State Decisions and Issues

Colorado

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Colorado Marketplace Lending Update

Colorado, Legal Issues by State

Originally posted here. Mar 29, 2018 In our prior Clients & Friends Memo “Who’s My Lender?” published on March 14, 2018, we analyzed two actions brought against marketplace lenders, one against Kabbage Inc. (“Kabbage”) in federal court in Massachusetts1 and the other against Avant in federal court in Colorado.2 In that memo, we noted that the Massachusetts… Read More »

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Originally posted here.

Mar 29, 2018

In our prior Clients & Friends Memo “Who’s My Lender?” published on March 14, 2018, we analyzed two actions brought against marketplace lenders, one against Kabbage Inc. (“Kabbage”) in federal court in Massachusetts1 and the other against Avant in federal court in Colorado.2 In that memo, we noted that the Massachusetts action against Kabbage is proceeding to arbitration, while the action against Avant was remanded to state court.

Last week, Colorado courts issued several new rulings related to marketplace lending. First, the federal court in Colorado remanded another enforcement action brought by the Administrator of the Colorado Consumer Credit Code against Marlette Funding (“Marlette”),3 which had been doing business as a marketplace lender in Colorado under the name Best Egg. Following the reasoning in the Avant decision discussed in our prior memo, the court rejected the marketplace lender’s argument that Colorado’s usury laws were subject to complete preemption under federal law and therefore the court granted plaintiff’s motion to remand. As a result, Avant and Marlette will be forced to make their arguments that a bank is the “true lender” and that the Colorado Administrator’s usury claims are therefore preempted by federal law, and any other defenses, in Colorado state court.

Second, the federal court dismissed two parallel actions brought to halt the state court proceedings. In separate actions, WebBank and Cross River Bank,4 the banks that partner with Avant and Marlette, each attempted to prevent the enforcement actions from moving forward by filing actions in federal court seeking (1) a declaratory judgment that Section 27 of the Federal Deposit Insurance Act (“FDIA”) expressly preempts Colorado usury laws as to loans originated by WebBank and Cross River, and (2) a permanent injunction against Colorado barring its enforcement of usury laws against the banks or any party associated with loans they originated. Because the enforcements actions against Avant and Marlette had been remanded, the courts held that the Younger abstention doctrine, as articulated by the Supreme Court in Younger v. Harris,5 applied to these challenges, and dismissed the banks’ challenges to the state’s enforcement powers. The Younger abstention doctrine bars federal courts from hearing claims that are subject to concurrent administrative proceedings initiated by a state agency, among others.

In reaching this conclusion, the courts found that the requirements for Younger abstention were met6 and rejected each of WebBank’s and Cross River’s arguments as to why the doctrine should not apply. The banks contended that: (1) they were not parties to the Avant and Marlette actions and were not an alter egos of the non-bank finance companies; (2) the Younger doctrine did not apply to the Avant or Marlette actions because they are enforcement actions; and (3) preemption under Section 27 of the FDIA is “facially conclusive” such that no state interest would be served by allowing the state court to act.

In rejecting these arguments, the courts wrote that although WebBank and Cross River are not parties to the related cases, they also are not strangers to the enforcement actions because they “[have] a close business relationship with Avant [and Marlette]” and their “mutual interests go beyond merely opposing the same policy . . . [seeking] to vindicate the same conduct that is at issue in the enforcement action[s].” The Court also found that Younger abstention applies to civil enforcement actions and that, even if a “facially conclusive” exception to Younger did exist, as WebBank and Cross River had argued, they made no showing that it would apply to the facts of these cases.

Considered alongside the remand of the state enforcement actions against Avant and Marlette, the federal court’s rejection of WebBank and Cross River’s challenges to the state’s enforcement powers is notable. Unlike many prior marketplace lending cases, the litigants were represented by nationally renowned law firms and supported by national trade groups as amici. These recent rulings illustrate the risks that persist in some states for marketplace lenders utilizing the bank origination model. We will continue to closely monitor these developments.

