Friday, July 10, 2015

Return to Discredit Usury?

Here is an obscure case that has heads scratching, but harkens back to a time when usury (charging interest) was deemed baleful.

AS we return to private credit, as a program of economic salvation, how courts view credit and collections, or how courts are returning to earlier views, is useful.

That is the ruling that has piqued the interest of the credit markets. Not that debt collection itself is all that big a fish. But the issue of transferrable preemption pops up throughout the financial pond. Credit cards, like mortgages, student loans, etc., get securitized, and have been getting securitized without any concern about applicable usury laws so long as they have been lawful at origination (when, as in this case, they are generally protected by preemption).Shout Out to LevitinThe defendant and the court’s various friends will try to change the result. But in the meantime, some credit has to go to Adam J. Levitin, of the Georgetown University Law Center, for creative lawyering. The appeals panel has now adopted a theory that Levitin first advanced back in 2009. In an article published in the Yale Journal on Regulation, Levitin wrote of the “recent changes in financial markets” that had “placed the majority of consumer debt in the hands of secondary market entities … which are not protected by federal regulation.” This gave the states what Levitin called the ability to “channel the hydraulic force of the markets.” He thereby created the argument that the plaintiffs are now using, thus far with success.
The legal argument that defendants are using on the other side, against the 2d Circuit’s holding, relies on a precedent almost two centuries old, the U.S. Supreme Court decision in Gaither v. Farmers & Mechanics (1828). The high court said then that “the rule cannot be doubted, that is a note [is] free from usury, in its origin, no subsequent usurious transactions respecting it, can affect it with the taint of usury.” Gaither doesn’t seem to have had anything to do with federal/state issues. Indeed, the notion of federal preemption of state regulatory authority was itself only slowly developing in those years, in a string of cases in which Gaither plays no part.
There was no plausible argument for federal preemption of any of the consequences of state usury laws until the passage of the National Bank Act thirty five years after Gaither, so it isn’t immediately obvious how the appeals courten banc, or the Supreme Court should the issue get that far, is going to judge the relevance of Gaither to these facts.
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