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Does the White House Stand for Consumer Protection or for Predatory Lending?

posted by Adam Levitin

Does the Obama White House truly stand for consumer financial protection, or will it support Wall Street when it thinks no one is looking?  That's the question that the Supreme Court served up today.  The Supreme Court is considering whether to hear an appeal in a critical consumer protection case called Midland Funding v. Madden. This is one of the most important consumer financial protection case the Supreme Court has considered in years. (See here for my previous post about it.)

The Court will only take the appeal if at least four Justices are in favor of hearing it.  Today the Supreme Court requested the opinion of the Solicitor General about whether to take the case.  That's a good indication that there's currently no more than three Justices who want to hear the appeal and another one or more who are unsure (it will take five to overturn the lower court decision in the case).  If four Justices wanted to hear the case, there'd be no reason to ping the Solicitor General. 

The request for the Solicitor General to weigh in on the case puts the White House in the position of having to decide whether it wants to stand up for consumer financial protection or to fight for Wall Street.

This is because Midland Funding is about whether the 1864 National Bank Act preempts the application of state usury laws to loans originated by a national bank, but then sold to a debt collector.  The 2d Circuit said that state usury laws are not preempted as against the debt collector because National Bank Act preemption goes with a regulatory regime that applies only to national banks.  The really important implication is that state usury laws apply not only to debt collectors, but also to securitization trusts, which are not national banks, even if the trustees are.

Many people assume that state usury laws are dead. But they aren't. It's just that they don't apply in many instances because of the operation of federal law.  Prior to 1978, state usury laws were the primary mode of consumer financial protection (and not coincidentally, we didn't have consumer debt crises-usury laws, for better or worse, prevent consumer credit markets from overheating).

In 1978, however, the Supreme Court ruled in a case called Marquette National Bank that based on the language of the 1864 National Bank Act (rather than because of some policy against usury laws) that a federally-chartered national bank is subject only to the usury laws of its home state, which it can then export to other states.  The result was that credit card issuers moved to states with low or no usury laws, such as Delaware and South Dakota, and then exported the lax regulation to other jurisdictions.  That in turn set off a deregulatory race to the bottom as states sought to keep their own bank chartering business with usury law exceptions.  All of which is to say that usury laws were largely gutted not out of a considered policy debate but because of the wording of a Civil War finance statute.  

Notice, however, that Marquette did not void state usury laws. It only made them inapplicable to certain entities. In 1978 this didn't matter much because there weren't real secondary markets in consumer debt. Today is a different matter. Many, nay, most consumer credit obligations end up in the hands of entities other than national banks--especially securitization trusts and debt collectors. There's nothing in the Marquette decision suggesting that state usury laws do not apply to these entities. 

There's an important policy question about whether we should have usury laws, and if so, what they should look like.  The arguments are actually rather complex.  But they're policy decisions that are properly left to legislative bodies.  It's not a decision for the courts.  The issue in Midland Funding is about whether federal law preempts state law in regard to certain entities that are not subject to pervasive federal regulatory oversight. Extending preemption will have the effect of usurping the legislative policy decision and declaring that usury laws are over and done-with, which is a license for predatory lending in markets not covered by ability-to-pay rules (e.g., student loans, auto loans, signature loans). 

So will the Solicitor General back Wall Street or Main Street?  It's easy to overlook things like Solicitor General opinions; they aren't flashy legislative battles. But they matter, and they also indicate what an administration truly stands for when it is not under the glare of the public spot light.  (Some of us noticed that the SG did not weigh in regarding Caulkett v. Bank of America, when many expected the administration to support Bank of America.)  So we'll see.  Does the Obama administration truly stand for consumer protection?  Or when it thinks no one is watching, will it support Wall Street interests?  At least some of us are watching very closely. 


What effect will the 2d Cir decision, if it stands, have one secondary debt markets? It seems like it would make it harder for banks to off-load debt and free up capital. Wouldn't this be bad for consumers too?


Usury laws do have the effect of restricting access to credit. Whether that's a bad thing is trickier. They cut off access to credit for the riskiest borrowers, who are probably the ones who are least well suited for handling the credit. Balancing between these concerns is a policy issue, and it should be decided by the legislatures, not by the courts under the guise of preemption based on a statute written for a time when there were almost no consumer credit markets.

Putting on my Hayekian hat, I would add that usury laws have been around since the earliest civilizations and exist across civilizations. We should be hesitant to summarily reject such millennia of received social learning absent real strong evidence against it.

Is there even a question here? There has been precious little consumer protection from this DLC-owned-and-operated administration, and I suspect what little there has been was fully vetted by the financial industry, because the industry had found either a way to circumvent it or turn a profit from it. And at the risk of sounding like a wear a tinfoil hat, I would note that usury laws died just as it became impossible for a large and rapidly growing percentage of the citizenry to live on their paychecks.

I'm a small claims judge, and 80-90% of my weekly docket consists of payday loan collections. The defendants didn't take out these loams to pay for bar tabs and Las Vegas vacations. They had to fix a car or pay a doctor or pay a heating bill. The high-interest debt regime does nothing but paper over the fact that our system is failing a rapidly growing segment of the population while shifting all blame to that segment ("Those people caused their own problem. Look at the debt they took on."). The real purpose of the high-interest debt regime (I'll leave it to others to decide whether it was intentional.) is to keep the disenfranchised and dispossessed out of the streets while giving them a soft landing into serfdom.

I won't even go into things like Utah's Kafkaesque, intent-free, bad check statute, which criminalizes virtually every bounced check, turns the DA into a collection attorney, and creates a restitution debt that can not be discharged in bankruptcy.

If I understand the case correctly, allowing third-party buyers to benefit from preemption would not do away with usury laws altogether; it just means the third party debt buyers would get to keep the interest rate at which the national bank originally extended the credit. What seems problematic is if the the usury is constantly changing when the debt changes hands. For instance, what happens when John Doe's credit card debt (lets say at 25% interest) goes to a debt buyer who is forced to change the rate to 20% due to their location then goes and sales the debt again to a buyer who can charge 25%? Does John's interest just keep changing on his monthly bills? It also creates a race to the bottom for states wanting to attract debt-buying entities—again, bad for consumers and for usury limits.

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