USURY REVIVED: 2d Circuit Rules Assignee Does Not Inherit the Preemption of National Banks

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see Assignees of Debt May Not Charge Usurious Rates in the State of the Borrower

This is a decision with extremely far reaching consequences. Practically all debt now is subject to claims of securitization. Thus most “loans” are assigned and/or sold or transferred to a third party. It has been assumed that the National Banking Act preempted any local laws on usury.

But it turns out that the ability of national banks (like Bank of America et al) to exclude themselves from laws setting the limit for the rate of interest they can charge is limited to that Bank. The hidden ruling here is that for all those loans that are originated by “lenders” that are NOT national banks, the local usury laws apply. The obvious ruling that any successor that is not a national bank must comply with local laws on usury regardless of what is stated in the loan documents.

This applies to every sort of debt that is created for consumers — mortgage loans, student loans, auto loans, credit card debt etc. The laws vary from state to state. Some will say only that the original interest rate must be reduced to the rate allowed locally. Other state really go after the usurious lenders and negate the entire debt and even allow treble damages, plus attorney fees and costs. You have to check with an attorney in your state who can research the usury laws in that state.

This probably means that those loans that allow interest rates to climb into the stratosphere are subject to numerous defenses including unclean hands, which would eliminate the ability of an assignee to partake of the equitable remedy of foreclosure. It also is an opportunity for borrowers to challenge the loan, the existence of a default (because the borrower paid above the usury rate, which should have been allocated to principal on the loan or returned) etc.

None of the REMIC Trusts are national banks. That means that there could be liability for any loans they have in which the borrower’s state does not allow the high interest rate charged by the loan documents. Of course none of the Trusts seem to have any ownership or possession of the debt, note or mortgage. So the identity of the real creditor (probably the investor) becomes especially important when usury is used as a defense. Once that defense is asserted the issue of discovery of the names of investors or the transactions by which the Trust “acquired” the loan becomes especially important and much more difficult for the Judge to deny.

Usury laws were passed as a matter of public policy. It has been determined by virtually all legislative bodies that even if a borrower consents to a ridiculously high interest rate, the transaction will not be enforced becasue the legislature decided that any interest rate above the limit for usury would effectively enslave the debtor, who would never be able to pay back the “loan.”

And there is another corollary to this ruling that needs to be tested on student loans originated by private banks. If they are a national bank then they are excluded from local usury laws. But if the loan was assigned to an entity that was not a national bank, then the high rates hitting some students or former students could not be enforced.

NOTE on STUDENT LOANS: There is another issue that this case might lend support on student loans and specifically their dischargeability in bankruptcy. It is automatically assumed that such loans are not dischargeable in bankruptcy. That is because credit is being extended in anticipation of the earning power of the student after graduation. In order to qualify for borrowing the money for education (which is free in many other countries) the U.S. government either guarantees the loan, buys the loan or provides in its laws that the loan may NOT be discharged in bankruptcy.

If the loan was guaranteed or issued by the US Government then it is not dischargeable in bankruptcy. But is the guarantee transferable to a successor? And the corollary is if the government guarantee does travel with the assignment, then the student loan would still be nondischargeable in bankruptcy. What if the successor is a REMIC Trust where all sorts of hedge products were used. If the student loan was assigned into a securitization scheme, the reasoning in this case MIGHT be used by analogy to say that the student debt then the ability to avoid discharge in bankruptcy would be eliminated; this because the originator elected its remedies to control risk.Just a thought, comments welcome.

By securitizing the debt they privately reduced their risk. But their risk had been zero when they had the government guarantee. If they made money and eliminated their risk by assignment to another party, securitized or not, it would seem to me that the rule governing dischargeability of student loans might be subject to interpretation — because of the originator’s election on how they would profit and how they would control the risk to themselves. And successors not approved for guarantee would by some of the reasoning expressed in the 2d Circuit NOT qualify for nondischargeable status.

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