• DYE CULIK PC | Consumer Protection Division

Debt Buyers Can’t Charge High Interest on Debts Purchased from National Banks, Says Appeals Court


You may be familiar with the concept of “usury,” which is the charging of an illegal amount of interest. For example, under the Massachusetts usury law, the maximum interest rate that you can be charged is typically 20%.

But, as you may remember from civics class, federal law is the law of the land, and takes precedence over conflicting state laws. This is called “preemption.” And there is a federal law that allows national banks to charge almost any interest rate they want, even if it violates state law, and even if it would be illegal for normal people to charge that amount of interest.

Why is this relevant? It’s relevant to how much interest debt collectors charge. When you originally take out a credit card from a national bank — a company like Bank of America, Capital One, or Citi — they can charge unlimited interest.

If the card goes into default, however, banks often sell these accounts to a debt buyer. Debt buyers are companies that do not lend money, but buy defaulted accounts in order to collect on them, often suing consumers in court.

It had often been assumed that debt buyers (who are not national banks) are permitted to keep charging the high rates of interest that banks were charging.

The court in this case decided the opposite — that because only national banks are supposed to be protected under the principles of preemption, there is no reason to permit non-bank debt buyers to charge what would otherwise be illegal and usurious interest rates.

What effect does this have? Although the decision is not binding on Massachusetts courts, it makes a persuasive case that debt buyers and debt collectors should not be allowed to charge consumers outrageous rates of interest. This may be a defense that consumers can raise and prevail in debt-collection lawsuits.

The case is here: Madden v. Midland Funding, LLC

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