On August 7, 2020, an Assurance of Discontinuance (the “AOD”) was entered into by and among the Colorado Administrator of the Uniform Consumer Credit Code (the “Administrator”); the Colorado Attorney General; Avant of Colorado, LLC; Avant, LLC; WebBank; Marlette Funding, LLC; and Cross River Bank and two trustee banks. In the Matters of: AVANT OF COLORADO, LLC; and MARLETTE FUNDING, LLC. The AOD resolves allegations by the Administrator that certain loans originated by Cross River Bank and WebBank (the “Banks”) through the online technology platforms of Avant of Colorado, LLC, Avant, LLC and Marlette Funding, LLC (the “Fintechs”) under a third party partnership arrangement violated various provisions of the Colorado Consumer Credit Code, including its usury limits. The AOD also included monetary relief in the form of a $1,050,000 payment made collectively by the Banks and the Fintechs to the Colorado Attorney General. No consumer remediation was required.
The underlying dispute involved allegations that the Fintechs were the “true lenders” instead of their partners, the Banks, which originated and funded the subject loans at interest rates that were permissible under federal law but in excess of Colorado usury limits. The AOD is significant because it establishes a definitive “safe harbor” framework (the “Safe Harbor”) for determining whether a bank is a “true lender” in a partnership arrangement with a fintech’s online lending platform. The AOD gives fintechs, their bank partners and investors certainty that consumer loans complying with the Safe Harbor Framework are valid and their terms are enforceable in Colorado. The AOD also serves as a potential model for other states to adopt in order to resolve any “true lender” questions raised by the bank partnership model.
The AOD essentially requires the Banks, in addition to having various economic and regulatory risks with respect to loans made under their partnerships with the Fintechs, to also have economic risk in loans made by the Banks in Colorado.
The Banks will qualify for the Safe Harbor if they meet five detailed criteria. These criteria include: Oversight Criteria, Disclosure and Funding Criteria, Licensing Criteria, Consumer Terms Criteria, and Structural Criteria. Each term is defined within Section III of the AOD. These criteria are intended to conclusively demonstrate that banks originating, and funding loans though online loan platforms are true lenders as a matter of law.
Colorado’s Oversight Criteria recognize that banks and their third party relationships, including those with the fintechs’ online loan platforms, are subject to extensive regulation and supervision by state and federal bank regulatory agencies and incorporates these principles into the criteria. Importantly, the Oversight Criteria expressly reference the FDIC’s extensive guidance addressing third party lending relationships found in FDIC FIL-44-2008 and the proposed FDIC FIL-50- 2016. Consequently, a state-chartered bank that complies with the FDIC’s third party partnership requirements would generally meet these criteria.
Disclosure and Funding Criteria
The Disclosure and Funding Criteria require that a bank’s partnership program with a fintech must specifically identify the bank as the lender in the loan agreement; disclose that the bank is the lender in marketing and website content and pre-origination consumer disclosures; and require the bank to fund the loans from its own sources and not by the fintech partner.
Importantly, the Licensing Criteria require fintechs to be licensed by the Administrator where they take assignment of and undertake direct collection of payments from or enforcement of rights against consumers arising from such supervised loans. They also require the submission of information on the products offered at licensing and annual compliance reporting with detailed loan information and information showing adherence to the AOD’s Structural Criteria. The Licensing Criteria give Colorado officials the ability to monitor and ensure compliance with the AOD and to protect individual consumer borrowers.
Consumer Terms Criteria
These criteria require that all loans have APRs of no higher than 36%, as calculated under the Federal Truth in Lending Act, and that all loan agreements provide that Colorado law applies, “except where otherwise preempted or authorized by federal law, including that any ‘interest’ terms as contemplated by 12 U.S.C. § 1831d (including origination fees, periodic interest, late fees, and returned check fees) shall be governed by 12 U.S.C. § 1831d and the laws of the Bank’s home state.” This provision is a recognition by Colorado officials that the interest rate exportation authority enjoyed by FDIC-insured banks under federal law preempts state usury limits. The acceptance of a voluntary interest rate cap is a significant concession by the Banks and it serves as an important demarcation between responsible bank partnership arrangements and predatory “rent a bank” arrangements, which are neither permitted nor condoned by the AOD. A 36% usury limit has generally been recognized as a reasonable interest cap by Congress under the Military Lending Act, which protects service members nationally, and certain foundations that advocate for affordable small dollar loans.
The AOD also establishes multiprong “Structural Criteria” governing commitments to sell and assign covered loans. A bank partnership program must comply with either: the Uncommitted Forward Flow Option, the Maximum Committed Forward Flow Option, the Maximum Overall Transfer Option, or an Alternative Structure Option. Each term is defined in detail in Section III(F) of the AOD.
The Colorado AOD is structured to protect consumers against sham bank partnerships with fintechs while at the same time recognizing that FDIC-insured banks are highly regulated and subject to federal law. As long as state and federal bank regulators actively police predatory third party relationships, the Safe Harbor framework could serve as a model for other states.