OCC Bulletin: Core Lending Principles for Short-Term, Small-Dollar Installment Lending

The Office of the Comptroller of the Currency (OCC) issued OCC BULLETIN 2018-14, which encourages small dollar lending by national banks. It has some interesting items regarding bank partnerships:

Reasonable policies and practices specific to short-term, small-dollar installment lending would generally include the following:

….

  • Loan pricing that complies with applicable state laws and reflects overall returns reasonably related to product risks and costs. The OCC views unfavorably an entity that partners with a bank with the sole goal of evading a lower interest rate established under the law of the entity’s licensing state(s)

OCC_ Installment Lending_ Core Lending Principles for Short-Term, Small-Dollar Installment Lending

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Colorado Federal Court Dismisses Bank Lawsuit in Bank Partnership Case

In an adverse decision for bank partnership programs, the U.S. District Court for the District of Colorado (Denver) has dismissed a key lawsuit filed by a state bank against the Administrator of the Uniform Consumer Credit Code for the State of Colorado. Colorado’s Administrator of the Uniform Consumer Credit Code sued a fintech company in 2016, alleging that it lacked licenses to operate in the state and that the fintech company was the true lender of loans originated by the state bank. The fintech company removed the lawsuit to federal court, and the bank filed its own, separate lawsuit directly against the regulator, claiming that the regulator’s lawsuit interfered with the bank’s powers under federal law. Earlier this month, the same court remanded the regulator’s lawsuit against the fintech company to state court. The court noted that state law claims brought only against non-bank entities like the fintech company are not subject to complete preemption, even if the state law claims would have been subject to complete preemption if they had been brought against a national or state-chartered bank. Accordingly, the court concluded that fintech company had no basis to support an order for removal to federal court. In the decision to dismiss the bank’s lawsuit, the court held that the bank sought to directly interfere in the regulator’s lawsuit, and thus the bank’s lawsuit should be dismissed.

WebBank v. Meade – ORDER Motion to Dismiss is Granted 031918

Judge dismisses WebBank suit against Colorado regulators _ Debtwire

New York to Study FinTech Lending

In late December 2017, New York Governor Andrew Cuomo signed Senate Bill 6593, which establishes a task force regarding online lending institutions. The task force will identify the main participants in the online lending industry, how they serve consumers and small businesses and the impact of online lending activities. The task force must provide a written report to the governor on its findings and recommendations by April 15, 2018.

SB 6593: https://www.nysenate.gov/legislation/bills/2017/s6593

Meade v. Avant of Colorado LLC Remanded to State Court

A magistrate judge for the U.S. District Court for the District of Colorado has recommended that the state consumer law regulator’s lawsuit against a fintech company that partners with a bank should be remanded to state court. Colorado’s Administrator of the Uniform Consumer Credit Code sued Avant of Colorado LLC last year, alleging that Avant lacked licenses to operate in the state and that Avant was the true lender of loans originated by WebBank, an FDIC-insured Utah-chartered bank. Avant removed the lawsuit to federal court, but the magistrate judge has now recommended sending the case back to state court. The magistrate judge noted that state law claims brought only against non-bank entities like Avant are not subject to complete preemption, even if the state law claims would have been subject to complete preemption if they had been brought against a national or state-chartered bank. Accordingly, the magistrate judge concluded that Avant has no basis to support an order for removal to federal court.

Meade v. Avant of Colorado – Recommendation of US Magistrate Judge to for Lack of Subject Matter Jurisdiction 122017

Bank Partnerships On Offense: Bank Sues State Regulator For Infringing on Bank Rights Under Federal Law

