Marketplace lenders that use a bank partner should carefully review their relationships in light of recent attacks on this model.
As we reported in our earlier Client Alert, the Colorado Attorney General recently filed complaints in state court against Marlette Funding LLC and Avant of Colorado LLC on behalf of the administrator of Colorado’s Uniform Consumer Credit Code, alleging violations of the code based on “true lender” and loan assignment cases. Those actions were removed to the U.S. District Court of Colorado. On April 3, Marlette’s lending partner, Cross River Bank, which was not sued, responded to those actions by filing a lawsuit in district court against the administrator. In its lawsuit, Cross River seeks declaratory relief invalidating the administrator’s lawsuit against Marlette and recognizing Cross River’s continued legal ability to originate loans under the “marketplace lending model” on which it relies. According to Cross River’s complaint, the administrator’s action against Marlette is unlawful and “directly challenge[s] the interstate banking system and infringe[s] on Cross River’s core rights under federal law (including the [Federal Deposit Insurance Act]) to originate, sell, transfer, and securitize loans.”
Cross River’s complaint recites numerous facts concerning its agreement with Marlette, with the aim of refuting the administrator’s contention that Cross River bears no risks for the Best Egg loans it originates. Contrary to the claims levied by the administrator against Marlette, Cross River asserts that it retains material economic risk in loans it sells to Marlette and that the “underwriting guidelines and the credit policy [for Best Egg loans] are established by Cross River and approved by its Board of Directors.”
With respect to legal risk, the complaint states that Cross River “is responsible for consumer compliance and is accountable to its prudential regulators for any potential violation.” More globally, Cross River asserts that the lending model the administrator is challenging is “essential to the way Cross River does business” and has been implicitly endorsed by virtue of the “FDIC, OCC, and interagency guidance on third-party lending” pursuant to which Cross River conducts its activities.
Noting that section 27 of the Federal Deposit Insurance Act (FDIA) explicitly permits state-chartered banks to “charge the interest rates of the banks’ home states to borrowers in all 50 states, notwithstanding individual states’ laws regarding the terms, including interest rates and fees, on which loans may be extended,” Cross River additionally asserts that the administrator’s action against Marlette “directly challenges Cross River’s federally protected rights to originate loans to borrowers nationwide with interest rate (and other) terms permitted by its home state of New Jersey and to sell those loans to third parties with the assurance that the loans’ original terms will remain valid after the loans are sold.”
In further support for its request for declaratory relief, Cross River cites numerous federal cases concerning the “valid when made” doctrine, which provides that a loan that was non-usurious when made cannot become usurious based on its subsequent assignment. In this regard, Cross River notes that the doctrine “has been a keystone of national banking law since at least the United States Supreme Court’s 1828 decision in Gaither v. Farmers’ & Mechanics’ Bank of Georgetown, 26 U.S. (1 Pet.) 37, 43 (1828).”
Cross River concludes its complaint with the following requests for relief:
(a) A declaration that the actions of Cross River and Marlette in connection with the program are permitted under applicable federal law
(b) A declaration that, insofar as the administrator seeks to enforce Colorado law against Cross River and Marlette in connection with the program, Colorado’s Uniform Consumer Credit Code is completely preempted by the FDIA and/or other provisions of federal law
(c) A permanent injunction barring the administrator from enforcing the provisions of the Colorado Uniform Consumer Credit Code against Marlette or Cross River in connection with the program, whether in the Marlette action or otherwise
(d) Any further equitable or other relief the court deems just and proper.
Cross River correctly asserts that the “true lender” actions filed on behalf of the administrator by the Colorado Attorney General directly threaten its ability to do business and call into question the legal legitimacy of the entire marketplace lending industry that is structured using a bank partner model.
The legal authority relied on by Cross River is compelling and should control the court's ultimate decision; although if the court adopts the predominant economic interest test, that will make prevailing on the true lender issue more arduous. In the interim, however, the filing of these actions is certain to require marketplace lenders that use a bank partner to carefully review their relationships to strengthen their ability to defeat these types of attacks on the model.
Ultimately, legislative action at the federal level may be the only way to remedy the legal uncertainty that these types of lawsuits create for the marketplace lending industry.