DENVER–A Colorado court has upheld the Colorado Attorney General’s claim that an online lender, Marlette Funding, which did business as Best Egg, must abide by Colorado’s interest rate limits when it purchases loans originated by a bank, Cross River Bank, that is exempt from the state’s rate caps.
The ruling is being hailed by consumer groups, which have long been critical of so-called “rent-a-bank” schemes.
“The Colorado ruling makes clear that federal banking laws do not give banks a license to sell their bank privileges to nonbank lenders that charge rates above state limits,” said Lauren Saunders, associate director of the National Consumer Law Center.
The Colorado court quoted the Second Circuit Madden decision in holding that extending federal banking laws “to third parties would create an end-run around usury laws for non-national bank entities.” “The decision upholds the power that states have had since the time of the American Revolution to cap interest rates to protect people from predatory lending,” Saunders added.
The Colorado attorney general had noted Marlette offers loans on its Best Egg website, but the fine print says that “Best Egg loans are unsecured personal loans made by Cross River Bank ….”
The investigation found loan rates as high 29.99%. Colorado allows 12% annual interest for consumer loans by unlicensed lenders and 21% for licensed lenders.
Getting Around Caps
At least 45 states and DC impose interest rate caps on many loans, but the National Consumer Law Center noted banks are generally exempt from state rate caps.
“In the last couple of years, high-cost lenders – some charging rates as high as 160% -- have begun trying to take advantage of this exemption by entering into rent-a-bank schemes where they launder their loans through banks and then purchase back the loans or receivables and continue to charge high rates that would be illegal for the non-bank lenders to charge directly,” the NCLC said.
The NCLC further suggested the ruling also puts into question the legality of proposed rules by the Federal Deposit Insurance Corporation Office and finalized rules by the Comptroller of the Currency (OCC). Those rules would overturn the Madden decision and allow an assignee of a bank loan to charge any rate the bank could charge.