have no or thin
files, living in the US are automatically
excluded from qualifying for most online
marketplace loan pools.”31 Opportun
focuses on the “25 million unbanked or
underbanked Hispanic individuals” in the
US, a customer base with an average
income of $32,100 per year, and an
average loan amount of $2,000,32 and
targets these customers by relying on
alternative data sources—such as utility
information, transactional data, or bank
account information—to “score” potential
borrowers; Opportun also provides
documentation in Spanish and English, as
well as mobile phone access33, physical
30
See Lend Academy, p. 13.
31
Opportun, p. 3.
32
Id., pp.
1, 7.
33
Opportun cites a Federal Reserve study that
found that 82% of Hispanic mobile phone users
have a smartphone, compared to 68% of nonPage 10 of 22
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locations in the communities it serves, and
cash repayment options to serve its
customers.34
Opportun and others cite an array of
statistics on the underbanked in America,
including: one in thirteen US households
remains unbanked; an additional 20 percent
of American households are
“underbanked—meaning that they rely
upon alternative financial services outside
of the banking system to fully meet their
financial needs”; and 25% of credit-eligible
consumer in the US have little or no history
at the three major US credit reporting
agencies. Id.
Although many comments point out that
Prosper and Lending Club cater primarily to
borrowers with good credit, for its part
Lending Club states that in 2015 it
expanded its platform’s reach to low- and
moderate-income individuals through
partnerships with Citi bank and Varadero
Capital, “designed to deliver $150mm of
affordable credit to underserved, low- to
moderate- income borrowers.”35
New Jersey-based Cross River Bank’s
comment reinforces the argument that
online lenders are expanding the credit box:
“Marketplace lenders are able to
develop models which they find to be
more effective at predicting credit
outcomes than traditional scoring
models, such as FICO based
models. These enhanced scoring
models enable marketplace lenders
to make loans to borrowers who
would not receive credit under
traditional market standards, but are
demonstrated to be worthwhile
credits when considering additional
information.”36
Affirm emphasizes that its online point-ofsale loans are widely available and that its
services are utilized by borrowers who may
be turned down by other lenders. “Affirm’s
loans span the spectrum of credit
worthiness from subprime to super prime.”37
Affirm believes that broad access to its
services benefits both its banking partner
(Cross River Bank), as well as traditionally
underserved borrowers.
“By lending to
consumers across the credit spectrum,
35
Hispanic white and 66 percent of non-Hispanic black
phone users. See Opportun, p. 15.
34
Opportun, p.
3, 8.
Lending Club, p. 14. Low- to moderate income
individuals are defined in the comment as those with
reported adjusted household income less than 80%
of the median income of their zip code and live in
majority or greater low to moderate income census
tracts as of June 30, 2015.
Lending Club, p. 14, fn.
9.
36
Cross River Bank, p. 4.
37
Affirm, p.
1.
Page 11 of 22
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Affirm has a more diverse credit and risk
portfolio. Most importantly, its products can
be used by all consumers and small
businesses.”38
Like Affirm, Upstart partners with Cross
River Bank to offer online loans. Both Affirm
and Upstart say that they leverage
innovative technology to underwrite their
loans, which results in credit being
extended to borrowers who may be rejected
under traditional underwriting techniques.39
For example, Affirm uses technology to
survey an applicant’s liquidity, which Affirm
believes gives it a more accurate picture of
the applicant’s creditworthiness than a
credit score alone. Affirm believes that its
“dynamic credit” model, which places
insular negative credit events in a larger
context of a borrower’s overall
creditworthiness, will increase consumers’
access to credit, and that “traditionally noncredit worthy consumers may actually be
offered credit to assist with improving their
financial well-being.”40
Upstart similarly points out that “[b]y
complementing (not replacing) traditional
underwriting factors with factors that are
correlated with financial capacity and
propensity to repay, the [Upstart]
underwriting model better understands and
quantifies risk associated with all borrowers
– those with credit history, and those
without.”41
In its comment, credit bureau Equifax notes
that the borrower may be additionally
protected by better income verification:
“Another industry best practice for
assessing a consumer’s ability to repay is
the use of employer payroll information to
verify a consumer’s income, which is more
accurate than consumer stated income.”42
The Center for Financial Services
Innovation (CFSI) believes that “online
marketplace lenders may continue to move
down the credit spectrum,” which would be
more beneficial to underserved consumers
than alternatives such as payday lending.43
CFSI believes, however, that “the online
marketplace lending environment has not
yet reached its full potential in serving
underserved consumer segments” because
most marketplace lenders do not offer small
loans.44 Thus, when consumers with lower
credit scores or those who want to borrow
smaller amounts go online, they are still
pushed to payday or high-cost installment
lenders.45
(3)
An example of a lender focused on very
small dollar loans is Kiva, a nonprofit
41
Id.
42
38
39
40
Micro-Lending
Equifax, p.
3.
Id., p. 4.
43
CFSI, p. 3.
See, e.g., Upstart, p.
2.
44
Id., p. 4
Affirm, p. 6.
45
Id.
Page 12 of 22
.
ReedSmith
organization that allows individuals to fund
microloans to borrowers both in the United
States and internationally, in increments as
small as $25 per lender. Unlike most online
marketplace lenders, Kiva does not charge
any interest or fees to borrowers and does
not allow its users to earn a return on their
loans. Users make credit decisions based
on “social underwriting” including: the
borrower’s online presence, endorsements
by local community members, and a
detailed loan profile.46 When Kiva first
launched its direct lending program, it set
aside a small amount of its own funds to
lend in case users did not fund the available
loans. Interestingly, the loans the crowd
chose not to fully fund, and which were
therefore partially funded by Kiva, proved to
have a higher default rate than those loans
that were funded entirely by the crowd.47
C.
Potential Changes to the
Financial Regulatory
Framework
The RFI questions what role the federal
government might play to facilitate positive
innovation in lending.48 Many commenters
responded that due to partnerships with
federally chartered banks, many of the
FinTech products effectively are issued by
federally regulated banks and are therefore
subject to the same regulatory protection as
other products provided to traditional bank
customers.49 Thus, these commenters did
not see an immediate need for new
regulation at the federal level.
Another common theme was that, given
that the marketplace lending industry is still
developing, trying to impose broad
regulations at this juncture in the industry’s
maturity could either unintentionally stifle
growth or harm both borrowers and
investors.50
OnDeck, for example, expressed the view
that the “current environment for
commercial lenders is conducive to
continued innovation” and that it would be
“premature and potentially harmful to small
business owners if additional regulation
were imposed to codify particular lending
models or credit products at this early-stage
of industry development.”51 WebBank, a
Utah-chartered industrial bank located in
Salt Lake City, agrees.
WebBank, which
originates a significant percentage of online
marketplace loans, maintains that “from a
regulatory perspective, the origination of
loans through marketplace platforms does
not break new ground” and that online
marketplace lenders “are [already] subject
to the same legal requirements and
borrower protections as other loans.”52
To the extent regulatory changes were
suggested by commenters, however, we
49
46
47
48
See, e.g., Lending Club, p. 4.
Kiva Microfunds, pp. 3-4.
50
See, e.g., KPMG, p.
11.
Kiva Microfunds, p. 4.
51
OnDeck, p. 9.
See RFI 9, 10, 11.
52
WebBank, p.
1.
Page 13 of 22
. ReedSmith
have tried here to group those proposals
and viewpoints into loose categories:
Madden Madness…
(1) Addressing State Laws and
Judicial Rulings
Beyond the regulatory regime applicable to
banks, a number of comments expressed
the view that marketplace lenders are not
only subject to significant state and federal
laws, but that many state laws are
inconsistent. Many lament the patchwork of
state licensing and consumer protection
laws for example—including varying
interest rate caps and usury laws, different
origination and servicing practices and
disclosure requirements, and restrictions on
advertising—that apply to marketplace
lenders not following the bank partnership
model.53 The comments also contain much
discussion about the Second Circuit’s
recent decision in Madden v. Midland
Funding: 54
In Madden v. Midland Funding, the Second
Circuit held that when a national bank sold
a loan portfolio to a debt buyer, the
purchaser could not avail of the preemptive
powers of the National Bank Act and
therefore lost the ability to apply the bank’s
home state interest rate.
Many have
criticized the decision, calling it “another
drag on marketplace lenders”55 and arguing
that the decision ignores the “valid when
made” doctrine—which states that a loan
that does not violate state usury laws when
made, remains valid when transferred or
sold to a party in another state. The parties
have filed a petition for the case to be heard
by the United States Supreme Court.
Affirm also addresses the patchwork quality
of the current regulatory landscape in its
comment: “[O]nline marketplace lenders
have varying degrees of regulation, which is
largely dependent on what type of funding
the marketplace lender uses… [s]ome must
adhere to the regulatory regime of each
state in which they lend while others must
adhere to the regulatory regime of the
home state of their bank affiliated
partner.”56 Similarly, Upstart claims that the
current regulatory regime subjects
marketplace lenders to “overlapping
regulation.”57 “As a result [] multiple layers
of compliance oversight apply to
marketplace lending activities.”58
55
53
54
See Appendix C, Madden v. Midland Funding,
Case No.
14-2131 (2nd Cir., May 22, 2015).
Affirm, p. 7.
57
See e.g., Opportun, p. 12; Orchard Platform, p.
7.
OLA, p. 8.
56
Upstart, p. 3.
58
Id.
Page 14 of 22
.
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As a solution to the “uneven regulatory
landscape”, Affirm suggests that“[t]he
federal government could substantially level
the playing field among marketplace
lenders by imposing a single federal
regulatory agency that supervises and
enforces federal law as it relates to
marketplace lending.”59
Perhaps not surprisingly, the state
regulators are generally opposed to any
efforts to preempt state laws. The
Conference of State Bank Supervisors
(CSBS) writes that “state regulators urge
Treasury to support policies that improve
the efficiency of existing licensing regimes
and promote protection without
undermining the states’ ability to regulate
and promote consumer protection entities
that make loans to the citizens within their
borders.”60 At the same time, many
commenters agreed that to the extent
marketplace lenders already are subject to
existing regulations, more regulation is not
what is needed—if anything, regulations
need to be updated to reflect the modern
economy and industry realities.
