Banks Seek Judgment That Loans Facilitated By Online Platforms Are Exempt From Colorado's Lending Laws

In the last two weeks, WebBank and Cross River Bank—federally insured banks chartered in Utah and New Jersey, respectively—filed separate federal court actions (WebBank Complaint; Cross River Bank Complaint) against the Administrator of Colorado's Uniform Consumer Credit Code, seeking declaratory and injunctive relief.  The Banks assert that loans they originated in collaboration with non-bank online lending platforms are exempt from Colorado's statutory limits on interest rates and fees.

The suits were filed in response to Colorado's enforcement actions against Avant, Inc. and Marlette Funding LLC, online lending platforms that facilitate, market, and service loans originated by the Banks.  Some of those loans have been made to Colorado residents and carry interest rates and fees that exceed Colorado's statutory limits.  The Administrator seeks civil penalties for those loans, contending that the Banks' role in the transactions is insufficient to preempt Colorado's lending statutes under federal banking law.  In so arguing, the Administrator relies on two cases:  the Second Circuit's decision in Madden v. Midland Funding, LLC, which held that charged-off debt sold by a bank was not entitled to federal preemption; and the West Virginia Supreme Court of Appeals' decision in Cashcall, Inc. v. Morrisey, which held that a loan's true lender is the party with the "predominant economic interest."

The Banks have sued to enjoin Colorado's enforcement actions.  They contend that their loans, even when facilitated by Avant or Marlette, are subject to federal law and regulations that preempt Colorado's limits on interest rates and fees.  In particular, the Banks argue that section 27 of the Federal Deposit Insurance Act codifies the "valid-when-made" principle, under which a state-chartered bank's nonusurious loan does not become usurious upon assignment or sale to a third party, including a marketplace lending platform.  The U.S. Solicitor General took a similar position in its amicus brief to the Supreme Court in Madden, before denial of certiorari.

The Colorado litigation is significant in several respects.  First, the Banks have taken notable initiative in filing actions to defend the validity of their business model and describe their continuing economic interest in the loans.  The elucidation of the business model on its own should bolster the case for preemption.  Second, the Administrator is seeking to use Madden to invalidate loans in which the originating banks retain an interest.  Madden, to date, has been applied only to defaulted debt where the originating bank retained no interest in the performance of the loan.  Third, the outcome of the litigation may bring some additional clarity to the relatively undeveloped and controversial "true lender" doctrine.

Orrick will continue to monitor developments and provide updates as appropriate.