Colorado Moves to Dismiss Suits Seeking Judgment That Bank-Originated Loans Facilitated and Serviced by Online Platforms Are Exempt From State Lending Laws

As we noted in a recent Alert, WebBank and Cross River Bank filed separate federal civil actions to enjoin the Administrator of Colorado's Uniform Consumer Credit Code from enforcing state lending laws against Avant, Inc. and Marlette Funding LLC, online lending platforms that facilitate and service loans originated by the two Banks. The Banks assert that Colorado's lending laws are preempted by federal banking statutes. On April 25, the Administrator moved to dismiss the Banks' actions on several grounds.

First, the Administrator contends that the lawsuits do not present a federal question and thus fail to establish subject-matter jurisdiction. While a federal preemption defense to the enforcement of state lending laws generally does not present a federal question, the Supreme Court has recognized a "complete preemption" exception to that rule where a national bank raises the defense. See Beneficial Nat. Bank v. Anderson, 539 U.S. 1, 11 (2003). In the Administrator's view, however, the exception does not extend to state-chartered banks like WebBank and Cross River. The Tenth Circuit (which covers Colorado, among other states) has never squarely addressed that issue; other circuits are divided. Compare Thomas v. U.S. Bank Nat. Ass'n ND, 575 F.3d 794, 799-800 (8th Cir. 2009) (no complete preemption), with Discover Bank v. Vaden, 489 F.3d 594, 606 (4th Cir. 2007) (complete preemption), rev'd on other grounds, 556 U.S. 49 (2009), and In re Community Bank of N. Va., 418 F.3d 277, 295 (3d Cir. 2005) (complete preemption).

Second, the Administrator argues that the Banks lack standing because their alleged injuries—including loss of revenue from the assignment or sale of their loans—are either inadequately pled or insufficiently related to the enforcement proceedings against Avant and Marlette.

Third, the Administrator argued that if the State's enforcement actions against Avant and Marlette (which were removed to federal court) are remanded to state court, then the federal court should either dismiss or stay the action brought by WebBank and Cross River Bank's cases based on the Younger abstention doctrine (which establishes rules against federal courts from interfering with ongoing state court or administrative proceedings).

Fourth, and perhaps most significantly, the Administrator asserts that the Banks' preemption arguments fail as a matter of law because federal banking statutes—particularly the National Bank Act ("NBA"), 12 U.S.C. § 85, and the Depository Institutions Deregulation and Monetary Control Act ("DIDMCA"), 12 U.S.C. § 1831d—do not preempt the application of state lending laws to nonbank entities. The Administrator makes several noteworthy arguments on that point:

• Most significantly, the Administrator challenges the relevance of the "valid-when-made" principle to enforcement actions against nonbank entities like Avant and Marlette. That principle provides that "a contract which in its inception is unaffected by usury can never be invalidated by any subsequent usurious transaction." Nichols v. Fearson, 32 U.S. (7 Pet.) 103, 109 (1833). Parties in several recent cases—including the Banks here, and the U.S. Solicitor General and OCC as amici in Madden v. Midland—have argued that the valid-when-made principle precludes the application of state lending laws to bank-originated loans, even after they are assigned or sold to nonbank entities. The Administrator disagrees. In her view, the "valid-when-made" principle means only that a loan contract remains valid as a general matter, not that the loans' interest rates are valid in states where they violate usury laws if the loan is sold to a nonbank. 

• The Administrator also points to the Dodd-Frank Act, which amended the NBA to clarify that preemption of state lending laws does not extend to a national bank's subsidiaries, affiliates or agents. See 12 U.S.C. § 25b(h). The Administrator argues that this is properly read to mean that preemption also does not extend to unaffiliated nonbank entities like Avant and Marlette. 

• Finally, the Administrator cites House Bill 5724, which was introduced in 2016 but never enacted. The bill would have amended the NBA and DIDMCA to expressly provide that preemption of state lending laws extends to nonbank purchasers and assignees. In the Administrator's view, the bill's failure implies that the NBA and DIDMCA do not, in their current form, extend preemption that far.

The Administrator's arguments add several wrinkles to the ongoing dispute over the scope of federal preemption under the NBA and DIDMCA. We will provide additional updates as the litigation progresses.