OnDeck argues, for example, that the
existing landscape of federal and state laws
was “created at a time that did not
contemplate our modern Internet economy,
and therefore includes a number of archaic
inefficiencies.”61 OnDeck writes that
59
60
61
policymakers should create cross-agency
FinTech working groups that can engage
with industry and streamline and harmonize
existing laws.62 Indeed, the comments
address a number of regulatory schemes
enacted prior to the development of today’s
internet and mobile-phone economy.
Opportun cites the ESIGN Act, for example,
which requires that, prior to consenting to
the use of an electronic record, a consumer
must be provided with a statement of the
hardware and software requirements for
access to such electronic records. While
the regulation may have been relevant to
desktop computer users in the past, “it is
unclear how much information a lender
needs to provide to ensure that a consumer
is able to access and retain an electronic
record via mobile device.”63 Some
commenters want to revamp the Electronic
Fund Transfer Act (EFTA) and Reg. E,
arguing the law is outdated based on
today’s access and convenience to
electronically access payments; the
National Consumer Law Center (NCLC), a
consumer advocacy non-profit disagrees,
however, arguing that the “EFTA ban on
compulsory electronic repayments is an
important protection that helps consumers
to maintain control over their bank
accounts.64
Affirm, p.
7.
62
Id., pp. 10-11
CSBS, p. 8.
63
Opportun, p.
15.
OnDeck, p. 10.
64
NCLC, p. 5.
Page 15 of 22
.
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(2) A Federal Charter for Online
Lenders
In another approach to updating the
regulatory landscape and ensuring
consistency, some commenters called for a
national charter for online lenders. The
Center for Financial Markets of the Milken
Institute’s proposed “National Lender
Charter” is one example; it would allow nonbanks to operate in the lending industry
under the following guidelines65:
National
National
marketplace
lenders could
lenders could: not:
National
lenders would
be responsible
for:
ï‚· Make
ï‚· Performing
loans
directly to
consumers and
businesses.
ï‚· Take
deposits.
ï‚· Access
the
Federal
Reserve
ï‚· Advertise loans discount
and solicit
window.
borrowers.
ï‚· Offer
ï‚· Set
interest
rates and terms
for their loans
that could be
transferred to
loan
purchasers or
securitizers
with interest
rate export
powers similar
to banks.
depository
services such
as checking
accounts, or
ATMs.
ï‚· Pay
interest on
investor money
except on
active
investment in
the lender.
itself
as a bank or
ï‚· Seek investors. depository
institution.
ï‚· Service
debt.
ï‚· Represent
ï‚· Engage
in
investment
banking except
for its own
securities.
65
See Milken Institute, pp. 10-11.
Page 16 of 22
necessary
checks on
borrowers and
investors.
ï‚· Complying
with
fair lending and
privacy laws.
ï‚· Maintaining
client
relationships.
ï‚· Providing
appropriate
disclosures to
both borrowers
and investors.
.
ReedSmith
(3) A New British Invasion…?
Some commenters lauded the regulatory
approaches to marketplace lending in the
UK, and suggested adopting some here in
the US:
Referral Network – OnDeck notes that the
British government supports a referral
network between banks and marketplace
lenders. “The UK government has
recognized the significant benefit this will
provide to small businesses and has
accordingly implemented measures to
increase decline referrals.”66 Orchard
Platform also cites the U.K.’s Financial
Conduct Authority’s (FCA) “light touch
approach” to regulating marketplace
lending.67 After taking control of the
regulation of marketplace lending, the FCA
stated in February 2015 that “we see no
need to change our regulatory approach to
crowdfunding, either to strengthen
consumer protections or to relax the
requirements that apply to firms.”68
Government and Technology Platform
Initiatives – the US government has
access to small business data, for example
at the IRS, and some commenters argue
that the government should make that data
available where the customer consents in
order to facilitate small business lending
and fraud detection and prevention. “A
similar initiative is already underway in the
(4) Other US Tax Reform
Lending Club’s response to the RFI
contains specific recommendations on how
the federal government can help facilitate
the safe growth of the marketplace lending
industry, specifically through revisions to
the tax code and collection process.
First, Lending Club recommends
automating the process by which tax return
OnDeck, p. 10.
70
Id.
Orchard Platform, pp.
7-8.
71
Lending Club, p. 29
Id., p. 8
72
OnDeck, p.
10; see also Lend Academy, pp. 1819.
68
Tax Free Investment Savings Accounts –
Lending Club suggests that the US
government should emulate a program in
the U.K., in which investors are able to
invest in “P2P loans” tax-free though an
Investment Savings Account (ISA) called an
Innovative Finance ISA, or “IFI”.71 Investors
can deposit up to £15,240 per year
(standard for ISAs), or transfer in money
from other ISAs. Unlike a US IRA, there is
not a tax penalty for withdrawing before
retirement.
Lending Club suggests that
“[t]he proposed US marketplace investing
incentive could similarly attract investment
in underserved consumers in the same
geographies, and in small businesses
nationwide.”72
69
66
67
UK” OnDeck says,69 and suggests that
marketplace platforms and technologies
could help “government agencies deploy
funds to small businesses in the aftermath
of natural disasters or emergencies.”70
Id.
Page 17 of 22
. ReedSmith
data is shared, thereby enabling lenders to
lower cost and improve access to credit
across consumer and small business
borrowers.73 Currently, the IRS allows
taxpayers to request a summary transcript
of their filed tax returns to be provided to a
third party – but processing these 4506T
forms is manual and can take 2-8 days.74
As lending is increasingly structured around
providing applicants with instant loan offers
online, this delay prevents the use of tax
data in credit models that price and approve
loan applications instantaneously.75
Second, the federal government could
facilitate an increase in investment and
economic growth in underserved
communities and certain economic sectors
by creating incentives in the tax code that
parallel existing tax programs.76 For
example, currently, investors only have the
ability to offset charge-offs against capital
gains.77 To encourage investment in
underserved areas, Lending Club proposes
“that investors who provide capital in
defined underserved areas and to low- to
moderate-income small businesses
borrowers be taxed at the capital gains tax
rate, rather than the current marginal
income tax rate, if the loan is held for over
73
74
75
12 months.”78 To encourage investment
and saving, Lending Club proposes that
investors in marketplace loans have “the
ability to offset losses and charge-offs
against interest income and gains and earn
tax-free returns” against a certain dollar
amount.79
Finally, for ease of operation and to lower
costs, Lending Club proposes government
regulations allowing “online marketplace
companies to make the default delivery
method of tax forms electronic,” rather than
paper copies, as is required by current
regulations.80 Other commenters likewise
supported providing access to federal tax
return information to help small-dollar loan
customers who may have difficulty
retrieving paper copies of income or
residential information.81
(5) Small Business Borrower’s Bill
of Rights
Many commenters cited the Small Business
Borrower’s Bill of Rights as a potential
guideline for regulation.82 The Small
Business Borrower’s Bill of Rights is a
consensus on responsible small business
lending practices assembled by a coalition
of lenders, marketplaces, and brokers.83
Lending Club, p. 28.
78
Id.
79
Id.
80
Id., p. 30
81
Opportun, p. 14.
76
Id.
Id.
One such program is the Treasury Department’s
New Markets Tax Credit program, which attracts
investment in commercial real estate development in
low-income census tracts.
Lending Club, p. 29.
See Lending Club, p. 49; Small Business Majority,
p.
2; CFSI, p. 2.
77
83
Id.
82
Id., p. 41
Page 18 of 22
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Lending Club recommends that the
marketplace lending industry fully adopt the
practices and principles enumerated in the
Small Business Borrower’s Bill of Rights,
and that the regulatory agencies monitor
the industry’s progress in extending credit
to historically underserved populations.84
(6) Data Privacy Protection
Given the recent large scale data breaches
many commenters addressed data privacy
and fraud protection. Equifax specifically
noted that determining and then protecting
the identity of consumers will necessarily be
a multi-step process in marketplace
lending: “As loan applications, supporting
documentation, and decisions move online,
it is important that lenders use all available
tools to validate and authenticate consumer
identity. Failure to properly do so will open
up this channel to significant fraud
perpetration.”85
The NCLC stressed its concerns regarding
the use of consumer data in ways it argues
are inconsistent with the Fair Credit
Reporting Act (FCRA). It also emphasized
the potential consumer harm that it claims
“lead generators” can cause by selling
consumer data to companies that use it to
perpetrate fraud.86
(7) Reforms of the Secondary
Market
Commenters are split on the necessity and
effects of regulation on the secondary
market for marketplace loans.
While
commenters agree that there is currently no
robust secondary market for marketplace
loans, they are split on the reason for this.87
Commenters agree on the advantages of a
secondary market for marketplace loans to
provide access to liquidity, but offer little
consensus on how to establish or
administer such a market.
Kabbage writes that however the secondary
market is developed, it is important that
there is some alignment between the
performance risk associated with a
particular loan and the organization that has
determined that risk. Marketplace lenders
without any capital risk put themselves in a
position of mismatched incentives, the
argument goes, because slightly lower
stated risk can greatly increase the
perceived return to the investors, and can
also create long-term challenges if the
assets do not perform in the manner
promoted.88
Cross River Bank suggests that the
secondary market is robust, and that “[t]he
Federal government should promote
standards for securitization of these assets
to promote a liquid and efficient secondary
84
Id., pp. 14, 42
85
Equifax, p.
3.
87
See Lend Academy, p. 29, Kabbage, p. 2.
NCLC, p.
2.
88
See Kabbage, p. 2.
