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Colorado Court Rejects “Valid When Made” Doctrine

BY: Stephen Ornstein
Supreme Court

A&B Abstract:

As we have previously reported, effective August 3 the Office of the Comptroller of the Currency’s (“OCC”) has issued a final rule affirming the “valid-when-made” doctrine while dismissing the Second Circuit decision in Madden v. Midland Finding, LLC.

On June 9, 2020, however, a Colorado state court handed down an unexpectedly negative ruling in the long-standing litigation between Marlette Funding LLC (“Marlette”) and the Colorado Uniform Consumer Credit Code Administrator (“Administrator”) involving an on-line consumer bank partnership program.  While the OCC affirmed the valid-when-made doctrine in its final rule, the Colorado court rejected the doctrine when applied to non-bank assignees of loans.

Marlette Decision

In Martha Fulford, Administrator Uniform Consumer Credit Code v. Marlette, Wilmington Trust, NA, solely as trustee for certain trusts, Wilmington Savings Fund Society, and intervenor Cross River Bank, a Colorado state court expressly declined to adhere to the valid-when-made doctrine.  The court held that “the non-bank purchasers are prohibited under C.R.S. § 5-2- 201 from charging interest rates in the designated loans in excess  of Colorado’s interest caps and, further, that [Cross River Bank (“CRB”), a state chartered bank] cannot export its interest rate to a nonbank such as Defendant Marlette, and finally, that the [Colorado] statute is not preempted.”


The Marlette ruling is the latest development in the long-running litigation brought by the Administrator against two online consumer bank partnership lending platforms – one run by Avant of Colorado (“Avant”) with its bank partner, WebBank, and the other by Marlette with its bank partner, CRB.

The thrust of the Administrator’s allegation is that both of these online lending platforms violated the Colorado Uniform Consumer Credit Code because WebBank and CRB are not the “true lenders” who are actively engaged in the lending programs and receive the benefits or assume the risks of a typical loan originator.  The Administrator asserts that Avant and Marlette are performing the critical development, marketing and underwriting associated with these programs, and that the bank partners’ respective roles are nominal. If the banks are not found to be the “true lender”, then the non-bank parties are required to have state consumer lending (and related) licenses, and the loans may be subject to the state usury laws applicable to the non-bank party (rather than the bank)—possibly render the loans unenforceable.

Non-Bank Assignees

Oddly, the Marlette decision does not directly address the “true lender” issues raised by the Administrator,  that Avant and Marlette are the “true lenders” in their bank partnership programs.  For the purposes of the motion, however, the Administrator argues that even if CRB is a true lender, it may not export the rate of its home state (New Jersey) to a non-bank loan assignee, Marlette.

Instead, the court in Marlette focused on whether a non-bank assignee, such as Marlette, stands in the shoes of the assignor state chartered bank who has the right to charge interest on loans in the state where it is located.  Section 5-2-201 of the Colorado Revised Statutes establishes a maximum rate of 12% per annum for consumer loans that are not “supervised loans” and 21% per annum for “supervised loans”.

Court’s Analysis

The court held that while Section 27 of the Federal Deposit Insurance Act (“Section 27”) [12 U.S.C. § 1831(d)(a)]] permits a state-chartered bank such as CRB to export the interest rate of its home state (or a state where it is “located”), thereby allowing CRB to preempt the 12% interest rate limit for Colorado consumer loans, “Section 27 applies to state banks only and does not extend the privilege of interest exportation to non-banks such as Marlette and other defendant trust banks” (namely, the securitization vehicles that currently hold the loans).

The court, analogizing to the Madden court’s analysis of Section 85 of the National Banking Act, reasoned that Section 27 should not be interpreted as creating an end-run around  state usury laws for non-bank entities.  Therefore, the preemption afforded by Section 27 should not be extended to loans originated by state-chartered banks and assigned to non-bank assignees.

In dismissing the valid-when-made doctrine, the Colorado court not only cited Madden as precedent, but indicated that it is not bound by rulemakings by the OCC and the Federal Deposit Insurance Corporation regarding valid-when-made.

Departure from Precedent

Notably, the Marlette decision is a narrower ruling than Madden in that it ignores Krispin v. May Department Stores (218 F. 3d 999 (8th Cir. 2000), in which the Eighth Circuit indicated that if the bank originator retains an interest in the loans being sold, such keeping credit card accounts, but selling the receivables, the non-bank assignee is able to avail itself of the rate charged by the bank.   Further, the court in Marlette makes no exception for state-chartered banks that retain an interest in the loans.  It is also troubling that the court does not appear to confer bank status to the loans held by statutory trusts with national bank trustees.


Marketplace lending programs have thrived in large part due to the participating bank lender’s ability to export a favorable interest rate—and fees—of its home state or a state where it is located to borrowers in other states, and the sale or transfer of these loans to various secondary market players, including non-bank assignees and securitization trusts.

Absent a reversal  of the precedent by an appeals court, the Marlette decision strikes a dagger in the heart of these marketplace lending programs in Colorado unless the loans conform to the state usury limit,  are retained by the bank originator, or are sold only to other banks, which apparently do not include securitization trusts. In following the Second Circuit in Midlands, and not adhering to the OCC’s recent rule on valid-when-made, the Colorado court severely restricts the salability of loans made under these market lending  arrangements.

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