Alston & Bird Consumer Finance Blog

#validwhenmade

Colorado “True Lender” Matters Settle

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A&B ABstract:

As we have previously reported, the Administrator of the Colorado Uniform Consumer Credit Code has been engaged in litigation against certain marketplace lending programs, alleging the marketplace lenders were the true lenders and could not enforce contracts in excess of Colorado’s statutory interest rate cap.

On August 18, 2020, the parties filed Stipulations to Dismiss the two matters – 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, and Martha Fulford, Administrator Uniform Consumer Credit Code v. Avant of Colorado LLC d/b/a Avant, Avant Inc. n/k/a Avant, LLC, Wilmington Trust, N.A., not in its individual capacity, but solely as a trustee for certain trusts, Wilmington Saving Fund Society, FSB, not in its individual capacity, but solely as trustee for certain trusts, and Avant PB SPV, LLC.  The Stipulation included a copy of the actual settlement agreement as an Exhibit.

Settlement Terms

The settlement is being hailed by the parties as a win for Colorado borrowers as well as all parties to the litigation.  Under the settlement, responsible lending programs can continue to offer Colorado borrowers liquidity while protecting them from higher cost credit programs, while preserving the State’s right to supervise such programs.  It also maintains the enforceability of those loans originated by the banks under these programs, whether retained by the banks or transferred to a non-bank purchaser.  And it provides access to innovative products designed to meet the needs of underserved consumers.

Safe Harbor

In resolving the litigation, the settlement provides a safe harbor for loans originated to Colorado borrowers under the programs, and at least some other similar programs, if certain conditions are met.  Those terms include that:

  • The maximum APR not exceed 36%;
  • The non-bank platforms obtain or maintain a Colorado license and file regular reports;
  • All aspects of the program be subject to active supervision by the banks consistent with applicable banking guidelines;
  • The bank will fund all loans at origination; and
  • Certain limitations on the platforms’ ability to commit to purchase certain loans originated by the banks in advance.
Loan Deferral

In addition, the platforms have agreed to make available to Colorado borrowers with loans having interest rates above 21% a loan deferral program that allows them to defer installments for up to 60-days.  This first of its kind settlement may provide a framework for similar programs throughout the United States, allowing underserved consumers to obtain responsible credit on terms that give them the financial freedom to meet their needs from lenders who provide a transparent and cost effective means of accessing those credit markets.

Alston & Bird represented the Avant and Wilmington defendants in the Avant matter, led by John Redding, a partner in the firm’s Los Angeles office.

Colorado Court Rejects “Valid When Made” Doctrine

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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.”

Background

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.

Takeaways:

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.

OCC Rule Affirms Valid-When-Made Doctrine

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A&B ABstract:

On May 15, the Office of the Comptroller of the Currency  (“OCC”) issued a final rule, effective August 3, 2020, addressing the “valid-when-made” doctrine.  The rule clarifies that the interest rate on a loan originated by a national bank or federal savings association, if permissible at the time of origination, will continue to be a permissible and enforceable term of the loan following a sale, transfer, or assignment of the loan, regardless of whether the third party debt buyer is a federally chartered bank.

Discussion

In November, 2019 the OCC issued a proposed rule to address the ambiguity created by the Second Circuit in Madden v. Midland Funding, LLC. The Madden court held that a purchaser of a loan (unsecured credit card debt) originated by a national bank could not charge interest at the rate permissible for the bank if that rate would not be permissible under the applicable state usury cap. Madden did not address the valid-when-made doctrine, and the U.S. Supreme Court declined to hear the case in 2016.

Final Rule

The OCC’s final rule, effective August 3, 2020, effectively codifies the valid-when-made doctrine.  Specifically, the rule provides that interest on a loan that is permissible pursuant to section 85 (applicable to national banks) and section 1463(g) (applicable to federally chartered thrifts) of the National Bank Act “shall not be affected by the sale, assignment or other transfer of the loan.” The OCC emphasized that “that sections 85 and 1463(g) incorporate, rather than eliminate, these state caps.”  A bank must comply with the interest rate limit established under the law of the state where it is located. The OCC recognized that disparities between interest rates between banks arise as a result of the state laws that impose such caps.

In affirming the valid-when-made doctrine, the OCC indicated that “to effectively assign a loan contract and allow the assignee to step into the shoes of the national bank assignor, a permissible interest term must remain permissible and enforceable notwithstanding the assignment”.  Further, the OCC, in rebutting comments made during the rulemaking that a third party non-bank debt buyer should not step into the shoes of the national bank originator, observed that “the enforceability of an assigned interest term should [not] depend on the licensing status of the assignor or assignee.”  Simply put, the OCC affirmed that when a bank transfers a loan, interest permissible before the transfer continues to be permissible after the transfer.

The rule does not address which entity is the true lender when a bank transfers a loan to a third party. The OCC’s rule applies to “interest,” as that term is defined in 12 C.F.R. §§ 7.4001(a) and 160.110(a).

Takeaways

The rule is welcome news, ensuring that uncertainty concerning the effects of the Madden decision does not erode the liquidity of the secondary market for loans originated by national banks and federally chartered thrifts.  It effectively levels the playing field by allowing purchasers of these loans to collect the same agreed upon interest rate and contractual loan terms as the original. Such uniformity is critical for the secondary market.  Hopefully, the FDIC will similarly finalize its proposed rule.

Nevertheless, we note that the OCC rulemaking does not reverse Madden, and while the pronouncement should be influential in circuits aside from the Second Circuit, it is expected to face court challenges, not to mention criticism from congressional Democrats.   The saga will likely continue.