86
Page 19 of 22
. ReedSmith
market for loans to, in turn, expand the
availability of credit.”89
However, other commenters believe that a
broker-dealer with an alternative trading
designation could establish a secondary
market for marketplace loans today, but
that broker-dealers are not presently
incentivized to do so. These commenters
point to a current lack of profitability and
regulation as the primary hurdle for such a
market.90 Lending Club and Prosper point
out that, due to cash from institutional
investors, they do not have an immediate
need for a secondary market to provide
liquidity.91
89
Cross River Bank, p. 7.
90
Pepper Hamilton, p. 9.
91
Lending Club, p.
47; Prosper, p. 15.
Page 20 of 22
. ReedSmith
IV.
Conclusion
Inevitably, many of the industry responses
to Treasury’s RFI promote their authors’
technologies and products, and promise to
revolutionize lending as we know it. Some
mild puffery is to be expected. But taken as
a whole, the advent of marketplace lending
marks a significant evolutionary moment in
the historical development of consumer
financial services. The industry comments
are sincere, insightful and forward-looking.
And the exchange with Treasury pulls the
curtain back on a financial services industry
that has been changed irrevocably, and
very quickly, by technology.
In its comment, the OLA recalls a parallel in
the “development of the national credit card
industry in the 1980s.” 92 OLA cites the
1978 Supreme Court case of Marquette v.
Omaha Serv.
Corp., and the subsequent
passage of the Depository Institution and
Deregulatory Monetary Control Act of 1981,
which granted “exportation powers to state
chartered banks . . .
and prompted the
explosion of the credit card marketplace.”93
But online marketplace lending also evokes
a more distant historical parallel as well.
During the Depression of the 1930s, almost
10,000 American community banks closed
their doors forever. Those banks had
operated in towns and cities across the
country, offering financial services (advice,
92
93
OLA, p. 4.
Id.
loans, business networks) to the consumers
of the day (local farmers, businesses and
families).
Community banks pooled
resources in order to facilitate lending, but
they also had the benefit of social data
about their communities and customers that
allowed them to make credit decisions and
provide a much needed service.
The declining number of US banks has
continued. In a December 2013 article, the
Wall Street Journal noted that the “number
of banking institutions in the US has
dwindled to its lowest level since at least
the Great Depression,” shrinking to less
than 7,000 “for the first time since federal
regulators began keeping track in 1934.”94
That number has continued to fall; as of
September 2015, there were just 6,270
FDIC-insured banks in the US.
Since that Wall Street Journal article was
published just two years ago, however, an
estimated $12 billion has been invested in
FinTech companies and marketplace
lenders globally. However, although these
companies deploy new underwriting models
and substitute social data of a different kind
to “know” their customers and make credit
decisions, the new tools arguably serve an
age-old need to fulfil the demand of small
businesses and individual borrowers to
access credit.
The US Department of the Treasury
explicitly recognizes the promise and
94
WSJ.com (“Tally of US Banks Sinks to Record
Low”), December 3, 2013, by Ryan Tracy.
Page 21 of 22
.
ReedSmith
potential of marketplace lending, and its
goals and the views of a full spectrum of
interested parties are collectively expressed
in the RFI and the comments submitted in
response. We look forward to the
government’s reaction to those comments,
and we will continue to watch its evolving
relationship with marketplace lenders with
anticipation in the coming months and
years.
Thank you for your interest,
David S. Reidy
Nicholas F.B. Smyth
Heather Cantua Phillips
Tyler M.
Layton
Reed Smith LLP
FinTech Team
San Francisco, January 14, 2016
Page 22 of 22
. ReedSmith
APPENDIX A The Reed Smith Team
David S. Reidy
Partner / Practice
Leader, FinTech
dreidy@reedsmith.com
San Francisco
+1 415 659 5933
Nicholas F.B.
Smyth
Associate
nsmyth@reedsmith.com
Pittsburgh
+1 412 288 3167
Heather Cantua
Phillips
Associate
hphillips@reedsmith.com
San Francisco
+1 415 659 4925
Tyler M. Layton
Associate
tlayton@reedsmith.com
San Francisco
+1 415 659 5959
David is a partner in the firm's Financial Industry Group and Practice
Leader of the firm’s FinTech group. He represents financial services
companies and other clients in consumer class and individual actions
asserting privacy, fair lending, credit reporting, debt collection and unfair
business practices claims, as well as Telephone Consumer Protection Act
(TCPA) and California Invasion of Privacy Act (CIPA) cases.
In addition to
his extensive class action litigation experience, David counsels FinTech
and other clients on compliance matters related to consumer financial
services. David has tried cases to verdict in federal and state court,
defeated dozens of cases at the summary judgment and class
certification stages, and negotiated favorable class and individual
settlements in many other matters.
Nick is a member of the Financial Industry Group, practicing in the area of
Financial Services Litigation. Previously, he spent four years as an
Enforcement Attorney at the Consumer Financial Protection Bureau
(CFPB), and he also helped draft the CFPB’s enabling legislation at the
Treasury Department.
Nick helps bank and nonbank clients prepare for
and respond to examinations and investigations by the CFPB, including
by conducting mock exams and assisting clients with remediation of selfidentified compliance issues and difficult decisions regarding selfreporting. He counsels banks and nonbanks that provide indirect auto
finance on complying with the CFPB’s fair lending (ECOA) guidance, and
he has helped clients navigate CFPB fair lending exams, including
responding to PARR letters. Nick has also advised clients on other
consumer financial laws, including UDAAP, FCRA, FDCPA, TILA, TISA,
CLA, EFTA, RESPA, and implementing regulations.
Heather focuses her practice in the area of financial services litigation,
representing banks and other financial institutions in consumer class and
individual actions, including mortgage banking, credit reporting, debt
collection and unfair business practices litigation.
Recently, she defeated
consumer class actions brought against financial institutions under the
Telephone Consumer Protection Act and Fair Credit Reporting Act. In
2014, Heather helped to defeat class certification and obtained summary
judgment in a putative class action alleging violations of the Fair Credit
Reporting Act. (Germain v.
Bank of Am., N.A., No. 13-CV-676-BBC, 2014
WL 5802018, at *1 (W.D. Wis.
Nov. 7, 2014)).
Tyler is an associate in the Financial Industry Group, whose practice
focuses primarily on representing banks and other financial institutions in
mortgage banking, consumer protection, credit reporting, debt collection
and unfair business practices litigation. Tyler has experience representing
and counseling clients in all phases of federal and state litigation.
Tyler’s
practice also focuses on counseling emerging and established FinTech
clients.
. ReedSmith
APPENDIX B
Treasury’s RFI
. 42866
Federal Register / Vol. 80, No. 138 / Monday, July 20, 2015 / Notices
PTC implementation status update
Respondent
universe
Total annual
responses
Average time
per response
Total annual
burden hours
Questionnaire to be completed by railroads required to implement PTC.
38 Railroads ................
456 Surveys ...................
10 minutes ...................
76
Form Number(s): N/A.
Respondent Universe: 38 Railroads.
Frequency of Submission: Monthly.
Total Estimated Responses: 456
Surveys.
Total Estimated Annual Burden: 380
hours.
Status: Emergency Review.
Pursuant to 44 U.S.C. 3507(a) and 5
CFR 320.5(b), 1320.8(b)(3)(vi), FRA
informs all interested parties that it may
not conduct or sponsor, and a
respondent is not required to respond
to, a collection of information unless it
displays a currently valid OMB control
number.
Authority: 44 U.S.C.
3501–3520.
Issued in Washington, DC, on July 15,
2015.
Rebecca Pennington,
Chief Financial Officer.
[FR Doc. 2015–17689 Filed 7–17–15; 8:45 am]
BILLING CODE 4910–06–P
DEPARTMENT OF THE TREASURY
Public Input on Expanding Access to
Credit Through Online Marketplace
Lending
Office of the Undersecretary for
Domestic Finance, Department of the
Treasury.
ACTION: Notice and request for
information.
AGENCY:
Online marketplace lending
refers to the segment of the financial
services industry that uses investment
capital and data-driven online platforms
to lend to small businesses and
consumers. The Treasury Department is
seeking public comment through this
Request For Information (RFI) on (i) the
various business models of and
products offered by online marketplace
lenders to small businesses and
consumers; (ii) the potential for online
marketplace lending to expand access to
credit to historically underserved
market segments; and (iii) how the
financial regulatory framework should
evolve to support the safe growth of this
industry.1 2
mstockstill on DSK4VPTVN1PROD with NOTICES
SUMMARY:
1 The Consumer Financial Protection Bureau
(CFPB) has broad authority governing standards
that may apply to a variety of consumer loans
issued through this segment, and it has recently
announced that it is considering proposing rules
that would apply to payday loans, vehicle title
VerDate Sep<11>2014
16:30 Jul 17, 2015
Jkt 235001
Submit comments on or before:
August 31, 2015.
ADDRESSES: Submit your comments
through the Federal eRulemaking Portal
or via U.S.
mail or commercial delivery.
We will not accept comments by fax or
by email. To ensure that we do not
receive duplicate copies, please submit
your comments only one time. In
addition, please include the Docket ID
and the term ‘‘Marketplace Lending
RFI’’ at the top of your comments.
• Federal eRulemaking Portal: You
are encouraged to submit comments
electronically through
www.regulations.gov.
Information on
using Regulations.gov, including
instructions for accessing agency
documents, submitting comments, and
viewing the docket, is available on the
site under a tab titled ‘‘Are you new to
the site?’’ Electronic submission of
comments allows the commenter
maximum time to prepare and submit a
comment, ensures timely receipt, and
enables the Department to make them
available to the public.
• U.S. Mail or Commercial Delivery: If
you mail your comments, address them
to Laura Temel, Attention: Marketplace
Lending RFI, U.S. Department of the
Treasury, 1500 Pennsylvania Avenue
NW., Room 1325, Washington, DC
20220.
