The Colorado banking regulator, in two recent enforcement actions, has challenged online lending platforms that partner with state-chartered banks. Although the enforcement actions name only the non-bank partners, the state-chartered banks have jumped into the fray by suing the Colorado regulator.
The Administrator of Colorado's Uniform Consumer Credit Code ("UCCC") filed enforcement actions against Marlette Funding and Avant. Both companies partner with state-chartered banks to offer consumer loans through an online platform. The state banks rely on their authority under Section 27 of the Federal Deposit Insurance Act to charge interest rates and fees authorized under the laws of their respective home states. The UCCC Administrator, relying on Madden v. Midland Funding, LLC and CashCall, Inc. v. Morrisey, argues that the loans are subject to the Colorado UCCC and therefore are usurious.
In Madden, the U.S. Court of Appeals for the Second Circuit held that a non-bank lender that purchased charged-off debt from a national bank could not rely on the bank's federal preemption authority to charge the same interest rate as the national bank. In other words, the bank's federal rate preemption authority did not transfer to the non-bank purchaser, thus the loans were usurious. The UCCC Administrator, citing Madden, argues that the state banks cannot assign their Section 27 interest rate preemption authority to the non-bank partners when they purchase the loans, therefore the loans are in violation of the UCCC's limitations on interest rates and fees.
The UCCC Administrator also claims that the non-bank partners are the true lenders of the loans based on the predominant economic interest test established by the West Virginia Supreme Court in CashCall. Specifically, the UCCC Administrator identified the following factors to argue that the non-bank partners had the predominant economic interest in the transactions:
- The non-bank partners paid the bank's costs associated with the initiation of the lending program, as well as the marketing costs for the program.
- The non-bank partners decided which applicants would receive loans, applying lending criteria agreed to by Marlette/Avant and the bank.
- The banks bore little or no risk of financial loss in the event the borrower defaulted on the loan, and their share of the profit was very low.
In response to these actions, the state bank partners, WebBank and Cross River Bank, sued the UCCC Administrator seeking a declaratory judgment and injunctive relief. The banks argue that although the UCCC Administrator filed the enforcement actions against the non-banks, these actions are unlawfully restricting the banks' lending business and have caused irreparable financial loss. Specifically, the banks argue that the enforcement actions interfere with their authority under Section 27 of the FDIA to operate a nationwide lending program under uniform interest rates, and that the application of Madden unlawfully restricts their ability to sell loans to third parties.
We will continue to monitor and report on these developments in Colorado. Although the litigation is ongoing, lenders operating in Colorado with an out-of-state bank partner should carefully review their contractual agreements in light of the UCCC Administrator's position in these cases.