In January 2017, the Attorney General of Colorado filed two lawsuits against Marlette Funding LLC and Avant of Colorado LLC. Among other things, the lawsuits claimed that these two companies, as the online platforms for loans made to Colorado citizens, violated Colorado’s usury caps. In November 2018, the Attorney General amended the complaint to include related entities and various securitization trusts. In June 2020, the court ruled that even if the banks were the “true lenders” of the loans, the platforms as assignees could not stand in the shoes of the banks regarding the loans.
On August 18, 2020, the Attorney General announced a settlement of the Marlette and Avant actions. The settlement allows the lending platforms to work with sponsor banks without being subject to the state’s challenge of federal preemption or claims that the platforms are the true lenders on the loans. The settlement also establishes a legal protection for future loans as long as the programs comply with the terms outlined in the settlement. The terms are limited to closed-end loans made to consumers through online platforms. In addition to the two companies involved in the action (i.e., Marlette and Avant), the settlement provides compliance guidelines for all similar programs of banks and other lending platforms providing loans to consumers in Colorado.
The settlement focuses on loans to Colorado residents with an interest rate of less than 36% offered by a nonbank online platform with interest rates that exceed the maximum 21% permitted under Colorado law. The settlement provides that no loans may exceed 36%. To the extent that a program offers “supervised loans” under Colorado law and a platform takes an assignment of such loans from a bank and directly collects payment on those loans, the online lending platform must obtain a license to service the loan from the Colorado UCCC Administrator.
Under the settlement, the programs must follow certain requirements to receive a safe harbor from further action by the state. Specifically:
- Banks must control and oversee the programs, including approval of origination, marketing, website content, credit terms, credit models, and approval/denial of credit policies determining whether credit is extended and under what terms.
- Banks must be named as the lender, fund loans from their own funds, and approve major third-party subcontractors, consistent with federal bank regulatory guidance.
- The online platforms must also have a compliance management system, including maintaining a consumer complaint system, and must comply with regulatory guidance for third party arrangements.
The settlement also offers four compliance options for how many loans the bank can sell to a platform which reflect a degree of risk the bank[s] needs to maintain. These options generally limit the percentage of such loans that a platform may purchase from the bank and make a distinction between committed and uncommitted facilities to purchase. No limitations are provided for loans that are to be securitized. The final option gives the platforms the right to negotiate an alternative purchase structure with the approval of the Colorado UCCC Administrator.
After a long period of litigation with heightened interest, the settlement represents a significant development in the bank-sponsored online lending industry. This landmark settlement may serve as a blueprint for bank sponsorship programs in other jurisdictions. However, while helpful as an outline of terms that bank sponsored lending programs should consider, the 36% interest rate cap is an unrealistic limitation that few online lenders will be willing or able to comply with as a practical matter.