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US House passes Madden Fix bill to clarify rights of digital lenders

In a 245-171 vote, the U.S. House of Representatives passed a bill seeking to resolve legal ambiguity around the rights of a digital lender when entering bank partnerships, known as the "Madden Fix."

The bill clarifies that a loan that is valid when made will retain its validity regardless of whether the loan is transferred to a third party, protecting it from any state laws that may say otherwise. The legislative tweak is aimed at addressing the Madden v. Midland Funding LLC case in which a circuit court ruled that if a lender was not a national bank, exemptions for a national bank with regard to the validity of a loan would not apply. The bill, sponsored by Rep. Patrick McHenry, R-N.C., argued that the court ruling harmed credit market liquidity, particularly in low- and moderate-income areas of the United States.

"This legislation merely restores consistency to our nation's banking laws after activist judges upended nearly 200 years of legal precedent," McHenry said in a statement.

House Financial Services Committee Ranking Member Maxine Waters, D-Calif., argued that the bill would give nonbanks, such as payday lenders, the ability to sidestep state-level law. Waters said 20 state attorneys general opposed the legislation, adding that the bill could allow third parties to collect on interest rates that would otherwise be illegal because they exceed state caps.

"The type of credit that this bill helps consumers access is the kind that makes it easier for vulnerable consumers to sink into insurmountable debt - like payday and other high cost loans," Waters said.

Sixteen Democrats voted in favor of the bill, while one Republican, Walter Jones of North Carolina, voted against the bill.

The Senate introduced an identical bill, sponsored by Democrat Mark Warner of Virginia, but the chamber has yet to move on it.