The Administrator of the Uniform Consumer Credit Code for the State of Colorado, Julie Ann Meade, has filed motions to dismiss the complaints filed in federal court by two state-chartered banks seeking to permanently enjoin enforcement actions brought by the Administrator against the banks’ nonbank partners.  According to the complaints, these nonbank partners market and service loans originated by the banks, and the banks sometimes sell these loans to their partners.

In the enforcement actions, the Administrator takes the position that the banks are not the “true lender” of the loans, and that, pursuant to the Second Circuit’s decision in Madden v. Midland Funding, LLC, the banks could not validly assign their ability to export interest rates under federal law.  Accordingly, the enforcement actions assert that the loans sold to the banks’ partners are subject to Colorado usury laws despite the fact that state interest rate limits on state bank loans are preempted by Section 27 of the Federal Deposit Insurance Act.  The banks’ complaints allege that the Administrator’s enforcement actions disregard two fundamental principles of banking law—the banks’ right to “export” their respective home state’s interest rates to borrowers in other states under Section 27, and the “valid-when-made” rule.

In her motions to dismiss, the Administrator makes the following arguments:

  • Under the “well-pleaded complaint rule,” the court has no subject matter jurisdiction over the complaints because they seek to assert a federal preemption defense to the enforcement actions and such a defense does not, by itself, give rise to a federal question.  The Administrator argues that although the U.S. Supreme Court has held that state usury claims against a national bank are completely preempted notwithstanding the well-pleaded complaint rule, complete preemption does not apply to state usury claims against state-chartered banks.
  • The banks lack standing because the enforcement actions are only directed against the non-bank partners and any injury alleged by the banks, such as the actions’ impact on the secondary investor market or loss of revenue, is too attenuated.
  • The complaints fail to state a claim under Rule 12(b)(6) because under relevant federal banking laws and case law (such as Madden), only banks have interest exportation rights and such rights do not preempt state law as applied to non-banks.  In addition, the U.S. Supreme Court cases cited by the banks to support their “valid-when-made” argument are not relevant precedent because they addressed whether promissory notes created in non-usurious loans become unenforceable when used as collateral or discounted in subsequent usurious transactions.  (According to the Administrator, the OCC, in arguing in its amicus brief filed with the Supreme Court in Madden that the “valid-when-made” rule applies to assignees of national bank loans, relied upon a similar “misunderstanding of the holding” in such cases.)
  • The non-banks removed the enforcement actions to federal court and the Administrator has filed remand motions.  Assuming the remand motions are granted, the court should abstain from hearing the complaints under the Younger doctrine because there would be a state proceeding that provides an adequate forum for the banks’ federal claims and the state proceeding involves important state interests.  Alternatively, the court should decline to exercise its jurisdiction under the Declaratory Judgments Act because a declaration is not needed to resolve the legal issues raised in the case as they will necessarily be decided in the enforcement action.

We will continue to follow the banks’ lawsuits and the Administrator’s enforcement actions.