DATES:
loans, deposit advance products, and certain highcost installment loans and open-end loans.
See
‘‘Small Business Advisory Review Panel for
Potential Rulemakings for Payday, Vehicle Title,
and Similar Loans: Outline of Proposals Under
Consideration and Alternatives Considered’’ (March
26, 2015), available at http://
files.consumerfinance.gov/f/201503_cfpb_outlineof-the-proposals-from-small-business-reviewpanel.pdf. The potential content, effects, and policy
underpinnings of CFPB rules are outside the scope
of this RFI, and comments responding to this RFI
should not address these CFPB rulemakings or their
potential effects on marketplace lending to
consumers. Thus, the RFI only seeks comment on
online marketplace lending not covered in the
potential rulemakings, which, under the current
framework, would include comments on the
making or facilitating of a loan by online lender to
consumers with a term of more than 45 days and
an annual percentage rate (as defined in 10 U.S.C.
987(i)(4)) that (I) does not exceed 36% or (II)
exceeds 36% provided the loan neither provides for
repayment directly from a consumer’s account or
paycheck nor creates a non-purchase money
security interest in a vehicle.
This framework is
currently under discussion, however, and the CFPB
may ultimately change the scope of any proposed
or final CFPB regulation.
2 The activities on online marketplace lending
platforms also may entail the offering of securities
that are subject to the federal securities laws.
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• Privacy Note: The Department’s
policy for comments received from
members of the public (including
comments submitted by mail and
commercial delivery) is to make these
submissions available for public
viewing in their entirety on the Federal
eRulemaking Portal at
www.regulations.gov. Therefore,
commenters should be careful to
include in their comments only
information that they wish to make
publicly available on the Internet.
FOR FURTHER INFORMATION CONTACT: For
general inquiries, submission process
questions or any additional information,
please email Marketplace_Lending@
treasury.gov or call (202) 622–1083. All
responses to this Notice and Request for
Information should be submitted via
http://www.regulations.gov to ensure
consideration.
If you use a
telecommunications device for the deaf
(TDD) or a text telephone (TTY), call the
Federal Relay Service (FRS), toll free, at
1–800–877–8339.
SUPPLEMENTARY INFORMATION:
I. Request for Information
The Treasury Department is seeking
public comment through this RFI to
study (i) the various business models of
and products offered by online
marketplace lenders to small businesses
and consumers; (ii) the potential for
online marketplace lending to expand
access to credit to historically
underserved market segments; and (iii)
how the financial regulatory framework
should evolve to support the safe
growth of this industry.
In particular, the Treasury
Department is interested in responses to
the following questions. We also seek
any additional information beyond
these questions that market participants
believe would assist in our efforts to
become better informed of the impact of
online marketplace lending on small
businesses, consumers, and the broader
economy.
Online marketplace lenders may be
subject to regulations promulgated by
various agencies including, but not
limited to, the CFPB and the Federal
Trade Commission.
Respondents should provide as much
detail as possible about the particular
type of institution, product (e.g., small
business loan, consumer loan), business
model, and practices to which their
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comments apply. Responses to this RFI
will be made public.
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II.
Purpose
Historically, many American
households, small businesses, and
promising new enterprises have faced
barriers in accessing affordable credit
from traditional lenders. To date, the
large majority of online marketplace
consumer loans have been originated to
prime or near-prime consumers to
refinance existing debt. Online
marketplace lending has filled a need
for these borrowers by often delivering
lower costs and faster decision times
than traditional lenders.
Non-prime
consumers face other challenges in
obtaining traditional bank-originated
credit, particularly due to having thin or
no credit files or damaged credit.
Moreover, high underwriting costs can
make it uneconomical to make smallvalue consumer loans. For example, it
can cost the same amount to underwrite
a $300 consumer loan as a $3,000 loan.
Small-value loans to non-prime
consumers thus have often come with
triple digit annual percentage rates
(APR). Some online marketplace
lenders, however, are developing
product structures and underwriting
models that might allow making loans
to non-prime borrowers at lower rates.3
With respect to small businesses, a
number of studies have shown that
these borrowers are more dependent on
community banks for financing than
larger firms, which have access to other
forms of finance including public debt
and equity markets.
While larger
businesses typically rely on banks for 30
percent of their financing, small
businesses receive 90 percent of their
financing from banks.4 Small business
lending, however, has high search,
transaction, and underwriting costs for
banks relative to potential revenue—it
costs about the same to underwrite a $5
million dollar loan as a $200,000
loan 5—and many small business
owners report they are unable to access
the credit needed to grow their business.
According to Federal Reserve survey
data released in February 2015, ‘‘a
majority of small firms (under $1
million in annual revenues) and
startups (under 5 years in business)
3 As noted elsewhere, the CFPB is contemplating
issuing a rule that would regulate ‘‘payday’’ and
related loans, including loans with terms greater
than 45 days and an APR greater than 36%, if the
loan also provides for repayment directly from a
consumer’s account or paycheck or includes a nonpurchase money security interest in a vehicle. Such
consumer loans are outside the scope of this RFI.
4 ‘‘2011 Economic Report of the President,’’
Council of Economic Advisors. The White House.
5 ‘‘The Future of Finance,’’ Goldman Sachs Equity
Research, March 3, 2015.
VerDate Sep<11>2014
16:30 Jul 17, 2015
Jkt 235001
were unable to secure any credit in the
prior year.’’ 6
The challenge is particularly acute for
small business loans of lower value and
shorter terms.
More than half of small
businesses that applied for credit in
2014 sought loans of $100,000 or less.
At the same time, more than two thirds
of businesses with under $1 million in
annual revenue that applied for credit
received less than the full amount that
they sought and half received none.7
Technology-enabled credit provisioning
offers the potential to reduce transaction
costs for these products, while
investment capital may offer a new
source of financing for historically
underserved markets. The 2014 Small
Business Credit Survey indicated that
almost 20 percent of applicants sought
credit from an online lender.
While online marketplace lending is
still a very small component of the
small business and consumer lending
market, it is a rapidly developing and
fast-growing sector that is changing the
credit marketplace. In less than a
decade, online marketplace lending has
grown to an estimated $12 billion in
new loan originations in 2014, the
majority of which is consumer lending.8
Through this RFI, Treasury is seeking to
study the potential for online
marketplace lending to expand access to
credit and how the financial regulatory
framework should evolve to support the
safe growth of this industry.
III.
Background
Online marketplace lending broadly
refers to the segment of the financial
services industry that uses investment
capital and data-driven online platforms
to lend either directly or indirectly to
small businesses and consumers. This
segment initially emerged with
companies giving investors the ability to
provide financing that would be used to
fund individual borrowers through what
became known as a ‘‘peer-to-peer’’
model. However, it has since evolved to
include a diverse set of individual and
institutional credit investors who seek
to provide financing that ultimately is
used to fund small business and
consumer loans of various types to gain
access to additional credit channels and
favorable rates of return.
Companies operating in this industry
tend to fall into three general categories:
(1) Balance sheet lenders that retain
6 ‘‘The Joint Small Business Credit Survey, 2014,’’
a collaboration among the Federal Reserve Banks of
New York, Atlanta, Cleveland and Philadelphia.
Released February 2015.
7 Ibid.
8 ‘‘Global Marketplace Lending: Disruptive
Innovation in Financials,’’ Morgan Stanley
Research, May 2015.
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42867
credit risk in their own portfolios and
are typically funded by venture capital,
hedge fund, or family office
investments; (2) online platforms
(formerly known as ‘‘peer-to-peer’’) that,
through the sale of securities such as
member-dependent notes, obtain the
financing to enable third parties to fund
borrowers and, due to the contingent
nature of the payment obligation on
such securities, do not retain credit risk
that the borrowers will not pay; and (3)
bank-affiliated online lenders that are
funded by a commercial bank, often a
regional or community bank, originate
loans and directly assume the credit
risk.
Additionally, some of these
companies have adopted a business
model in which they partner and have
agreements with banks.
In these
arrangements, the bank acts as the
lender to borrowers that apply on the
platform. The loans are then purchased
by a second party — either by an
investor, in which the transaction is
facilitated by the marketplace lender, or
by the marketplace lender itself, which
funds the loan purchase by note sales.
While the loans are not pooled, small
investors can obtain a return by making
small investments in a number of notes
offered by a marketplace lender through
its platforms.
Online marketplace lenders share key
similarities. They provide funding
through convenient online loan
applications and most have no retail
branches.
They use electronic data
sources and technology-enabled
underwriting models to automate
processes such as determining a
borrower’s identity and credit risk.
These data sources might include
traditional underwriting statistics (e.g.,
income and debt obligations), but also
often include other forms of
information, including novel data points
or combinations. Online marketplace
lenders typically provide borrowers
with faster access to credit than the
traditional face-to-face credit
application process. Small business
online market place lenders, provide
small businesses with lower value (less
than $100,000) and shorter terms.
Key Questions
1.
There are many different models for
online marketplace lending including
platform lenders (also referred to as
‘‘peer-to-peer’’), balance sheet lenders,
and bank-affiliated lenders. In what
ways should policymakers be thinking
about market segmentation; and in what
ways do different models raise different
policy or regulatory concerns?
2. According to a survey by the
National Small Business Association, 85
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percent of small businesses purchase
supplies online, 83 percent manage
bank accounts online, 82 percent
maintain their own Web site, 72 percent
pay bills online, and 41 percent use
tablets for their businesses.9 Small
businesses are also increasingly using
online bookkeeping and operations
management tools. As such, there is
now an unprecedented amount of
online data available on the activities of
these small businesses.
What role are
electronic data sources playing in
enabling marketplace lending? For
instance, how do they affect
traditionally manual processes or
evaluation of identity, fraud, and credit
risk for lenders? Are there new
opportunities or risks arising from these
data-based processes relative to those
used in traditional lending?
