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
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"
Orrick will continue to monitor developments and provide updates
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