Colorado, long a leader in the fight for consumer protection, has taken two separate actions in the last three months to shut down the bank partnership model in its borders. In one of the actions, Meade v. Marlette Funding LLC, Julie Anne Meade, the administrator of the Uniform Consumer Credit Code (“UCCC”), asserts on behalf of the state and its residents that Marlette violated the Colorado Uniform Consumer Credit Code in marketing “Best Egg” consumer loans to Colorado residents. Cross River Bank, a New Jersey state-chartered bank that partners with Marlette to provide these loans and that was not named in the Administrator’s lawsuit as a defendant, subsequently filed a complaint for declaratory judgment and conjunctive relief against Meade in her official capacity as Administrator of the uniform Consumer Credit Code for Colorado. The complaint seeks a declaration to protect the bank’s federal, statutory and contractual rights, as, according to the bank, the Administrator’s activities directly threaten the bank’s “federally protected rights to extend and freely transfer validly-made loans on a nationwide basis, consistent with the Federal Deposit Insurance Act (“FDIA”) and centuries-old federal case law.”[1]

The complaint features prominently the bedrock legal concept that a loan that is “valid when made” remains valid throughout the life of the loan. This concept was undermined by the U.S. Court of Appeals for the Second Circuit in Madden v. Midland Funding. Before Madden, centuries of case law established that usury is determined at the time of loan origination – this is the “valid when made” concept. As far back as 1828, the U.S. Supreme Court held that if a loan note is free from usury in its origin, no subsequent usurious transactions with regard to that note can make that note usurious. Madden upended this concept in favor of a test that determined usury based on who holds the loan and what rate they impose. Madden negatively impacts bank partnership programs because a key aspect of virtually all bank partnership programs is the ability of the bank to sell the loans it originates to non-bank parties.

In filing its complaint, the bank noted that the Administrator made a strategic decision not to sue the bank, but that her enforcement action against Marlette would prohibit Cross River from selling any loans it makes to Colorado residents unless Cross River conforms the loans to Colorado limitations on interest and fees. The bank asserts that the Administrator’s action has damaged the bank, in that the bank receives less revenue in connection with loans already originated by the bank and sold to Marlette as well as its ability to originate loans in the future.

The complaint recites the ability of state-chartered banks to export the interest rates and fees associated with their home state, regardless of where the borrower resides. It also cites to the various guidance promulgated by the FDIC and other federal banking agencies regarding the ability of banks to work with third-party vendors to support the bank’s loan originations. The complaint alleges that Congress grants the FDIC the power to examine both the banks and its third-party partners, and that the FDIC is to evaluate the activities conducted by third-party vendors as if the bank performed them directly. Specifically, “(w)henever a depository institution that is regularly examined by an appropriate Federal banking agency, or any subsidiary or affiliate of such a depository institution that is subject to examination by that agency, causes to be performed for itself, by contract or otherwise, any services authorized …, whether on or off its premises

  • such performance shall be subject to regulation and examination by such agency to the same extent as if such services were being performed by the depository institution itself on its own premises, and
  • the depository institution shall notify each such agency of the existence of the service relationship within thirty days after the making of such service contract or the performance of the service, whichever occurs first.

Cross River further refers to numerous statements and guidance proposed by the FDIC on managing relationships with third parties as support for the idea that FDIC-insured state chartered banks are well within their federal powers to work with third-party vendors to execute banking functions. Cross River ultimately asserts that the Administrator’s lawsuit against Marlette violates both Section 27 of the FDIA, which preempts any state law regarding the terms, including interest rates and fees, on which a bank may originate loans, and the “valid when made” doctrine. Cross River thus seeks a declaration under federal law that its activities and Marlette’s activities in connection with the bank partner program comply with applicable federal law and that “any Colorado laws or regulations that interfere with federal law are preempted.” It also seeks an injunction barring the Administrator from enforcing preempted Colorado laws or regulations against the bank as well as its non-bank partners.

[1]             Complaint at Paragraph 1.

South Dakota On The Brink of Reopening Business Lending

In November 2016, voters in South Dakota approved Initiated Measure 21, which prohibited state-licensed money lenders from making a loan that imposes total interest, fees, and charges at an all-in annual percentage rate greater than 36%. The rate cap includes all charges for ancillary products or services and any other charge or fee incidental to the extension of credit. The rate cap applies to commercial and personal loans originated after November 16, 2016. The measure, which does not apply to state and national banks, bank holding companies, other federally-insured financial institutions, or state-chartered trust companies or to businesses that provide financing for goods and services they sell, significantly inhibited the ability of commercial lenders to originate loans to businesses and merchants in the state. Now, the South Dakota Legislature is poised to re-open lending in the state.

