We have previously blogged about the lawsuits filed by the Colorado Attorney General against fintechs Avant and Marlette Funding and their partner banks WebBank and Cross River Bank. These lawsuits challenged on Madden and “true lender” grounds the interest rates charged under the defendants’ loan programs. The AG has now settled with the defendants and dismissed the lawsuits with prejudice.
The settlement establishes a “safe harbor” that permits each defendant bank and its partner fintechs (including but not limited to Avant and Marlette Funding) to continue their programs offering closed-end consumer loans to Colorado residents. The programs must comply with the terms of the safe harbor for the next five years (or the next two years in the event the U.S. Supreme Court, a Colorado appellate court (after any chance for appeal has run) or the FDIC adopts a “true lender” test that differs from the safe harbor). Elements of the safe harbor include:
- Oversight Criteria – Among other requirements, the banks must oversee and retain ultimate approval authority over loan origination services, marketing materials, website content and credit policy, and must manage third-party relationships in compliance with FDIC guidance.
- Disclosure and Funding Criteria – Program loan agreements, websites and disclosures must identify the bank as the lender, and the bank must fund the loans from its own account. However, the bank may require the fintech to maintain a deposit account at the bank to secure fintech obligations to the bank, subject to specified limitations.
- Licensing Criteria – The fintechs must obtain supervised lender licenses if they take assignment of loans and collect payments or enforce rights against consumers. (Avant and Marlette Funding are currently licensed.) As licensees, the fintechs must submit annual compliance reports to the Colorado Administrator.
- Consumer Terms Criteria – Loan agreements must provide for APRs no higher than 36% and the application of Colorado law except where federal law otherwise governs “interest” (as broadly defined under federal law to include origination fees, periodic interest, late fees, and returned check fees). The AG stressed the importance of this safe harbor condition in the press release announcing the settlement.
- Structural Criteria – The programs must comply with at least one program structure option specified in the settlement agreement, either the “Uncommitted Forward Flow Option,” the “Maximum Committed Forward Flow Option,” “the Maximum Overall Transfer Option” or the “Alternative Structure Option.”
- Under the Uncommitted Forward Flow Option, the fintech and its affiliates may not enter into a committed obligation, in advance, to purchase loans with APRs exceeding the Colorado maximum consumer loan rate cap (“Specified Loans”), and the fintech may only post collateral to purchase declining percentages of Specified Loans over time.
- Under the Maximum Committed Forward Flow Option, the bank must limit the sales of economic interests in Specified Loans that it makes to the fintech partner and its affiliates. Such sales must either be limited to 49% of such economic interests pursuant to a committed forward flow agreement and no uncommitted sales or they must be limited to 25% of such economic interests pursuant to a committed forward flow agreement without any restriction on uncommitted sales. Under the Maximum Committed Forward Flow Option, the bank is not limited in its sales to third parties other than the fintech partner and its affiliates. It appears to us that the second plank of the Maximum Committed Forward Flow Option will in all cases be more permissive than the Uncommitted Forward Flow Option.
- Under the Maximum Overall Transfer Option, the bank must limit to 85% the sales of economic interests in all loans that it makes to the fintech partner and its affiliates and must limit its originations of Specified Loans to 35% in principal amount of all loans under the program.
- Finally, under the Alternative Structure Option, the Administrator may approve in writing a program structure that does not meet any of the other options defined under the settlement agreement.
In the settlement, the defendants agreed to pay $ 1,050,000 for the reimbursement of attorney fees and costs, consumer education and other public purposes and to donate an additional $500,000 to the Colorado Council on Economic Education.
The fintechs also agreed to (1) a hardship plan over the next 30 days, providing for deferrals of payments due within 60 days of enrollment and suspension of credit reporting on delinquent accounts for plan participants during this period, and (2) a sixty-day waiver of late fees and nonsufficient funds fees, together with a halt in outbound collections activities during this period. The defendants are required to provide relief under these programs for at least 30 days more than any relief they provide on a nationwide basis.
The settlement agreement binds only the banks and fintechs involved in these two lawsuits (and the AG with respect to these defendants). Under applicable law as recently clarified by the OCC’s and FDIC’s Madden-fix rules and the OCC’s proposed “true lender” rule, other banks and companies remain free to assert that their programs are lawful and beneficial to borrowers in Colorado and nationwide, even where program APRs are in excess of 36% or the program does not fit within the settlement safe harbor for other reasons. Nevertheless, the settlement clearly provides a template that other banks and fintechs may choose to adopt in whole or in part in Colorado (and perhaps other states as well). At least in Colorado, a bank or fintech partner that brings its program into full compliance with the safe harbor can take substantial comfort from the settlement and the language in the AG’s press release stating his position that the settlement agreement “creates a model for how other lenders can comply with Colorado law.”