In two closely-watched enforcement actions pending in Colorado state court, the Administrator of the Uniform Consumer Credit Code for the State of Colorado is employing the “true lender” theory and the Second Circuit’s decision in Madden v. Midland Funding, LLC to challenge two bank-model lending programs. Specifically, the Administrator asserts that the origination of the loans by state-chartered banks should be disregarded under the “predominant economic interest” test employed by some district courts in true lender cases, and that the banks’ power to export interest rates under federal law does not follow loans they assign to their program partners. For these reasons, the Administrator contends that the loans 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 (FDIA).
Although these cases were filed in January 2017, little has happened on the merits to date. The cases were removed to federal court by the program sponsors and remanded a year later. The banks involved in the programs filed separate declaratory relief actions in federal court, but those cases were dismissed without prejudice on abstention grounds. The banks then filed motions to intervene in the state court actions, and the program sponsors moved to dismiss the state court cases. The motions to dismiss argue that the usury claims are preempted by the FDIA, that Madden was wrongly decided and should not be followed, and that the banks are the “true lenders” as a matter of federal law, and also under state law if it applies.
On June 22, 2018, the state court heard oral argument on the motions to dismiss and to intervene in both cases. The Court allowed argument for nearly two hours, and provided no clear indication on how it would rule before taking the motions under submission. We will continue to follow the cases closely and report on additional developments.