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54 U. Mich. J. L. Reform Online 1 (2020)

handle is hein.journals/caveat54 and id is 1 raw text is: A BETTER MADDEN FIX: HOLISTIC REFORM, NOT BAND-AIDS, TO MODERNIZE BANKING LAW Matthew J. Razzano* INTRODUCTION 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.i 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 * Law Clerk, J.D., University of Notre Dame, 2019; M.Sc., London School of Economics, 2016; B.A., University of Notre Dame, 2012. 1. Marquette Nat'l Bank of Minneapolis v. First Omaha Serv. Corp., 439 U.S. 299 (1978) (holding that the National Bank Act preempted state usury laws, which allowed interest rates to be based on the state where the bank was headquartered and not where the loans were issued); see also Sean H. Vanatta, Citibank, Credit Cards, and the Local Politics of National Consumer Finance, 1968-1991, 90 Bus. HIST. REV. 57, 64-68 (2015), https://www.cambridge.org/core/journas/business-history-review/article/citibank-credit- cards-and-the-local-politics-of-national-consumer-finance-19681991- /680B71265464A22A9-B83108EEE33-6547. 2. See Vanatta, supra note 1, at 72-77. 3. Madden v. Midland Funding, LLC, 786 F.3d 246 (2d Cir. 2015). 4. Id. at 251-52. 5. Id. at 250-51. 6. See, e.g., Raj Date, Madden Ruling was a Step Backward. Congress Should Fix It, Am. Banker (Dec. 4, 2017), https://www.americanbanker.com/opinion/madden-ruling-was-a- step-backward-congress-should-fix-it; Peter Rudegeair & Telis Demos, LendingClub to Change its Fee Model, WALL ST. J. (Feb. 26, 2016), https://www.wsj.com/articles/fast-growing-lending- club-to-change-its-fee-model-1456488393. 7. See, e.g., Peter Conti-Brown, Can Fintech Increase Lending?How Courts are Undermining Financial Inclusion, BROOKINGS INST. (Apr. 16, 2019), https://www.brookings.edu/research /can-fintech-increas e-lending-how-courts -are-undermining-financial-inclusion/ (summarizing the primary critiques of the Madden decision and discussing two empirical studies about the case's impact on credit availability in the Second Circuit). 1

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