3. How are online marketplace
lenders designing their business models
and products for different borrower
segments, such as:
• Small business and consumer
borrowers;
• Subprime borrowers;
• Borrowers who are ‘‘unscoreable’’
or have no or thin files;
Depending on borrower needs (e.g.,
new small businesses, mature small
businesses, consumers seeking to
consolidate existing debt, consumers
seeking to take out new credit) and
other segmentations?
4. Is marketplace lending expanding
access to credit to historically
underserved market segments?
5.
Describe the customer acquisition
process for online marketplace lenders.
What kinds of marketing channels are
used to reach new customers? What
kinds of partnerships do online
marketplace lenders have with
traditional financial institutions,
community development financial
institutions (CDFIs), or other types of
businesses to reach new customers?
6. How are borrowers assessed for
their creditworthiness and repayment
ability? How accurate are these models
in predicting credit risk? How does the
assessment of small business borrowers
differ from consumer borrowers? Does
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9 ‘‘2013 Small Business Technology Survey,’’
National Small Business Association.
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the borrower’s stated use of proceeds
affect underwriting for the loan?
7. Describe whether and how
marketplace lending relies on services
or relationships provided by traditional
lending institutions or insured
depository institutions.
What steps have
been taken toward regulatory
compliance with the new lending model
by the various industry participants
throughout the lending process? What
issues are raised with online
marketplace lending across state lines?
8. Describe how marketplace lenders
manage operational practices such as
loan servicing, fraud detection, credit
reporting, and collections. How are
these practices handled differently than
by traditional lending institutions?
What, if anything, do marketplace
lenders outsource to third party service
providers? Are there provisions for
back-up services?
9.
What roles, if any, can the federal
government play to facilitate positive
innovation in lending, such as making
it easier for borrowers to share their own
government-held data with lenders?
What are the competitive advantages
and, if any, disadvantages for non-banks
and banks to participate in and grow in
this market segment? How can
policymakers address any disadvantages
for each? How might changes in the
credit environment affect online
marketplace lenders?
10. Under the different models of
marketplace lending, to what extent, if
any, should platform or ‘‘peer-to-peer’’
lenders be required to have ‘‘skin in the
game’’ for the loans they originate or
underwrite in order to align interests
with investors who have acquired debt
of the marketplace lenders through the
platforms? Under the different models,
is there pooling of loans that raise issues
of alignment with investors in the
lenders’ debt obligations? How would
the concept of risk retention apply in a
non-securitization context for the
different entities in the distribution
chain, including those in which there is
no pooling of loans? Should this
concept of ‘‘risk retention’’ be the same
for other types of syndicated or
participated loans?
11. Marketplace lending potentially
offers significant benefits and value to
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borrowers, but what harms might online
marketplace lending also present to
consumers and small businesses? What
privacy considerations, cybersecurity
threats, consumer protection concerns,
and other related risks might arise out
of online marketplace lending? Do
existing statutory and regulatory
regimes adequately address these issues
in the context of online marketplace
lending?
12.
What factors do investors consider
when: (i) Investing in notes funding
loans being made through online
marketplace lenders, (ii) doing business
with particular entities, or (iii)
determining the characteristics of the
notes investors are willing to purchase?
What are the operational arrangements?
What are the various methods through
which investors may finance online
platform assets, including purchase of
securities, and what are the advantages
and disadvantages of using them? Who
are the end investors? How prevalent is
the use of financial leverage for
investors? How is leverage typically
obtained and deployed?
13. What is the current availability of
secondary liquidity for loan assets
originated in this manner? What are the
advantages and disadvantages of an
active secondary market? Describe the
efforts to develop such a market,
including any hurdles (regulatory or
otherwise). Is this market likely to grow
and what advantages and disadvantages
might a larger securitization market,
including derivatives and benchmarks,
present?
14.
What are other key trends and
issues that policymakers should be
monitoring as this market continues to
develop?
Guidance for Submitting Documents:
We ask that each respondent include the
name and address of his or her
institution or affiliation, and the name,
title, mailing and email addresses, and
telephone number of a contact person
for his or her institution or affiliation, if
any.
Dated: July, 13, 2015.
David G. Clunie,
Executive Secretary,
[FR Doc. 2015–17644 Filed 7–17–15; 8:45 am]
BILLING CODE 4810–25–P
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ReedSmith
APPENDIX C
List of Comments in Response to RFI
. ReedSmith
Company Name
Page Count
1
Accion U.S. Network
12
2
Affirm, Inc.
8
3
Alliance Partners
22
4
Amalgamated Bank
3
5
Americans for Financial Reform
3
6
Association for Enterprise Opportunity
5
7
Avant, Inc.
4
8
Banking Up
2
9
Blue Elephant Capital Management
12
10
Bond Street
11
11
Broadmoor Consulting LLC
4
12
BuckleySandler
13
13
CAN Capital, Inc.
10
14
Center for Capital Markets Competitiveness
7
15
Center for Financial Services Innovation
6
16
Center for Responsible Lending
7
17
CommonBond, Inc.
11
18
Community Reinvestment Fund, Inc
15
19
Conference of State Bank Supervisors
9
20
Connect Lending
4
21
Cross River Bank
11
22
Crowdnetic
9
23
CUNA
3
24
Dealstruck
9
25
Distributed Finance Corporation
7
26
Duck Creek Tribal Financial, LLC
6
27
Earnest
3
28
Edward C. Yale CFA
2
29
Electronic Transactions Association
16
30
eOriginal
4
31
Equifax
3
32
Fundera
32
33
Funding Circle
44
34
GDR
4
. ReedSmith
Company Name
Page Count
35
GLI Finance
7
36
Godolphin Capital Management, LLC
24
37
Habematolel Pomo of Upper Lake
11
38
Income & Technologies, Inc.
10
39
Independent Community Bankers of America
4
40
INSIKT
11
41
Kabbage, Inc.
10
42
Kiva Microfunds
12
43
KPMG LLP
12
44
Lend Academy
31
45
Lending Club
51
46
LendingTree
5
47
Lendio
10
48
LiftFroward
4
49
Manatt, Phelps & Phillips, LLP
5
50
Milken Institute Center for Financial Markets
13
51
Missouri Credit Union Association
2
52
Missouri Credit Union Association
2
53
MonJa
8
54
Mountain BizWorks
6
55
NAFCU
3
56
NASAA
3
57
National Association of Industrial Bankers
10
58
National Association of REALTORS
4
59
National Consumer Law Center
8
60
National Pawnbrokers Association
6
61
Native American Financial Services Association
9
62
Nelson Mullins
4
63
Office of the Mayor Chicago
1
64
OnDeck
22
65
Online Lenders Alliance
77
66
Oportun, Inc
19
67
Opportunity Finance Network
6
68
Opportunity Fund
7
. ReedSmith
Company Name
Page Count
69
Orchard Platform
16
70
Otoe-Missouria
10
71
PayNet
9
72
PayPal Inc.
5
73
PeerIQ
22
74
Peer-to-Peer Finance Association
19
75
Pepper Hamilton
11
76
PIRG and Center for Digital Democracy
15
77
Prosper Marketplace
15
78
QTX Systems
21
79
RapidAdvance
15
80
RevenueTrades
15
81
Rosette, LLP
4
82
SIFMA
11
83
Small Business Majority
3
84
SoFi
7
85
Structured Finance Industry Group
15
86
The American Bankers Association and The Consumer Bankers Association
10
87
The Heritage Foundation
4
88
The Support Center
3
89
U.C. Berkeley Law School
11
90
University of Colorado Boulder
2
91
Upstart
4
92
WebBank
4
93
Woodstock Institute
8
94
ZestFinance
3
. ReedSmith
APPENDIX D
Madden v. Midland
. Case 14-2131, Document 74-1, 05/22/2015, 1516242, Page1 of 29
14â€2131â€cv
Madden v. Midland Funding, LLC
1
In the
2
United States Court of Appeals
3
For the Second Circuit
4
5
6
August Term, 2014
No. 14â€2131â€cv
7
8
9
SALIHA MADDEN,
on behalf of herself and all others similarly situated,
Plaintiffâ€Appellant,
10
v.
11
12
13
MIDLAND FUNDING, LLC, MIDLAND CREDIT MANAGEMENT, INC.,
Defendantsâ€Appellees.
14
15
16
17
18
19
20
21
22
23
24
Appeal from the United States District Court
for the Southern District of New York.
No. 7:11â€cvâ€08149 ― Cathy Seibel, Judge.
ARGUED: MARCH 19, 2015
DECIDED: MAY 22, 2015
Before: LEVAL, STRAUB and DRONEY, Circuit Judges.
. Case 14-2131, Document 74-1, 05/22/2015, 1516242, Page2 of 29
MADDEN V. MIDLAND FUNDING, LLC
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
Appeal from an order of the United States District Court for
the Southern District of New York (Cathy Seibel, Judge), holding that
the plaintiff’s claims are preempted by the National Bank Act,
denying class certification, and granting judgment in favor of the
defendants. We hold that nonâ€national bank entities are not entitled
to protection under the National Bank Act from stateâ€law usury
claims merely because they are assignees of a national bank.
Accordingly, we REVERSE the District Court’s holding as to
National Bank Act preemption, VACATE the District Court’s
judgment and denial of class certification, and REMAND for further
proceedings consistent with this opinion.
DANIEL ADAM SCHLANGER, Schlanger &
Schlanger LLP, Pleasantville, NY (Peter Thomas
Lane, Schlanger & Schlanger LLP, Pleasantville,
NY; Owen Randolph Bragg, Horwitz, Horwitz &
Associates, Chicago, IL, on the brief), for Saliha
Madden.
THOMAS ARTHUR LEGHORN (Joseph L. Francoeur,
on the brief), Wilson Elser Moskowitz Edelman &
Dicker LLP, New York, NY, for Midland Funding,
LLC and Midland Credit Management, Inc.
