Usury Preemption Follows Its Debt: Non-bank purchasers of debt enjoy the same state usury exemption as the national bank originating the loan

As reported in the September 13, 2007 American Banker, a federal judge dismissed a borrower’s Fair Debt Collection Practices Act (FDCPA) claim, concluding the National Bank Act (NBA) usury preemption benefits non-bank buyers of charged-off debt to the same extent it benefits the national bank originating the loan. See Munoz v. Pipestone Fin., LLC, No. 04-4142 (JNE/SRN), 2007 U.S. Dist. LEXIS 64314 (D. Minn. Aug. 30, 2007).

The plaintiff, Douglas Munoz, claimed Pipestone Financial violated FDCPA by trying to collect usurious interest on a debt it purchased. Munoz opened a credit card account with First USA Bank of Delaware (First USA) and eventually defaulted on about $7,500 of debt. First USA assigned the debt to Unifund CCR Partners, who in turn sold the account to Pipestone.

The FDCPA prohibits debt collectors from collecting interest unauthorized by contract or by law. Minnesota law limits interest rates to 8%. Nevertheless, Pipestone continued charging Munoz the 11.99% interest rate established in the original First USA card member agreement.

Although state law prohibited Pipestone from charging interest rates over 8%, the NBA authorized First USA, a national bank chartered in Delaware, to charge Munoz 11.99%. Because the national bank originated Munoz’s loan, that debt remained subject to preemption, even though non-bank Pipestone bought the debt. The court held it "must look at the originating entity (the bank), and not the ongoing assignee" to determine whether the NBA applied. A national bank originated the loan, so the debt enjoyed exemption from state usury laws and Pipestone properly charged Munoz the 11.99% interest rate provided by his card member agreement.

Any contrary ruling would have dramatically impacted the banking industry. If the court had declared buyers of charged-off debt to be subject to state usury laws, card issuers would have faced incredible challenges in trying to sell charged-off receivables.

For further information contact Megan Erickson of Dickinson Mackaman Tyler & Hagen, P.C.