The Obama administration will get a big say in resolving a court case that has bedeviled the online lending sector and sparked fear inside the banking industry.
Financial industry officials were hoping that the Supreme Court on Monday would announce plans to hear the case, Madden v. Midland Funding. Instead, the justices invited the Solicitor General's office, which is part of the Justice Department, for its views on whether the appeal should be granted.
The Supreme Court does not have to heed the executive branch's advice, but it does listen more often than not, according to two lawyers who used to head the Solicitor General's office.
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The burgeoning industry has been hoping the Supreme Court would overturn a problematic lower-court ruling, but the unexpected passing of a conservative stalwart makes that outcome less likely.
February 16 -
The burgeoning industry has been hoping the Supreme Court would overturn a problematic lower-court ruling, but the unexpected passing of a conservative stalwart makes that outcome less likely.
February 16 -
If the decision by the New York appeals court is upheld, banks and other lenders could have trouble finding buyers for credit card and other consumer loans.
July 24
"If the Solicitor General recommends that the Court grant review, the Court usually follows that recommendation," Paul Clement, who served as solicitor general from 2005 to 2008, wrote in an email.
"If the Solicitor General recommends that the Court should deny review, the Court will still sometimes grant review. In those circumstances, it depends on the nature of the government's argument."
Neal Katyal, who served as acting solicitor general in 2010 and 2011, offered a similar assessment.
He said in an email that when the Solicitor General's office recommends hearing a case, the Supreme Court almost always follows its advice. In the opposite scenario, the Supreme Court complies slightly more often than not, he added.
So now attention turns to the Obama administration, which has exerted enormous influence over the financial industry for the past seven years, and will get one last, unexpected chance to do so again.
The facts of the Madden case involve the sale of charged-off credit card debt by a Bank of America subsidiary. A federal appeals court in New York found that the bank's legal authority to charge an interest rate above state usury caps did not transfer to the debt buyer.
That ruling, issued in May 2015, cast legal doubt on various arrangements in which nonbanks benefit from privileges accorded to banks.
Although the ruling is currently binding only in New York, Connecticut and Vermont, many in the financial industry worry that the same reasoning could eventually be applied nationwide. The fears are particularly acute inside the online lending sector, where many firms rely on partnerships with banks to avoid complying with state-by-state usury laws.
Banks are also concerned and are eager for the Supreme Court to hear the case in hopes that the lower court ruling will be reversed.
In a brief filed in December, the American Bankers Association and other industry groups argued that the lower court's decision could discourage banks from selling loans on the secondary market because the loan buyer might then have to lower the borrower's interest rate.
"In today's banking environment, efficient lending requires not only a functioning primary market in which banks make loans to borrowers, but also an efficient secondary market in which banks sell loans to other parties," the trade groups stated.
From a policy standpoint, the Madden case raises two issues that have long been hot buttons in Washington.
The first is consumer protection, an area where the Obama administration has sought to build a legacy with the establishment of the Consumer Financial Protection Bureau. The lower court's ruling was seen as a victory for consumers, and that win may be jeopardized if the Supreme Court decides to take the case.
The second issue is preemption — or the application of federal banking law in a way that preempts state laws — which is a delicate subject for banking agencies like the Federal Reserve Board and the Office of the Comptroller of the Currency.
Kevin Petrasic, an industry lawyer at White & Case, predicted that the Solicitor General's office will receive input from federal banking agencies.
When the Solicitor General's office will offer its views is anyone's guess. The office typically files briefs with the Supreme Court in May, August and December, according to Jaret Seiberg, an analyst at Guggenheim Securities.
He interpreted the Supreme Court's decision to ask for the administration's input as a positive sign for the financial industry.
"There is no reason to ask the Solicitor General to weigh in unless the justices are inclined to take the case," Seiberg wrote in a research note.
