Online Lenders and Colorado AG Announce Settlement in Bank Partnerships Suit

A new settlement between Colorado authorities, two online lending companies, and the lenders’ bank partners provides for a legal safe harbor in the state if the lenders abide by new regulations, which includes a ban on loans with annual interest rates in excess of 36 percent. The settlement, which puts an end to lawsuits originally filed in 2017,  resolves legal issues that have made fintechs hesitant to do business with banks in Colorado.

Though the terms of the agreement  involve only four companies directly, it “protects Colorado consumers and creates a model for how other lenders can comply with Colorado law and treat consumers fairly,” said Phil Weiser, the state’s Attorney General, in a press release.

“It provides a ton of clarity with respect to this area of the law that has caused a lot of confusion,” said Roxy Bargoz, general counsel at Avant, as reported by American Banker.

The resolution involved online lenders Avant and Marlette Funding, as well as partners WebBank and Cross River Bank, clarifying which company is considered the true lender in consumer transactions.

The four companies were sued by Weiser’s office in 2017, arguing that Avant and Marlette were charging interest and other fees over the amounts allowed by state law. The loans were made by WebBank and Cross River, neither of which are Colorado-based, allowing them to export their home states’ rate caps. However, because Avant and Marlette allegedly had the predominant economic interest, according to the Attorney General, Colorado authorities ruled them the true lenders.

The state-by-state inconsistency of interest rate caps has proved challenging to many online lenders, resulting in many bank relationships being fought in court. In these partnerships, the bank must control all credit terms, and regulators must have the ability to audit the fintech firm.

Additionally, the settlement offers different options pertaining to the banks’ degree of risk in connection with fintechs. Assumptions that banks are not accepting enough risk have raised uncertainty about which entity is the true lender.

While online lending companies likely prefer a federal solution to resolve state-by-state rate caps, it is unclear if a decision will come from Washington. In July, however, the Office of the Comptroller of the Currency (OCC)proposed a rule that clarifies the longstanding “true lender” question.