The issue of “true lender” has been one that has dogged the marketplace lending industry virtually since its inception. When a borrower takes out a loan from most marketplace lenders the loan is often originated by a partner bank then held on their balance sheet for a short time before being sold to the lending platform. There has been debate about who is the true lender in these circumstances.
In 2017, the Colorado Attorney General filed two separate lawsuits against Marlette Funding and Avant alleging violations of the state’s Uniform Consumer Credit Code by charging interest rates in excess of those allowed under Colorado law. These loans were originated by out of state banks, Cross River Bank and WebBank, who were also party to these lawsuits. These banks are allowed to export higher interest rate caps across state lines but Colorado was saying that this was all a scheme to lend above Colorado’s usury rate limited.
The upshot of these lawsuits was that Colorado consumers had less choice as both Avant and Marlette, along with WebBank, started excluding Colorado consumers from their loan offerings. And it even called into question the business models of Cross River Bank and WebBank as both banks have established long running partnerships with many marketplace lenders.
After years of back and forth, and much time and expense, today the Colorado Attorney General announced a settlement with all parties. It is hard to overstate how important this is for the industry. These lawsuits have been hanging over the industry for years and even though the OCC recently proposed a new true lender rule there was still a great deal of uncertainty.
With this settlement, which amounts to $1.55 million in total, the companies have “committed that they will not lend to Colorado consumers at rates above 36% and will provide consumers with other protections required by Colorado law. In addition, non-bank partners will maintain a Colorado lending license.” There are also certain oversight requirements and they laid out a model for successful bank-fintech partnerships in Colorado. It is this model that could be adopted by other states and become a de facto national standard. Which is why this is big news today.
The industry was clearly pleased with this settlement. I reached out to several parties to get their commentary on what this means. First, Nat Hoopes from the Marketplace Lending Association:
MLA and its members are pleased that this agreement recognizes that responsible fintech-bank lending partnerships are critical for consumer access to credit in America today. Under this agreement, consumers in Colorado retain the ability to borrow from MLA fintech lenders that have always recognized and adhered to the 36% APR threshold, and loan investors know that the <36% loans are recognized as valid. By laying out a model for responsible lending partnerships between well-regulated banks and loan purchasers, the Colorado settlement has shown how a state can support innovation while discouraging high-rate lending or consumer abuse. This agreement can be a long-term win-win.
Marlette Funding‘s general counsel, Frank Borchert, sent me this comment:
Marlette Funding supports the settlement of the Fulford v. Marlette Funding, LLC, which creates a safe harbor that allows fintechs to partner with banks like Cross River Bank to make responsible loans to consumers. The settlement allows for responsible lending programs to be offered to borrowers, maintains the state’s ability to supervise lending practices, provides consumers with access to innovative financial services products, and creates a framework for the future. The decision provides a framework for resolving true lender claims on a nationwide basis – balancing consumer, state, and industry interests. We look forward to continuing to serve our customers in Colorado.
Avant‘s general counsel, Roxy Bargoz, had this to say:
We are pleased to have reached an agreement with the State of Colorado that is a win-win for consumers and for banks and their fintech partners. We worked closely with Attorney General Phil Weiser and his team to come up with an agreement that sheds some light on the true lender laws that have caused a lot of confusion in the past. Now we can move forward with clarity, providing much-needed access to credit for an otherwise underserved segment of consumers. We hope the new Colorado rules will serve as an example for other states that are trying to navigate the rules around how banks and fintechs can work together to meet the lending needs of consumers.
The SVP of Public Affairs at Cross River Bank, Phil Goldfeder, said:
We applaud Attorney General Weiser for his vision and approach to protecting Colorado consumers, which will enhance access to affordable credit and enable the state to provide oversight, preventing abusive, high interest lenders from taking advantage of Colorado borrowers. As a bank born in the aftermath of the 2008 recession, we understand the importance of providing access to financial services to families in need. This settlement Cross River has reached with Attorney General Weiser is a long overdue victory for responsible fintech partnerships which provide access to affordable credit and financial services to consumers across the country.
Jason Lloyd, EVP – Strategy & Business Development at WebBank said:
WebBank is pleased that the settlement promotes greater access to responsible credit for Colorado consumers while reinforcing the state’s ability to supervise licensed companies operating through a proven bank lending model. We greatly appreciate the willingness of Attorney General Weiser and his team to craft a solution with us that benefits Colorado consumers and promotes financial innovation. We are also pleased to be supporting the work of Economic Literacy Colorado.
As you can see from all these comments there is a great deal of hope that this will expand beyond Colorado and provide a precedent in other states. The issue of true lender has never been clarified this way before with a detailed explanation of what is needed from all parties to make these partnerships acceptable. It requires small but meaningful changes for the marketplace lenders and issuing banks, changes they are willing and able to make.