These complaints drive home the importance of closely scrutinizing contractual provisions governing a “bank model” relationship between a non-bank lender and a bank to ensure that all legal and economic risks cannot be construed as resting with the non-bank.

On February 15, the Colorado Attorney General filed substantially similar, separate amended complaints in the U.S. District Court of Colorado against Marlette Funding LLC and Avant of Colorado LLC, alleging violations of Colorado’s Uniform Consumer Credit Code based on “true lender” and loan assignment cases. Both actions were originally filed in state court on January 27, 2017, and both were subsequently removed to federal court — on March 3, 2017 and March 9, 2017, respectively. In each instance, the complaint cites CashCall, Inc. v. Morrisey, 2014 W. Va LEXIS (W. Va. May 30, 2014), and Madden v. Midland Funding, LLC, 786 F.3d 246 (2d Cir. 2015), as legal authority for claims alleging usury and other violations of Colorado’s Uniform Consumer Credit Code.

CashCall, Inc. v. Morrisey affirmed the decision of the U.S. District Court for the Southern District of West Virginia in West Virginia v. CashCall, Inc., 605 F. Supp. 2d 781, 2009 U.S. Dist. LEXIS 23179 (S.D. W. Va. 2009). In that decision, the court found that non-bank defendant CashCall and not First Bank and Trust of Milbank, with whom CashCall maintained an agreement to originate loans, was the true lender for loans made to West Virginia residents. The court reached this conclusion by applying a fact-based “predominate economic interest” test that looked past the parties’ agreement designating Milbank as the lender to determine which party bore the greatest economic risk and, hence, should be deemed the actual lender as a matter of law. The respective complaints filed by the Colorado Attorney General against Marlette and Avant closely track the foregoing analysis. In each case, the complaints cite specific provisions of the defendant’s then-current contract with the state-chartered bank that originated the subject loans, with the aim of demonstrating that the non-bank defendant bore nearly all of the legal and economic risks.

The amended complaint filed in Mead v. Marlette Funding LLC d/b/a Best Egg asserts that Marlette paid all costs, including legal, marketing and other expenses, incurred by Cross River Bank in originating Best Egg loans. According to the complaint, the parties’ agreement gives Marlette the ability to decide which applicants will be approved. In addition, the complaint asserts that Cross River “bears no risk that it will lose its principal in the event consumers default on the Best Egg Loans that it sells to Marlette or to Marlette’s non-bank designees” because: (i) Marlette maintains a bank account in favor of Cross River in the amount of Marlette’s anticipated purchases; (ii) Best Egg loans originated by Cross River are sold to Marlette within two business days; (iii) the parties’ contract specifies that Cross River has no liability to Marlette for sold loans, and (iv) Marlette is obligated to indemnify Cross River “against any claim that any aspect of the Best Egg lending program violates the law.”

Furthermore, although both parties share in the profit of Best Egg loans, the complaint notes that Cross River’s share “is only approximately 1% of total profit.” In addition, Marlette maintains a tracking and accounting system at its own expense for Best Egg loans and furnishes the program’s funding. Finally, the complaint alleges that Cross River is prohibited under the parties’ agreement from using, selling or transferring any information regarding Best Egg applicants or customers unless it obtains Marlette’s consent.

The amended complaint filed in Mead v. Avant of Colorado LLC, in turn, similarly asserts that Avant and not WebBank, which originated the subject loans, bears all cost and expenses, including the costs of evaluating loan applications and credit reports and the costs associated with dispersals of loan proceeds. In this regard, the complaint describes the various provisions of the parties’ contractual agreement for ensuring that “WebBank bears no risk that it will lose principal in the event that customers default on Avant Loans that it sells to Avant.” As in the case of the Marlette complaint, the Avant complaint also asserts that Avant, and not its bank partner, is solely responsible for legal compliance. In this regard, the complaint notes that Avant developed and implemented both a Bank Secrecy Act policy and a Truth in Lending Act policy for the Avant lending program.

In addition, according to the complaint, Avant and not WebBank is responsible for all communications with customers and for “all servicing and administration of the Avant Loans, even during the period before WebBank sells the loans to Avant or its affiliates.” The complaint also notes that “WebBank cannot use information regarding Avant Loan applicants for any reason.” Lastly, the complaint asserts that the funding for Avant Loans is provided by Avant.

Both the Marlette and the Avant complaints cite the Madden case for the broad legal position that “a bank cannot validly assign [federal interest rate exportation] to a non-bank.” In this regard, we note that the facts of Madden concerned the sales and assignment of charged-off debt and not a loan origination under an ongoing “bank model” lending arrangement between a non-bank lender and federally insured bank. Furthermore, in a footnote near the conclusion of its decision, the Second Circuit in Madden expressly left the door open to the possibility that a loan assignment under different factual circumstances might lead to a different outcome, noting that the extent of the bank/loan assignor’s ongoing involvement might be a distinguishing factor. In any event, however, it is clear that the Colorado Attorney General interprets Madden broadly.

Pepper Points

  • These “true lender” actions by the Colorado Attorney General against Marlette and Avant highlight the ongoing concern within the online lending industry that the Madden and West Virginia CashCall decisions will trigger lawsuits, and potentially result in unfavorable court decisions, outside the jurisdictions where those cases were decided.

  • The respective complaints filed against Marlette and Avant allege facts that are clearly distinguishable from the facts considered by the Second Circuit in Madden. Yet those differences did not prevent the Colorado Attorney General from citing Madden for the broad-based proposition that a non-bank that receives the assignment of a loan from a bank can never rely on federal preemption of state usury laws “because banks cannot validly assign such rights to non-banks.” If adopted by the court, this position could have severe adverse consequences for the marketplace and online lending industry and for the banking industry generally, which relies on the ability to sell loans to other parties as part of managing their balance sheets.

  • These complaints drive home the importance of closely scrutinizing contractual provisions governing a “bank model” relationship between a non-bank lender and a bank to ensure that all legal and economic risks cannot be construed as resting with the non-bank.

  • Regardless of whether these cases move forward beyond summary judgment, they highlight the unsettled state of the law and are likely to spur increased interest among fintech lenders about the possibility of obtaining a special-purpose national bank charter.