1. Disruptive Potential of Madden v. Midland Funding
Presented by
Arthur J. Rotatori, Esq.
McGlinchey Stafford

2. What is Rent-a-Charter?
Non-bank enters into an arrangement with a “Bank” whereby:
The non-bank markets and services the loans
The “Bank” makes a loan payable to the “Bank”
The “Bank” sells the loan to the non-bank
The non-bank holds a portfolio with uniform loan pricing

3. Foundations of Rent-a-Charter
The “Bank” is a federal-insured depository institution:
National bank, federal savings bank, state-chartered bank, industrial loan company
The Bank is located in a state with favorable lending laws 
Either because it has a charter from that state or it is a federally-chartered bank relying on “most-favored lender” authority, the Bank relies on federal law to export the interest rate from its home state to other states
Based on a combination of the True-Lender doctrine and the Valid-When-Made doctrine, the non-bank enforces the loan according to its original terms

4. Settled Law Federal statutes, regulations and regulator opinions say:
A National Bank can charge interest at the rate allowed by the laws of the state where the Bank is located, relying on the rate permitted by state law for the “most-favored lender”
A State-chartered bank relies on its own banking law
Both National and State banks can export interest, and matters material to the interest rate, to borrowers in other states, notwithstanding the law of the borrower’s state
Interest is broadly defined to include most fees as well as periodic interest

5. The Effect of Selling the Loan to a Third-Party
If the Bank makes and holds the loan, all of the above should apply without controversy
If the Bank contracts with a third-party who markets the loans, services the loans and buys the loans shortly after closing, does any of this change?
If it does change, are the loans re-characterized as having been made by the third-party?
True-lender analysis and the Valid-When-Made doctrine should apply here

6. True-Lender Doctrine
The True-Lender Doctrine is found in case law and is a fact-specific determination of whether the bank was really the lender
True-lender analysis looks at such facts as:
Identification of the Bank as the lender in the loan documentation
Loan program design and approval by the Bank
Whether Bank assumes compliance responsibility for the loan program
But other factors are more problematic:
The Bank sells the loans to the buyer very shortly after closing, with little or no possibility of credit exposure
The Bank uses funds placed on deposit by the buyer to make the loans
The buyer controls all borrower interactions

7. Valid-When-Made Doctrine
If the Bank is the true lender, is the loan re-characterized after sale?
Sparse case law suggests that the interest rate remains enforceable after assignment if it was lawful at the time that the loan is made
Some authority states that Section 85 may allow assignees to rely on the national bank’s authority to enforce a loan according to its terms
Is the status (type of entity) of the buyer relevant to this issue?
As the loan marketer
As the loan originator/servicer
As the loan holder
Each of these roles raises licensing and compliance issues

8. The Current State of Rent-a-Charter
The problematic issues discussed above remain unresolved
Rent-a-Charter programs had become less numerous, although they are common for marketplace lenders, including private education loan lenders
Large banks appear to have little or no appetite for rent-a-charter programs
No regulatory action with respect to these programs
Contradictory case law

9. Madden v. Midland Funding, LLC 786 F.3d 246, 2015 WL 2435657
(2nd Cir. May 22, 2015)
Petition for Rehearing en banc denied No
(2nd Cir. August 12, 2015)

10. Midland Funding Facts:
Putative class action filed by New York resident alleging that attempted collection of charged-off credit card violated New York law due to 27% interest rate
Credit card was issued by Bank of America, assigned to FIA Card Services, NA, and sold to Midland Funding post charge-off

11. Midland Funding Argument:
Midland Funding argued NBA federal preemption allowed it to enforce the terms of the credit card account
Second Circuit concluded no Barnett Bank preemption because there was no interference with the national bank’s powers
There was no interference with the national bank powers because Midland wasn’t acting on the bank’s behalf

12. Implications of Midland Funding Holding
Relevance of preemption is unclear
No discussion of Valid-When-Made Doctrine or other common law assignee rights
A contract right can be assigned unless the assignment materially changes the obligor’s duty, risk, likelihood of obtaining return performance or value of the contract
No recognition of significance to secondary market
Federal preemption does not bear on common law of assignment

13. What Happens Now?
Cert Petition filed 11/10/2015 currently pending Supreme Court review
Conflicts with Krispin v. May Dept. Stores (8th Cir.) and FDIC v. Lattimore Land Corp. (5th Cir.)
Common law of contract assignment
Threat to functioning secondary; securitization markets
Impinges on authority of national bank to sell loans by looking to state law applicable to loan purchases
If no Supreme Court review, remand to trial court to determine whether Delaware law (where the bank is located) or New York law (where the borrower resides) applies
OCC; FDIC reactions?

14. More Happening Now
Uncertainty for any purchaser of any type of loan from any lender
The effect of Midland Funding varies greatly by loan type and characteristics
Marketplace lenders considering obtaining lender licenses
Disclosures of risks in securities filings

15. If Cert Petition is Denied?
Some question whether Midland really overturned the Valid-When-Made doctrine – no explicit holding to that effect
Some question whether Midland really changed the common law applicable to contract assignment
Can Midland be viewed as merely holding that there is no direct application of the National Bank Act (and federal preemption) to non-bank third-parties? If so, this is a side issue that doesn’t change Valid-When-Made

16. Questions?