Senate Bill 166, which the Senate and the House have approved, would exempt “business to business lending” from the reach of the 36% rate cap. “Business to business lending” is defined as a loan of more than $5,000 made to a borrower with a federal employer identification number “in furtherance of a business or commercial venture that is not for personal, family, or household use and is not secured by a nonpurchase money security interest in a motor vehicle.” Commercial lenders would still need the money broker license, however, to lend directly in the state.

Republican Governor Dennis Daugaard is expected to sign the bill, which would take effect July 1, 2017.

Madden Court Applies New York Law; Allows Class Certification of FDCPA & UDAP Claims

The U.S. District Court for the Southern District of New York injected additional uncertainty into the debt buying and bank partnership markets with its remand decision in Madden v. Midland Funding. In Madden, the U.S. Court of Appeals for the Second Circuit – which includes Connecticut, New York, and Vermont – held that non-national bank entities that purchase loans originated by national banks cannot rely on the National Bank Act (“NBA”) to protect them from state-law usury claims. The Second Circuit’s decision in Madden undermined the “valid when made” theory on which assignees relied for many years and impeded the ability of national banks (and, by analogy, state-chartered banks) to sell the loan obligations they originate, thus reducing their ability to lend. One issue the Second Circuit did not decide is what state law should governing the underlying loan agreement – New York, the state where Madden lived, or Delaware, the state chosen as the governing law for the underlying agreement. Continue reading “Madden Court Applies New York Law; Allows Class Certification of FDCPA & UDAP Claims”

Bank Partnership Scores Win In Putative Class Action

LendingClub scored a significant victory in a lawsuit brought by a putative class of consumers who asserted that the marketplace platform partnered with a Utah bank to avoid application of such state interest rate limitations.

In Bethune v. LendingClub Corporation et al., Civil Case # 1:16-cv-02578-NRB (S.D.N.Y. April 6, 2016), Bethune claimed that LendingClub “improperly attempted to circumvent the application of relevant state usury laws … by contracting with … WebBank, a bank with a Utah state charter, to act as a ‘pass through’ for LendingClub’s loans.” Bethune argued that this structure, pejoratively referred to by consumer advocates as a “rent a bank scheme,” circumvented New York usury laws because Utah has no usury limitations and WebBank, as a Utah bank, could export Utah interest rates into all other states, including New York, pursuant to federal law. Bethune claimed that this “scheme” allowed LendingClub to offer him a loan in New York that exceeded New York’s criminal usury cap of 25% per year. He thus sued LendingClub and WebBank in the U.S. District Court for the Southern District of New York in a putative class action for usury law violations as well as UDAP and RICO claims.

LendingClub and WebBank countered that Bethune’s loan agreement included an arbitration provision, which bound him to arbitrate all disputes as an individual, and not on behalf of a class. Importantly, the arbitration provision included an opt-out provision that Bethune did not exercise. That is, he could have written LendingClub to state that the arbitration provision would not apply to the agreement, but he did not exercise this right. The loan agreement also provided that federal law and Utah law governed the agreement, and that the arbitrator would be the decider of all disputes arising from the loan agreement, including whether a dispute could be arbitrated. The court sided with LendingClub and WebBank and concluded that the loan agreement contained “clear and unmistakable evidence” that the parties to the agreement delegated the question of arbitrability of disputes under the loan agreement to the arbitrator. In an effort to derail arbitration, Bethune asserted that the loan agreement was “unconscionable” and the court should thus set aside the arbitration provision. The court was not moved by this argument, however, because Bethune did not address how the arbitration provision itself was specifically unconscionable. Rather, he attempted to bootstrap his desire to avoid arbitration to his bald assertion that the usury rate was “unconscionable.” The court thus granted the motion to compel arbitration on an individual basis, effectively undercutting Bethune’s lawsuit.

Bethune v. LendingClub Corporation et al. Civil Case # 1:16-cv-02578-NRB (S.D.N.Y. January 30, 2017)