On June 9th, the Colorado District Court issued a order Noting that under Section 27 of the Federal Deposit Insurance Act, the Federal Interest Export Administration does not extend to non-banks purchasing loans from out-of-state banks; Therefore, Colorado’s usury limit on the loans is in place to cap the interest that these unbanked buyers can accrue and collect.
The Colorado Uniform Consumer Credit Code (UCCC) Administrator has filed two lawsuits against non-bank participants in bank partner loan programs who purchased loans from the original bank. In both cases, the UCCC administrator claimed that the non-bank buyer was the “true lender” because it had the overriding economic interest in the loan and/or other significant lending-related activities, such as B. Servicing, is involved.
Although a decision has been made in only one of the two cases, both are significant: if the district court’s opinion is upheld or followed by other courts, other state regulators, particularly in other UCCC states, may seek similar action against non-bank buyers . It should also be noted that the defendants in these cases are the trustees of securitization trusts and special purpose vehicles that purchased the loans, expanding the scope of potential liability.
The court’s analysis was somewhat surprising in many respects. First, the court rejected the rules of the Federal Deposit Insurance Company (FDIC) and Office of the Comptroller of the Currency (OCC) as not worthy of consideration because they were not in force, although they recognized that the agencies are entitled to be considered. Although the bank in question is an FDIC-insured custodian, it was strange to see the court finding that the OCC rule was not in effect, even though its final rule dated April 29, 1999, on a loan made under 12 USC 85 is permissible is not affected by the sale, assignment or other transfer of the loan.
Second, the Court’s analysis confuses the core principles of the “valid when made” and “true lender” arguments and concludes that the originating bank cannot “export” its interest rate authority to the non-bank buyer. The originator bank does not try to “export” its interest rate sovereignty, but the originator bank extends a loan to the non-bank buyer. For its part, the non-bank buyer asserts that the loan terms were valid when granted by the original bank, since the loans carry an interest rate permissible under the law of the state in which the bank is located, and federal laws allow the original bank to export that rate to borrowers in other states. Third, the court’s judgment fails to address common law principles of assignment, which support the ability of an assignee of a contract to enforce the contract on its terms.
We anticipate that this decision will promptly be appealed to the Colorado Court of Appeals, where we hope that the issues will be analyzed more thoroughly and that the federal and judicial authorities cited therein have due regard to their statutes. In the meantime, however, this decision will likely limit access to credit in Colorado as national and state chartered banks are unable due to the risk that a buyer will not be able to reclaim the fair value of loans they have made interest will be due. This will inevitably force banks to hold these loans on their balance sheets rather than sell them to third-party buyers, freeing up capital for additional loans.
The decision also adds more uncertainty to banking partners’ lending models and questions the ability of federal regulators to address that uncertainty in the absence of legislation, or at least a rule, that addresses the true lender problem.
Arthur Rotatori is a member and practices the Consumer Financial Services Compliance Act in McGlinchey‘s office in Cleveland.
Jeremy Rzepka is an attorney in McGlinchey’s Consumer Financial Services Compliance practice. He advises banks, financial firms, mortgage lenders, online lenders and fintech startups on regulatory and compliance issues from our Cleveland office.
Robert Savoy is a member of McGlinchey’s Consumer Financial Services Compliance Group, based in Cleveland.
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