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.”
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.
 Complaint at Paragraph 1.