Two state-chartered banks, WebBank and Cross River Bank, recently filed complaints for declaratory judgment and injunctive relief against the Administrator of the Uniform Consumer Credit Code for the State of Colorado, Julie Ann Meade. The complaints were filed in federal court and seek to permanently enjoin enforcement actions brought by Ms. Meade against the banks' nonbank partners. According to the complaints, these nonbank partners market and service loans originated by the banks, and the banks sometimes sell these loans to their partners.

WebBank is a Utah state-chartered bank, while Cross River Bank is a New Jersey state-chartered bank. Ms. Meade took the position in her enforcement actions against the banks' partners that the banks are not the "true lender" of the loans, and that, pursuant to the Second Circuit's decision in Madden v. Midland Funding, LLC, the banks could not validly assign their ability to export interest rates as state banks under federal law. Accordingly, Ms. Meade's enforcement actions assert that the loans sold to the banks' partners are subject to Colorado law regarding interest rates and late fees despite the fact that state interest rate limits on state bank loans are preempted by Section 27 of the Federal Deposit Insurance Act. Both banks contend that Ms. Meade did not join them in the enforcement action in an attempt to avoid this Section 27 preemption issue.

The complaints make similar allegations, namely, that Ms. Meade's enforcement actions disregard two fundamental principles of banking law—the banks' right to "export" their respective home state's interest rates to borrowers in other states under Section 27, and the "valid-when-made" principle. The complaints contend that the "valid-when-made" principle is incorporated into Section 27 and provides that a loan which is non-usurious when it is made cannot later become usurious after assignment. Accordingly, the banks argue that federal law completely preempts Ms. Meade's enforcement actions against their partners for alleged violations of Colorado law because the banks make the loans and the preemptive effect of Section 27 is not affected by the sale of the loans to the nonbank partner.

We have previously discussed the Madden case a number of times in a series of legal alerts, an American Banker article, and webinars. We note that the banks' positions in the Colorado lawsuits echoe the position taken by the Solicitor General and Office of the Comptroller of the Currency in their amicus brief to the U.S. Supreme Court addressing the (subsequently denied) petition for certiorari in Madden. "True lender" and Madden uncertainties are major drivers of the OCC's push to establish a special purpose national bank charter option for financial technology companies, the subject of an upcoming webinar.

The outcome of the banks' lawsuits, as well as the two enforcement actions brought by Ms. Meade, could have significant implications for marketplace lenders that use similar bank-partner models, and for other credit card and lending programs in which banks sell or transfer loans to nonbank entities. Both companies that partner with banks, and their bank partners, should monitor these cases closely in the coming year.

Ballard Spahr's Consumer Financial Services Group is nationally recognized for its guidance in structuring and documenting new consumer financial services products and programs, its experience with the full range of federal and state consumer credit laws, and its skill in litigation defense and avoidance.

The firm's Marketplace Lending Task Force is nationally recognized for counseling marketplace lending businesses in both the consumer and small business spaces. We offer soup-to-nuts guidance, working with startup alternative lenders, long-established market leaders, banks, institutional investors, and others. We document and advise on the structure and strategy of bank, platform, and investor relationships, assist in concluding account servicing arrangements, provide extensive consumer regulatory advice, documentation, and diligence assistance, and help with state licensing. We are already advising clients on the OCC’s proposal, the comment process, and the steps involved in chartering a national bank.


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