Anchor in (Safe) Harbor: Colorado ‘Real Lender’ Dispute Settled | Morrison & Foerster LLP
Ending years of litigation, the Colorado Attorney General and the Administrator of the Colorado Uniform Consumer Credit Code (“Administrator”) have announced a regulation with market lenders Avant of Colorado, LLC and Marlette Funding, LLC (together, the “non-bank partners”), and their banking partners WebBank and Cross River Bank (together, the “banks”). Under the regulations, market loan programs will be permitted under Colorado law, provided the programs meet certain safe harbor conditions set out in the regulations and non-bank partners obtain or maintain a license from the regulations. Colorado to provide supervised loans.
In January 2017, on behalf of the administrator, the Colorado attorney general brought actions against the nonbank partners, alleging that these non-banks were granting usurious loans to Colorado residents because the interest rates on the loans exceeded the rates allowed under Colorado law. . The Administrator asserted that the non-bank partners, rather than the banks, were the real lenders because the non-bank partners held the predominant economic interest in the loans. The loans should therefore be subject to the Colorado usury limit applicable to non-bank partners, who were approved lenders under Colorado law.
The Trustee argued in the alternative that even assuming that the banks were the real lenders, the non-bank partners and the securitization trusts that acquired the loans could not charge interest at the rate specified when the loan was made and instead, were bound by Colorado wear ceilings. . The Administrator relied on the decision of the Second Circuit in Madden v. Midland Funding, LLC rejecting valid doctrine once made.
These cases have been argued in the context of the development of regulatory rules on both the “valid-once-done” and “true lender” doctrines:
Valid once done. Since the filing of these files, both the OCC and the FDIC finalized rules reaffirming the “validity when effected” doctrine, under which loans ceded or otherwise transferred by a bank or savings association could retain qualifying interest prior to transfer once the transfer is made . Weeks before the FDIC released its final ruling, the court presiding over the administrator’s affairs issued an order following the Second Circuit ruling Madden ruling and refusing to apply the validity at the time of fulfillment doctrine to non-bank partners and related securitized trust assignees of loans issued by banks.
Real lender. The OCC also proposed a rule that would establish a clear test for determining when a national bank or a federal savings association is the true lender of a loan. Specifically, if the bank is named in the loan agreement or finances the loan, the bank is the real lender. However, the banks are state chartered banks, not domestic banks, and the regulation does not mention the proposed rule for the OCC’s real lender.
Instead, the settlement focuses on the real issue of the lender. By confirming the circumstances under which the administrator will consider banks to be the true lender and specifying the types of safe harbor assignments, the administrator has avoided having to deal with the issue of validity once made and FDIC final rule on the matter.
Colorado Safe Harbor for Banks and Non-Banks
Faced with this regulatory uncertainty and after a protracted litigation, the parties announced a settlement of all claims. The regulations provide a safe harbor for loan programs in the market involved in the lawsuits, as well as for certain other loan programs in the banks’ market. If these market loan programs meet certain criteria related to monitoring, disclosure, financing, licensing, consumption terms, and structure, the programs will be deemed to comply with Colorado’s usury limits.
- Loans must be subject to supervision by the Bank’s prudential regulators.
- Each bank and its respective non-bank partner must provide applicable regulators with access to review, review and audit the non-bank partner.
Disclosure and Funding Criteria
- The Bank must be identified as the lender of the loan in the loan agreement.
- The Bank must finance the loans on its own account.
- Website content, pre-consumer disclosures and marketing materials should reflect that the Bank is the lender.
- Non-bank partners must obtain and maintain a license to grant supervised loans.
- Non-Banking Partners must, as part of the initial license application, and before participating in any new program, inform the Administrator and describe the products offered and how the products comply with the Safe Harbor of the settlement agreement.
- Non-bank partners must file annual approved lender reports.
Criteria for consumption conditions
- Under Colorado usury limitations, the APR on loans made in Colorado cannot exceed 36%.
- Loan agreements must provide that Colorado laws apply, unless otherwise pre-empted or permitted by federal law.
- The program must comply with one of the four possible structural options: (1) Uncommitted forward flow option; (2) Maximum forward flow engaged option; (3) Maximum aggregate transfer option; or (4) Alternative structure option — each with normative terms and limitations.
- Under the no-commitment term flow option, for example, non-bank partners cannot commit in advance to purchase loans from banks.
- The maximum committed forward flow option and the maximum aggregate transfer option both impose percentage restrictions on the transfer of economic interests (for example, whole loans, equity interest, economic risk of loss or securities) in the loans.
- The alternative structure option allows alternative structures with the written approval of the administrator.
Additional payment terms
Banks and non-bank partners, collectively, will pay a civil fine of $ 1,050,000 and contribute $ 500,000 to a Colorado state financial literacy program. The Banks have agreed to modify their market lending programs to comply with the Safe Harbor of the Settlement Agreement and ensure safe harbor compliance for a period of five years. This requirement is subject to a shorter compliance period if there is a change in the law, such as an FDIC final rule that adopts a true lender test different from the safe harbor established under the regulations. The latest FDIC rule of validity does not constitute a change in law under this provision. This is consistent with the regulation’s emphasis on genuine lender agreements, not the doctrine of validity once made.
Take away food
Only banks and non-bank partners are bound by the terms of the settlement, but the terms of settlement provide a possible framework that other banks and non-banks can use to structure their own market lending programs. According to its terms, however, the regulation concerns only closed loans offered by banks in collaboration with non-bank partners or other fintechs in partnership with banks that involve loan origination via an online platform. It is not clear how the Colorado administrator would view market loan programs involving other types of loans or origination methods. It is also not clear whether bank regulators or other state MAs would accept or adopt the program structure approved by the Colorado administrator in the regulations.
The settlement must be seen in the context of growing tensions between the states and the federal government over the validity-when-made doctrine and the real issues of lenders. GAs in California, New York, and other states have sued the OCC and the FDIC to direct the application of the final rules affirming the rule valid when made. In these lawsuits, the AGs blur the line between the two issues, arguing that the once-made validity rule allows non-banks to evade state consumer protection laws through illegal rental programs. ‘a chart.
These GAs had vigorously opposed these rules when they were proposed, and we expect them to do the same when commenting on the OCC’s true lender proposal. Since the OCC has yet to issue a final rule and the FDIC has yet to come up with a true lender rule, we might see state officials focusing more on the real lender issues at short term.
 Fulford v. Marlette Funding, LLC, n ° 17CV30376, 2020 WL 3979929 (Colo. Dist. Ct. 9 June 2020). More recently, a Colorado federal court followed and invoked the OCC validity rule by affirming a bankruptcy court ruling that an interest rate on a loan that was valid when made remains valid once the loan has been transferred to a non-banking organization. . The district court, however, overturned and remanded the decision, directing the bankruptcy court to consider whether the state chartered bank or the non-bank was the true lender of the loan in question. Rent-Rite Superkegs West Ltd. vs. World Business Lenders, LLC, n ° 1: 19-cv-01552-RBJ (D. Colo. August 12, 2020).