 

1   NRO Boston LLC and Indelicato v. Kabbage Inc. and Celtic Bank Corp., No. 17-cv-11976 (D. Mass. Oct. 12, 2017).

2   Meade v. Avant of Colorado LLC, No. 17-cv-620 (D. Col. Mar. 9, 2017).

3   Meade v. Marlette Funding, No. 17-cv-575 (D. Col. Mar. 3, 2017).

4   WebBank v. Meade, No. 17-cv-786 (D. Col. Mar. 28, 2017); Cross River Bank v. Meade, No. 17-cv-832 (D. Col. Apr. 3, 2017).

5   401 U.S. 37 (1971).

6   The courts found that the enforcement action was pending in state court, it implicated an important state interest, and there was no showing that Avant or Marlette would not be able to raise their preemption challenges in state court. See WebBank at pp. 4-5; Cross River at pp. 4-5.

Colorado Usury Laws Overview

Colorado, Legal Issues by State

Originally posted here. 1. What is usury? Usury involves lending money as excessive or unreasonably high rates. Charging excessive loan terms can be criminal usury in Colorado. This practice may also be known as “loan-sharking” or “predatory lending.” “Any person who knowingly charges, takes, or receives any money or other property as a loan finance charge where… Read More »

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Originally posted here.

1. What is usury?

Usury involves lending money as excessive or unreasonably high rates. Charging excessive loan terms can be criminal usury in Colorado. This practice may also be known as “loan-sharking” or “predatory lending.”

“Any person who knowingly charges, takes, or receives any money or other property as a loan finance charge where the charge exceeds an annual percentage rate of 45% or the equivalent for a longer or shorter period commits the crime of criminal usury.“1

Providing the source of usurious money is also a criminal offense. Any person who provides money or property to a person with the understanding that the money may be used for engaging in this practice is also guilty of the crime.2

2. What kinds of loans are illegal in Colorado?

Some individuals may find it difficult to qualify for a loan. Banks or lenders may be unwilling to lend money to people for a variety of reasons, including poor credit, no collateral, a criminal history, or the money is going to be used for an unlawful purpose. They may have to take out a loan with unreasonably high interest rates in order to get the money.

Some reasons individuals resort to unreasonably high-interest loans include covering gambling losses, buying contraband, or pay bills to prevent losing their house or car. In some cases, illegal loans may be taken out to pay for expensive medical bills. If those loans are taken at an extremely high interest rate, the lender may be engaging in criminal usury. Usury often involves loans provided by organized crime.

Possession of records of criminal usury is also a criminal offense. Any person who possesses or hides records of criminally usurious transactions commits possession or concealment of records of criminal usury.3

3. Penalties

Criminal usury and providing money therefor loans is a class 6 felony in Colorado. The penalties for a conviction include 12 to 18 months in prison and a fine of up to $100,000. There is a mandatory parole period of 1 year for a class 6 felony conviction.4

4. Defenses

Not all high-interest loans are usurious. There are a number of affirmative defenses to criminal usury. It is an affirmative defense for a person who charges a loan finance charge in excess of 45% annually, with the terms in a signed written agreement, in the following circumstances:

  • At the time of making the loan finance charge it could not have been determined by a mathematical computation that the annual percentage rate would exceed 45% a year; or
  • The loan finance charge was not in excess of 45% a year when the rate of the finance charge was calculated on the unpaid balance of the debt on the assumption that the debt is to be paid according to its terms and is not paid before the end of the agreed term.5

Criminal usury also may not apply to reverse mortgages; credit card charges not exceeding those permitted, and other charges or fees permitted by Colorado law.6

5. Related Offenses

Criminal usury may be related to other criminal offenses. These include white collar crimes of money laundering, and organized crimes involving racketeering, extortion, and bribery.

5.1. Racketeering C.R.S. 18-17-104

Racketeering under the Colorado Organized Crime Act is a pattern of criminal activity generally committed by gangs or organized crime. This includes gambling, loan-sharking, fencing stolen property, or drug distribution. Racketeering is a felony, with penalties including up to 24 years in prison and a fine of up to $1 million.

