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Joint settlement proposed in Madden lawsuit, but industry still awaits a fix

A settlement in the long-running Madden lawsuit has been proposed.

The proposed settlement would provide $9.8 million in cash and debt relief to as many as 58,000 consumers, closing the books on an eight-year-old case that caused regulatory uncertainty in the online lending industry. Lawyers said the settlement "forecloses a realistic possibility" of several more years of litigation, March 1 court filings show. But the settlement does not change the uncertainty regarding the legal precedent the lawsuit established for the online lending industry.

When the legal debate began in 2011, two of the largest marketplace lenders, LendingClub Corp. and Prosper Marketplace Inc., had partnered with WebBank to issue loans. WebBank is based in Utah, which does not have a maximum interest rate for loans. The class-action lawsuit — Madden v. Midland Funding LLC — was filed by a Bank of America credit card customer whose unpaid obligations were sold to a debt collector. The customer alleged that Midland Funding had violated New York's usury law since the debt carried an interest rate that exceeded that state's cap.

The U.S. Court of Appeals for the Second Circuit found a nonbank debt collector that had purchased debt from a bank — in this case, Midland Funding — could not rely on that bank's exemption from state-level usury laws, even though the debt was originally issued by a national bank. As a result of the increasingly popular strategy to partner with banks, many marketplace lenders depend on nationally chartered banks to fund loans, making clarity around the treatment of these loans crucial to business.

In the U.S. Treasury Department's July 2018 report on financial technology and innovation, it recommended that Congress codify the "valid-when-made" doctrine, which would allow marketplace lenders to buy and sell loans without conflicting with state interest-rate limits.

Online lenders had initially hoped the U.S. Supreme Court would overturn the controversial ruling, but uncertainty persisted when the court decided not to review the case in 2016.

Several industry members and government officials have pushed back against the ruling. Lawmakers are still working through proposed legislation but have faced opposition from state attorneys general, who argue the "fix" would usurp their local consumer protection laws.

Both the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. are considering possible action, American Banker reported, citing an unnamed industry official with knowledge of agency deliberations. A spokesperson for the FDIC declined to comment. The OCC did not comment on the matter.

Lawyers in the case filed a joint motion with the New York federal district court seeking preliminary approval of a class settlement. Under the lawsuit's proposed settlement, about $9.3 million would go toward reducing the balances of affected consumers, and $555,000 would be set aside for consumers that choose a cash relief payment.