May 11, 2017 - Last week the LSTA joined The Clearing House and the American Bankers Association to file amicus briefs in two related cases that have been initiated by the State of Colorado against two marketplace lenders, Avant and Marlette, each of whom have bank partners. These cases raise the same important principle, whether a loan that was valid when made is valid in the hands of a buyer.
The facts are as follows: Cross River Bank and WebBank are each FDIC-insured state banks that offer credit on a nationwide basis in partnership with two marketplace platforms, Marlette Funding (a platform through which Cross River Bank makes loans) and Avant (a platform though which WebBank makes loans). In January, Colorado regulators sued the two marketplace platforms, claiming that the loans are subject to Colorado interest rate and fee limitations because the banks are not the “true lenders” of the credit extended. Colorado also has challenged the “valid-when-made” doctrine, asserting that assignees of loans are not entitled under section 27 of the FDI Act to enforce loans on the same terms available to the state banks that made them. Because of the potential impact of the Colorado action on their businesses, WebBank and Cross River each filed separate lawsuits against the Colorado regulator. The amicus brief focuses on the “valid when made” principle, asserting that for hundreds of years, the U.S. credit markets have relied on long-settled expectations regarding usury law. Since the first half of the nineteenth century, courts, including the U.S. Supreme Court, have recognized the cardinal rule that a loan that is not usurious in its inception cannot be rendered usurious subsequently, including by being sold or transferred to a third party.
While usury tends not to be an issue in most commercial settings, the LSTA nevertheless agreed to join the amicus because of the importance to liquid secondary markets of the principle of “valid when made” whether in the context of usury or otherwise. We will continue to follow this case closely.