STRAUB, Circuit Judge:
This putative class action alleges violations of the Fair Debt
27
Collection Practices Act (“FDCPA”) and New York’s usury law. The
28
proposed class representative, Saliha Madden, alleges that the
â€2â€
. Case 14-2131, Document 74-1, 05/22/2015, 1516242, Page3 of 29
MADDEN V. MIDLAND FUNDING, LLC
1
defendants violated the FDCPA by charging and attempting to
2
collect interest at a rate higher than that permitted under the law of
3
her home state, which is New York. The defendants contend that
4
Madden’s claims fail as a matter of law for two reasons: (1) stateâ€
5
law usury claims and FDCPA claims predicated on stateâ€law
6
violations against a national bank’s assignees, such as the
7
defendants here, are preempted by the National Bank Act (“NBA”),
8
and (2) the agreement governing Madden’s debt requires the
9
application of Delaware law, under which the interest charged is
10
11
permissible.
The District Court entered judgment for the defendants.
12
Because neither defendant is a national bank nor a subsidiary or
13
agent of a national bank, or is otherwise acting on behalf of a
14
national bank, and because application of the state law on which
15
Madden’s claim relies would not significantly interfere with any
16
national bank’s ability to exercise its powers under the NBA, we
â€3â€
. Case 14-2131, Document 74-1, 05/22/2015, 1516242, Page4 of 29
MADDEN V. MIDLAND FUNDING, LLC
1
reverse the District Court’s holding that the NBA preempts
2
Madden’s claims and accordingly vacate the judgment of the District
3
Court. We leave to the District Court to address in the first instance
4
whether the Delaware choiceâ€ofâ€law clause precludes Madden’s
5
claims.
6
The District Court also denied Madden’s motion for class
7
certification, holding that potential NBA preemption required
8
individualized factual inquires incompatible with proceeding as a
9
class. Because this conclusion rested upon the same erroneous
10
preemption analysis, we also vacate the District Court’s denial of
11
class certification.
12
13
14
15
16
17
BACKGROUND
A.
Madden’s Credit Card Debt, the Sale of Her Account, and
the Defendants’ Collection Efforts
In 2005, Saliha Madden, a resident of New York, opened a
Bank of America (“BoA”) credit card account. BoA is a national
â€4â€
. Case 14-2131, Document 74-1, 05/22/2015, 1516242, Page5 of 29
MADDEN V. MIDLAND FUNDING, LLC
1
bank.1 The account was governed by a document she received from
2
BoA titled “Cardholder Agreement.” The following year, BoA’s
3
credit card program was consolidated into another national bank,
4
FIA Card Services, N.A. (“FIA”). Contemporaneously with the
5
transfer to FIA, the account’s terms and conditions were amended
6
upon receipt by Madden of a document titled “Change In Terms,”
7
which contained a Delaware choiceâ€ofâ€law clause.
8
9
Madden owed approximately $5,000 on her credit card
account and in 2008, FIA “chargedâ€off” her account (i.e., wrote off
10
her debt as uncollectable). FIA then sold Madden’s debt to
11
Defendantâ€Appellee Midland Funding, LLC (“Midland Funding”), a
12
debt purchaser. Midland Credit Management, Inc. (“Midland
13
Credit”), the other defendant in this case, is an affiliate of Midland
14
Funding that services Midland Funding’s consumer debt accounts.
National banks are “corporate entities chartered not by any State, but by the
Comptroller of the Currency of the U.S. Treasury.” Wachovia Bank v. Schmidt, 546
U.S. 303, 306 (2006).
1
â€5â€
. Case 14-2131, Document 74-1, 05/22/2015, 1516242, Page6 of 29
MADDEN V. MIDLAND FUNDING, LLC
1
Neither defendant is a national bank. Upon Midland Funding’s
2
acquisition of Madden’s debt, neither FIA nor BoA possessed any
3
further interest in the account.
4
In November 2010, Midland Credit sent Madden a letter
5
seeking to collect payment on her debt and stating that an interest
6
rate of 27% per year applied.
7
B.
8
9
Procedural History
A year later, Madden filed suit against the defendants—on
behalf of herself and a putative class—alleging that they had
10
engaged in abusive and unfair debt collection practices in violation
11
of the FDCPA, 15 U.S.C. §§ 1692e, 1692f, and had charged a usurious
12
rate of interest in violation of New York law, N.Y. Gen. Bus. Law
13
§ 349; N.Y. Gen. Oblig. Law § 5â€501; N.Y. Penal Law § 190.40
14
(proscribing interest from being charged at a rate exceeding 25% per
15
year).
â€6â€
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MADDEN V. MIDLAND FUNDING, LLC
1
On September 30, 2013, the District Court denied the
2
defendants’ motion for summary judgment and Madden’s motion
3
for class certification. In ruling on the motion for summary
4
judgment, the District Court concluded that genuine issues of
5
material fact remained as to whether Madden had received the
6
Cardholder Agreement and Change In Terms, and as to whether
7
FIA had actually assigned her debt to Midland Funding. However,
8
the court stated that if, at trial, the defendants were able to prove
9
that Madden had received the Cardholder Agreement and Change
10
In Terms, and that FIA had assigned her debt to Midland Funding,
11
her claims would fail as a matter of law because the NBA would
12
preempt any stateâ€law usury claim against the defendants. The
13
District Court also found that if the Cardholder Agreement and
14
Change In Terms were binding upon Madden, any FDCPA claim of
15
false representation or unfair practice would be defeated because the
16
agreement permitted the interest rate applied by the defendants.
â€7â€
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MADDEN V. MIDLAND FUNDING, LLC
1
In ruling on Madden’s motion for class certification, the
2
District Court held that because “assignees are entitled to the
3
protection of the NBA if the originating bank was entitled to the
4
protection of the NBA . . . the class action device in my view is not
5
appropriate here.” App’x at 120. The District Court concluded that
6
the proposed class failed to satisfy Rule 23(a)’s commonality and
7
typicality requirements because “[t]he claims of each member of the
8
class will turn on whether the class member agreed to Delaware
9
interest rates” and “whether the class member’s debt was validly
10
assigned to the Defendants,” id. at 127â€28, both of which were
11
disputed with respect to Madden. Similarly, the court held that the
12
requirements of Rule 23(b)(2) (relief sought appropriate to class as a
13
whole) and (b)(3) (common questions of law or fact predominate)
14
were not satisfied “because there is no showing that the
15
circumstances of each proposed class member are like those of
16
Plaintiff, and because the resolution will turn on individual
â€8â€
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MADDEN V. MIDLAND FUNDING, LLC
1
determinations as to cardholder agreements and assignments of
2
debt.” Id. at 128.
3
On May 30, 2014, the parties entered into a “Stipulation for
4
Entry of Judgment for Defendants for Purpose of Appeal.” Id.
5
at 135. The parties stipulated that FIA had assigned Madden’s
6
account to the defendants and that Madden had received the
7
Cardholder Agreement and Change In Terms. This stipulation
8
disposed of the two genuine disputes of material fact identified by
9
the District Court, and provided that “a final, appealable judgment
10
in favor of Defendants is appropriate.” Id. at 138. The District Court
11
“so ordered” the Stipulation for Entry of Judgment.
12
This timely appeal followed.
13
DISCUSSION
14
Madden argues on appeal that the District Court erred in
15
holding that NBA preemption bars her stateâ€law usury claims. We
16
agree. Because neither defendant is a national bank nor a subsidiary
17
or agent of a national bank, or is otherwise acting on behalf of a
â€9â€
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MADDEN V. MIDLAND FUNDING, LLC
1
national bank, and because application of the state law on which
2
Madden’s claim relies would not significantly interfere with any
3
national bank’s ability to exercise its powers under the NBA, we
4
reverse the District Court’s holding that the NBA preempts
5
Madden’s claims and accordingly vacate the judgment of the District
6
Court. We also vacate the District Court’s judgment as to Madden’s
7
FDCPA claim and the denial of class certification because those
8
rulings were predicated on the same flawed preemption analysis.
9
The defendants contend that even if we find that Madden’s
10
claims are not preempted by the NBA, we must affirm because
11
Delaware law—rather than New York law—applies and the interest
12
charged by the defendants is permissible under Delaware law.
13
Because the District Court did not reach this issue, we leave it to the
14
District Court to address in the first instance on remand.
â€10â€
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MADDEN V. MIDLAND FUNDING, LLC
1
2
I.
National Bank Act Preemption
The federal preemption doctrine derives from the Supremacy
3
Clause of the United States Constitution, which provides that “the
4
Laws of the United States which shall be made in Pursuance” of the
5
Constitution “shall be the supreme Law of the Land.” U.S. Const.
6
art. VI, cl. 2. According to the Supreme Court, “[t]he phrase ‘Laws
7
of the United States’ encompasses both federal statutes themselves
8
and federal regulations that are properly adopted in accordance
9
with statutory authorization.” City of New York v. FCC, 486 U.S. 57,
10
11
63 (1988).
“Preemption can generally occur in three ways: where
12
Congress has expressly preempted state law, where Congress has
13
legislated so comprehensively that federal law occupies an entire
14
field of regulation and leaves no room for state law, or where federal
15
law conflicts with state law.” Wachovia Bank, N.A. v. Burke, 414 F.3d
16
305, 313 (2d Cir. 2005), cert. denied, 550 U.S. 913 (2007). The
â€11â€
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1
defendants appear to suggest that this case involves “conflict
2
preemption,” which “occurs when compliance with both state and
3
federal law is impossible, or when the state law stands as an obstacle
4
to the accomplishment and execution of the full purposes and
5
objective of Congress.” United States v. Locke, 529 U.S. 89, 109 (2000)
6
(internal quotation marks omitted).
7
The National Bank Act expressly permits national banks to
8
“charge on any loan . . . interest at the rate allowed by the laws of
9
the State, Territory, or District where the bank is located.” 12 U.S.C.
