Credit Card ABS: Securitization and State Usury Laws

Consumer lending as we know it today – and credit card lending in particular – depend on securitization for significant access to capital. However, the ability of banks to bundle and sell credit card debt-backed securities may be thrown into disarray depending on the outcomes of a pair of pending cases: Cohen v. Capital One Funding, LLC[1] and Cohen v. Chase Card Funding, LLC.[2]

The outcomes of these matters will likely turn on the application of a 2015 decision by the 2nd Circuit Court of Appeals regarding a statute that is more than 150 years old: the National Bank Act of 1864 (“NBA”).

The Supreme Court has stated that the NBA preempts state laws that “significantly interfere” with a “national bank’s exercise of its powers,”[3] a ruling that has been applied to cover state usury laws that set maximum rates of interest. As a result, a bank must comply with the usury law of the state “in which the bank [is] located”[4] – if the borrower moves to a state with a lower rate cap, the interest rate remains valid.

In 2015, the 2nd Circuit decided Madden v. Midland Funding, LLC.[5] In Madden, a Delaware-based bank had issued a loan to a New York borrower with an interest rate that complied with Delaware law.[6] The bank, however, then sold the loan to a debt purchaser. But because the purchaser was neither a national bank itself nor acting “on behalf of” a national bank, the 2nd Circuit found that New York’s usury law[7] did not “significantly interfere” with the bank and held that New York’s maximum interest rate cap applied.

Now, plaintiffs in Capital One and Chase Card seek to extend this reasoning to ABS that hold credit card debts. Because the debts are now owned by an independent trust, plaintiffs allege the credit card ABS entity has no right to assert that state usury laws preempt the interest rates being charged on the underlying debts.

Data: SIFMA https://www.sifma.org/resources/research/us-abs-issuance-and-outstanding/

Should plaintiffs prevail, banks’ ability to free up capital and spread risk across nonbank institutional investors would be severely hampered – and would likely face a period of upheaval as the effects on the billions of dollars of outstanding CCABS are sorted out.

The 2nd Circuit’s decision in Madden has sparked criticism from regulators[8] and at least two efforts in Congress to legislate a change to the ruling.[9] However, until such a change is enacted, market participants will have to watch the courses of Capital One and Chase Card.

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[1] No. 19-cv-03479 (E.D.N.Y.).

[2] No. 19-cv-00741 (W.D.N.Y.).

[3] Marquette Nat. Bank v. First of Omaha Svc. Corp., 439 U.S. 299, 313 (1978).

[4] Barnett Bank of Marion County, N.A. v. Nelson, 517 U.S. 25, 33 (1996).

[5] 786 F.3d 246 (2d Cir. 2015).

[6] 6 Del. C. § 2301 et seq.

[7] NY CLS Gen Oblig § 5-501 et seq.

[8] See, e.g., amicus brief of the F.D.I.C. and Office of Comptroller of the Currency, In re: Rent-Rite Super Kegs West Ltd., No. 19-cv-01552 (D. Colo.), dkt. no. 11.

[9] See, e.g., Sykes, J., Banking Law: An Overview of Federal Preemption in the Dual Banking System (Jan. 23, 2018), available at http://fas.org/sgp/crs/misc/R45081.pdf.