WASHINGTON—The Obama administration on Tuesday advised the Supreme Court not to hear a closely watched case challenging state caps on interest rates.

The high court in March had invited U.S. Solicitor General Donald Verrilli to weigh in on the case, Midland Funding LLC v. Madden, before deciding whether to hear Midland's appeal.

Midland, a debt buyer, is seeking exemption from New York's state interest-rate cap because it purchased the debt from a national bank, which only has to comply with the rate cap set by its home state. Midland bought the debt from a Bank of America Corp. unit based in Delaware that charged an interest rate slightly higher than the cap set by New York.

The case is significant because many industry proponents say the decision last year by the U.S. Court of Appeals for the Second Circuit that stopped Midland from collecting debt could impair the ability to sell and securitize debt, and force nonbanks like online lenders and debt buyers to pull out of states that have lower caps on interest rates than the debt.

The solicitor general's suggestion likely reinforces advocates who have supported greater consumer protection through state usury laws. However, the solicitor general also disagreed with the appeals court's ruling in that it said the debt owner, or assignee, has the right to enforce the same interest rate that the bank had been charging on the debt.

"The court of appeals' decision is incorrect…A national bank's federal right to charge interest up to the rate allowed by [federal law] would be significantly impaired if the national bank's assignee could not continue to charge that rate," the solicitor general said. The "petitioners may still prevail on remand despite the error in the court of appeals' interlocutory decision."

The solicitor general sought opinions from agencies including the Office of the Comptroller of the Currency—the national bank regulator—and the Justice Department.

Justices often follow the solicitor general's recommendations, but sometimes the Supreme Court agrees to review cases even when the Obama administration has urged against doing so. That has happened in several recent cases, including one involving frozen funds tied to Iran's central bank.

Write to Rachel Witkowski at rachel.witkowski@wsj.com

 

(END) Dow Jones Newswires

May 24, 2016 20:55 ET (00:55 GMT)

Copyright (c) 2016 Dow Jones & Company, Inc.
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