10
§ 85. It also “provide[s] the exclusive cause of action” for usury
11
claims against national banks, Beneficial Nat’l Bank v. Anderson, 539
12
U.S. 1, 11 (2003), and “therefore completely preempt[s] analogous
13
stateâ€law usury claims,” Sullivan v. Am. Airlines, Inc., 424 F.3d 267,
14
275 (2d Cir. 2005). Thus, there is “no such thing as a stateâ€law claim
15
of usury against a national bank.” Beneficial Nat’l Bank, 539 U.S.
16
at 11; see also Pac. Capital Bank, N.A. v. Connecticut, 542 F.3d 341, 352
â€12â€
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1
(2d Cir. 2008) (“[A] state in which a national bank makes a loan may
2
not permissibly require the bank to charge an interest rate lower
3
than that allowed by its home state.”). Accordingly, because FIA is
4
incorporated in Delaware, which permits banks to charge interest
5
rates that would be usurious under New York law, FIA’s collection
6
at those rates in New York does not violate the NBA and is not
7
subject to New York’s stricter usury laws, which the NBA preempts.
8
9
they too are allowed under the NBA to charge interest at the rate
The defendants argue that, as assignees of a national bank,
10
permitted by the state where the assignor national bank is located—
11
here, Delaware. We disagree. In certain circumstances, NBA
12
preemption can be extended to nonâ€national bank entities. To apply
13
NBA preemption to an action taken by a nonâ€national bank entity,
14
application of state law to that action must significantly interfere
15
with a national bank’s ability to exercise its power under the NBA.
â€13â€
. Case 14-2131, Document 74-1, 05/22/2015, 1516242, Page14 of 29
MADDEN V. MIDLAND FUNDING, LLC
1
See Barnett Bank of Marion Cnty., N.A. v. Nelson, 517 U.S. 25, 33 (1996);
2
Pac. Capital Bank, 542 F.3d at 353.
3
The Supreme Court has suggested that that NBA preemption
4
may extend to entities beyond a national bank itself, such as nonâ€
5
national banks acting as the “equivalent to national banks with
6
respect to powers exercised under federal law.” Watters v. Wachovia
7
Bank, N.A., 550 U.S. 1, 18 (2007). For example, the Supreme Court
8
has held that operating subsidiaries of national banks may benefit
9
from NBA preemption. Id.; see also Burke, 414 F.3d at 309 (deferring
10
to reasonable regulation that operating subsidiaries of national
11
banks receive the same preemptive benefit as the parent bank). This
12
Court has also held that agents of national banks can benefit from
13
NBA preemption. Pac. Capital Bank, 542 F.3d at 353â€54 (holding that
14
a thirdâ€party tax preparer who facilitated the processing of refund
15
anticipation loans for a national bank was not subject to Connecticut
16
law regulating such loans); see also SPGGC, LLC v. Ayotte, 488 F.3d
â€14â€
. Case 14-2131, Document 74-1, 05/22/2015, 1516242, Page15 of 29
MADDEN V. MIDLAND FUNDING, LLC
1
525, 532 (1st Cir. 2007) (“The National Bank Act explicitly states that
2
a national bank may use ‘duly authorized officers or agents’ to
3
exercise its incidental powers.” (internal citation omitted)), cert.
4
denied, 552 U.S. 1185 (2008).
5
The Office of the Comptroller of the Currency (“OCC”), “a
6
federal agency that charters, regulates, and supervises all national
7
banks,” Town of Babylon v. Fed. Hous. Fin. Agency, 699 F.3d 221, 224
8
n.2 (2d Cir. 2012), has made clear that thirdâ€party debt buyers are
9
distinct from agents or subsidiaries of a national bank, see OCC
10
Bulletin 2014â€37, Risk Management Guidance (Aug. 4, 2014),
11
available at http://www.occ.gov/newsâ€
12
issuances/bulletins/2014/bulletinâ€2014â€37.html (“Banks may pursue
13
collection of delinquent accounts by (1) handling the collections
14
internally, (2) using third parties as agents in collecting the debt, or
15
(3) selling the debt to debt buyers for a fee.”). In fact, it is precisely
16
because national banks do not exercise control over thirdâ€party debt
â€15â€
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MADDEN V. MIDLAND FUNDING, LLC
1
buyers that the OCC issued guidance regarding how national banks
2
should manage the risk associated with selling consumer debt to
3
third parties. See id.
4
In most cases in which NBA preemption has been applied to a
5
nonâ€national bank entity, the entity has exercised the powers of a
6
national bank—i.e., has acted on behalf of a national bank in
7
carrying out the national bank’s business. This is not the case here.
8
The defendants did not act on behalf of BoA or FIA in attempting to
9
collect on Madden’s debt. The defendants acted solely on their own
10
behalves, as the owners of the debt.
11
12
applying state usury laws to the thirdâ€party debt buyers would
13
significantly interfere with either national bank’s ability to exercise
14
its powers under the NBA. See Barnett Bank, 517 U.S. at 33. Rather,
15
such application would “limit[] only activities of the third party
16
which are otherwise subject to state control,” SPGGC, LLC v.
No other mechanism appears on these facts by which
â€16â€
. Case 14-2131, Document 74-1, 05/22/2015, 1516242, Page17 of 29
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1
Blumenthal, 505 F.3d 183, 191 (2d Cir. 2007), and which are not
2
protected by federal banking law or subject to OCC oversight.
3
4
shopping mall operator, SPGGC, sold prepaid gift cards at its malls,
5
including its malls in Connecticut. Id. at 186. Bank of America
6
issued the cards, which looked like credit or debit cards and
7
operated on the Visa debit card system. Id. at 186â€87. The gift cards
8
included a monthly service fee and carried a oneâ€year expiration
9
date. Id. at 187. The Connecticut Attorney General sued SPGGC
10
alleging violations of Connecticut’s gift card law, which prohibits
11
the sale of gift cards subject to inactivity or dormancy fees or
12
expiration dates. Id. at 187â€88. SPGGC argued that NBA
13
preemption precluded suit. Id. at 189.
14
15
preemption of Connecticut law insofar as the law prohibited SPGGC
16
from imposing inactivity fees on consumers of its gift cards. Id.
We reached a similar conclusion in Blumenthal. There, a
We held that SPGGC failed to state a valid claim for
â€17â€
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MADDEN V. MIDLAND FUNDING, LLC
1
at 191. We reasoned that enforcement of the state law “does not
2
interfere with BoA’s ability to exercise its powers under the NBA
3
and OCC regulations.” Id. “Rather, it affects only the conduct of
4
SPGGC, which is neither protected under federal law nor subject to
5
the OCC’s exclusive oversight.” Id.
6
7
expiration dates could interfere with national bank powers because
8
Visa requires such cards to have expiration dates and “an outright
9
prohibition on expiration dates could have prevented a Visa
We did find, in Blumenthal, that Connecticut’s prohibition on
10
member bank (such as BoA) from acting as the issuer of the Simon
11
Giftcard.” Id. at 191. We remanded for further consideration of the
12
issue. Here, however, state usury laws would not prevent consumer
13
debt sales by national banks to third parties. Although it is possible
14
that usury laws might decrease the amount a national bank could
15
charge for its consumer debt in certain states (i.e., those with firm
â€18â€
. Case 14-2131, Document 74-1, 05/22/2015, 1516242, Page19 of 29
MADDEN V. MIDLAND FUNDING, LLC
1
usury limits, like New York), such an effect would not “significantly
2
interfere” with the exercise of a national bank power.
3
4
debt collectors such as the defendants would be an overly broad
5
application of the NBA. Although national banks’ agents and
6
subsidiaries exercise national banks’ powers and receive protection
7
under the NBA when doing so, extending those protections to third
8
parties would create an endâ€run around usury laws for nonâ€national
9
bank entities that are not acting on behalf of a national bank.
10
Furthermore, extension of NBA preemption to thirdâ€party
The defendants and the District Court rely principally on two
11
Eighth Circuit cases in which the court held that NBA preemption
12
precluded stateâ€law usury claims against nonâ€national bank entities.
13
In Krispin v. May Department Stores, 218 F.3d 919 (8th Cir. 2000), May
14
Department Stores Company (“May Stores”), a nonâ€national bank
15
entity, issued credit cards to the plaintiffs. Id. at 921. By agreement,
16
those credit card accounts were governed by Missouri law, which
â€19â€
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MADDEN V. MIDLAND FUNDING, LLC
1
limits delinquency fees to $10. Id. Subsequently, May Stores
2
notified the plaintiffs that the accounts had been assigned and
3
transferred to May National Bank of Arizona (“May Bank”), a
4
national bank and whollyâ€owned subsidiary of May Stores, and that
5
May Bank would charge delinquency fees of up to “$15, or as
6
allowed by law.” Id. Although May Stores had transferred all
7
authority over the terms and operations of the accounts to May
8
Bank, it subsequently purchased May Bank’s receivables and
9
maintained a role in account collection. Id. at 923.
10
The plaintiffs brought suit under Missouri law against May
11
Stores after being charged $15 delinquency fees. Id. at 922. May
12
Stores argued that the plaintiffs’ stateâ€law claims were preempted by
13
the NBA because the assignment and transfer of the accounts to May
14
Bank “was fully effective to cause the bank, and not the store, to be
15
the originator of [the plaintiffs’] accounts subsequent to that time.”
16
Id. at 923. The court agreed:
â€20â€
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2
3
4
5
6
7
8
9
10
11
12
[T]he store’s purchase of the bank’s receivables does not
diminish the fact that it is now the bank, and not the
store, that issues credit, processes and services customer
accounts, and sets such terms as interest and late fees.
Thus, although we recognize that the NBA governs only
national banks, in these circumstances we agree with
the district court that it makes sense to look to the
originating entity (the bank), and not the ongoing
assignee (the store), in determining whether the NBA
applies.
