54 U. Mich. J. L. Reform Caveat
Matthew J. Razzano*
Historically, state usury laws prohibited lending above certain interest rates, but in 1978 the Supreme Court interpreted the National Bank Act (NBA) to allow chartered banks to issue loans at rates based on where they were headquartered rather than where the loan originated.1 States like South Dakota virtually eliminated interest rate ceilings to attract business, incentivizing national banks to base credit operations there and avoid local usury laws.2 In 2015, however, the Second Circuit decided Madden v. Midland Funding, LLC and reversed long-standing banking practices, ruling that non-chartered financial institutions were not covered by the NBA and were therefore subject to state usury laws where the loan originated.3 The underlying reasoning for the court’s decision was well-intentioned and based on (a) an unwillingness to allow non-chartered institutions to function as pseudo-banks4 and (b) a desire to protect consumers.5 The court’s radical decision received widespread criticism,6 and empirical studies have demonstrated a noteworthy decrease in credit availability in the Second Circuit7—negating the court’s own policy rationales. Since Madden, Congress and federal agencies have attempted an outright reversal, but none of their solutions address the Madden court’s fundamental concerns. This Essay argues that a Madden fix is needed, but the most effective solution must incorporate and address the Second Circuit’s underlying concerns.