Id. at 924 (internal citation omitted).2
2 We believe the District Court gave unwarranted significance to Krispin’s
reference to the “originating entity” in the passage quoted above. The District
Court read the sentence to suggest that, once a national bank has originated a
credit, the NBA and the associated rule of conflict preemption continue to apply
to the credit, even if the bank has sold the credit and retains no further interest in
it. The point of the Krispin holding was, however, that notwithstanding the
bank’s sale of its receivables to May Stores, it retained substantial interests in the
credit card accounts so that application of state law to those accounts would have
conflicted with the bank’s powers authorized by the NBA. The crucial words of
the sentence were “in these circumstances,” which referred to the fact stated in
the previous sentence of the bank’s retention of substantial interests in the credit
card accounts. As we understand the Krispin opinion, the fact that the bank was
described as the “originating entity” had no significance for the court’s decision,
which would have come out the opposite way if the bank, notwithstanding that
it originated the credits in question, had sold them outright to a new, unrelated
owner, divesting itself completely of any continuing interest in them, so that its
operations would no longer be affected by the application of state law to the new
owner’s further administration of the credits.
â€21â€
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1
2
when the national bank’s receivables were purchased by May Stores,
3
the national bank retained ownership of the accounts, leading the
4
court to conclude that “the real party in interest is the bank.” 218
5
F.3d at 924. Unlike Krispin, neither BoA nor FIA has retained an
6
interest in Madden’s account, which further supports the conclusion
7
that subjecting the defendants to state regulations does not prevent
8
or significantly interfere with the exercise of BoA’s or FIA’s powers.
9
Krispin does not support finding preemption here. In Krispin,
The defendants and the District Court also rely upon Phipps v.
10
FDIC, 417 F.3d 1006 (8th Cir. 2005). In that case, the plaintiffs
11
brought an action under Missouri law to recover allegedly unlawful
12
fees charged by a national bank on mortgage loans. The plaintiffs
13
alleged that after charging these fees, which included a purported
14
“finder’s fee” to thirdâ€party Equity Guaranty LLC (a nonâ€bank
15
entity), the bank sold the loans to other defendants. The court held
16
that the fees at issue were properly considered “interest” under the
â€22â€
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MADDEN V. MIDLAND FUNDING, LLC
1
NBA and concluded that, under those circumstances, it “must look
2
at ‘the originating entity (the bank), and not the ongoing assignee . . .
3
in determining whether the NBA applies.’” Id. at 1013 (quoting
4
Krispin, 218 F.3d at 924 (alteration in original)).
5
Phipps is distinguishable from this case. There, the national
6
bank was the entity that charged the interest to which the plaintiffs
7
objected. Here, on the other hand, Madden objects only to the
8
interest charged after her account was sold by FIA to the defendants.
9
Furthermore, if Equity Guaranty was paid a “finder’s fee,” it would
10
benefit from NBA preemption as an agent of the national bank.
11
Indeed, Phipps recognized that “‘[a] national bank may use the
12
services of, and compensate persons not employed by, the bank for
13
originating loans.’” Id. (quoting 12 C.F.R. § 7.1004(a)). Here, the
â€23â€
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1
defendants do not suggest that they have such a relationship with
2
BoA or FIA.3
3
II.
Choice of Law: Delaware vs. New York
4
The defendants contend that the Delaware choiceâ€ofâ€law
5
provision contained in the Change In Terms precludes Madden’s
6
New York usury claims.4 Although raised below, the District Court
7
did not reach this issue in ruling on the defendants’ motion for
8
summary judgment.5 Subsequently, in the Stipulation for Entry of
We are not persuaded by Munoz v. Pipestone Financial, LLC, 513 F. Supp. 2d 1076
(D. Minn. 2007), upon which the defendants and the District Court also rely.
Although the court found preemption applicable to an assignee of a national
bank in a case analogous to Madden’s suit, it misapplied Eighth Circuit
precedent by applying unwarranted significance to Krispin’s use of the word
“originating entity” and straying from the essential inquiry—whether applying
state law would “significantly interfere with the national bank’s exercise of its
powers,” Barnett Bank, 517 U.S. at 33, because of a subsidiary or agency
relationship or for other reasons.
4 The Change In Terms, which amended the original Cardholder Agreement,
includes the following provision: “This Agreement is governed by the laws of
the State of Delaware (without regard to its conflict of laws principles) and by
any applicable federal laws.” App’x at 58, 91.
5 We reject Madden’s contention that this argument was waived. First, although
the defendants’ motion for summary judgment urged the District Court to rule
on other grounds, it did raise the Delaware choiceâ€ofâ€law clause. Defs.’ Summ. J.
Mem. 4 & n.3, No. 7:11â€cvâ€08149 (S.D.N.Y. Jan. 25, 2013), ECF No. 32. Second,
3
â€24â€
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1
Judgment, the parties resolved in the defendants’ favor the dispute
2
as to whether Madden was bound by the Change In Terms. The
3
parties appear to agree that if Delaware law applies, the rate the
4
defendants charged Madden was permissible.6
5
We do not decide the choiceâ€ofâ€law issue here, but instead
6
leave it for the District Court to address in the first instance.7
7
III.
Madden’s Fair Debt Collection Practices Act Claim
8
Madden also contends that by attempting to collect interest at
9
a rate higher than allowed by New York law, the defendants falsely
this argument was not viable prior to the Stipulation for Entry of Judgment due
to unresolved factual issues―principally, whether Madden had received the
Change In Terms.
6 We express no opinion as to whether Delaware law, which permits a “bank” to
charge any interest rate allowable by contract, see Del. Code Ann. tit. 5, § 943,
would apply to the defendants, both of which are nonâ€bank entities.
7 Because it may assist the District Court, we note that there appears to be a split
in the case law. Compare Am. Equities Grp., Inc. v. Ahava Dairy Prods. Corp., No. 01
Civ. 5207(RWS), 2004 WL 870260, at *7â€9 (S.D.N.Y. Apr. 23, 2004) (applying New
York’s usury law despite outâ€ofâ€state choiceâ€ofâ€law clause); Am. Express Travel
Related Servs. Co. v. Assih, 26 Misc. 3d 1016, 1026 (N.Y. Civ. Ct. 2009) (same); N.
Am. Bank, Ltd. v. Schulman, 123 Misc. 2d 516, 520â€21 (N.Y. Cnty. Ct. 1984) (same)
with RMP Capital Corp. v. Bam Brokerage, Inc., 21 F. Supp. 3d 173, 186 (E.D.N.Y.
2014) (finding outâ€ofâ€state choiceâ€ofâ€law clause to preclude application of New
York’s usury law).
â€25â€
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1
represented the amount to which they were legally entitled in
2
violation of the FDCPA, 15 U.S.C. §§ 1692e(2)(A), (5), (10), 1692f(1).
3
The District Court denied the defendants’ motion for summary
4
judgment on this claim for two reasons. First, it held that there was
5
a genuine dispute of material fact as to whether the defendants are
6
assignees of FIA; if they are, it reasoned, Madden’s FDCPA claim
7
would fail because state usury laws—the alleged violation of which
8
provide the basis for Madden’s FDCPA claim—do not apply to
9
assignees of a national bank. The parties subsequently stipulated
10
“that FIA assigned Defendants Ms. Madden’s account,” App’x
11
at 138, and the District Court, in accord with its prior ruling, entered
12
judgment for the defendants. Because this analysis was predicated
13
on the District Court’s erroneous holding that the defendants receive
14
the same protections under the NBA as do national banks, we find
15
that it is equally flawed.
â€26â€
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Second, the District Court held that if Madden received the
2
Cardholder Agreement and Change In Terms, a fact to which the
3
parties later stipulated, any FDCPA claim of false representation or
4
unfair practice would fail because the agreement allowed for the
5
interest rate applied by the defendants. This conclusion is premised
6
on an assumption that Delaware law, rather than New York law,
7
applies, an issue the District Court did not reach. If New York’s
8
usury law applies notwithstanding the Delaware choiceâ€ofâ€law
9
clause, the defendants may have made a false representation or
10
engaged in an unfair practice insofar as their collection letter to
11
Madden stated that they were legally entitled to charge interest in
12
excess of that permitted by New York law. Thus, the District Court
13
may need to revisit this conclusion after deciding whether Delaware
14
or New York law applies.
15
16
Because the District Court’s analysis of the FDCPA claim was
based on an erroneous NBA preemption finding and a premature
â€27â€
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MADDEN V. MIDLAND FUNDING, LLC
1
assumption that Delaware law applies, we vacate the District
2
Court’s judgment as to this claim.
3
IV.
4
Class Certification
Madden asserts her claims on behalf of herself and a class
5
consisting of “all persons residing in New York [] who were sent a
6
letter by Defendants attempting to collect interest in excess of 25%
7
per annum [] regarding debts incurred for personal, family, or
8
household purposes.” Pl.’s Class Certification Mem. 1, No. 7:11â€cvâ€
9
08149 (S.D.N.Y. Jan. 18, 2013), ECF No. 29. The defendants have
10
represented that they sent such letters with respect to 49,780
11
accounts.
12
Madden moved for class certification before the District Court.
13
The District Court denied the motion, holding that because
14
“assignees are entitled to the protection of the NBA if the originating
15
bank was entitled to the protection of the NBA . . . the class action
16
device in my view is not appropriate here.” App’x at 120. Because
â€28â€
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1
the District Court’s denial of class certification was entwined with its
2
erroneous holding that the defendants receive the same protections
3
under the NBA as do national banks, we vacate the denial of class
4
certification.
5
6
CONCLUSION
We REVERSE the District Court’s holding as to National Bank
7
Act preemption, VACATE the District Court’s judgment and denial
8
of class certification, and REMAND for further proceedings
9
consistent with this opinion.
â€29â€
.