5.2. Money Laundering C.R.S. 18-5-309

Money laundering involves moving money around to try and evade the government's ability to track the source of the funds. Money laundering may be used to hide money that was embezzled from an employer. Money laundering is a class 3 felony in Colorado, and the penalties include 4 to 12 years in prison and fines of up to $750,000.

5.3. Extortion C.R.S. 18-3-207

Criminal extortion in Colorado is threatening someone in order to get that person or another to do something or refrain from doing something, against their will. Extortion is commonly called “blackmail.” Extortion is a class 4 felony. Penalties include 2 to 6 years in prison and a fine of up to $500,000.

5.4. Bribery C.R.S. 18-8-302

In Colorado, offering money or other benefits to a public official to influence their actions is bribery. Offering a bribe or asking for a bribe is a felony. The penalties for bribery of a public official includes up to 12 years in prison and a fine of up to $750,000.

2016 Colorado Usury Statutes – Criminal Usury

Colorado, Legal Issues by State

Universal Citation: CO Rev Stat § 18-15-104 (2016) (1) Any person who knowingly charges, takes, or receives any money or other property as a loan finance charge where the charge exceeds an annual percentage rate of forty-five percent or the equivalent for a longer or shorter period commits the crime of criminal usury, which is a… Read More »

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Universal Citation: CO Rev Stat § 18-15-104 (2016)

(1) Any person who knowingly charges, takes, or receives any money or other property as a loan finance charge where the charge exceeds an annual percentage rate of forty-five percent or the equivalent for a longer or shorter period commits the crime of criminal usury, which is a class 6 felony.

(2) It is an affirmative defense to criminal usury for a person, or his agent or assignee, who charges, takes, or receives money or property as a loan finance charge in excess of an annual percentage rate of forty-five percent in either of the following circumstances:

(a) That at the time of making the loan finance charge it could not have been determined by a mathematical computation that the annual percentage rate would exceed an annual percentage rate of forty-five percent;

(b) That the loan finance charge was not in excess of an annual percentage rate of forty-five percent when the rate of the finance charge was calculated on the unpaid balance of the debt on the assumption that the debt is to be paid according to its terms and is not paid before the end of the agreed term.

(3) The affirmative defenses referred to in subsection (2) of this section shall only apply when the provisions relating to the loan finance charge are set forth in a written agreement signed by all the parties and such written agreement is submitted to the court and the district attorney at least ten days prior to trial.

(4) This section shall not apply to:

(a) Charges and fees permitted by articles 1 to 6 of title 5, C.R.S., or charges and fees that are similar to such charges and fees and are specifically authorized by law;

(b) Credit card charges and fees not exceeding those permitted for consumer transactions under articles 1 to 6 of title 5, C.R.S., when imposed upon or collected from a person or in a transaction not subject to said provisions;

(c) A reverse mortgage as defined in section 11-38-102, C.R.S.; and

(d) Additional interest charges permitted by section 5-12-107 (3), C.R.S.

Oasis Legal Fin. Grp. v. Coffman

Colorado, Legal Decisions by State

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[pdf-embedder url="http://mcarelief.wpengine.com/wp-content/uploads/2018/08/Colorado-Case-Law-What-is-a-Loan.pdf" title="Colorado Case Law - What is a Loan"]

Colorado Marketplace Lending Update

Originally posted here.

Mar 29, 2018

In our prior Clients & Friends Memo “Who’s My Lender?” published on March 14, 2018, we analyzed two actions brought against marketplace lenders, one against Kabbage Inc. (“Kabbage”) in federal court in Massachusetts1 and the other against Avant in federal court in Colorado.2 In that memo, we noted that the Massachusetts action against Kabbage is proceeding to arbitration, while the action against Avant was remanded to state court.

Last week, Colorado courts issued several new rulings related to marketplace lending. First, the federal court in Colorado remanded another enforcement action brought by the Administrator of the Colorado Consumer Credit Code against Marlette Funding (“Marlette”),3 which had been doing business as a marketplace lender in Colorado under the name Best Egg. Following the reasoning in the Avant decision discussed in our prior memo, the court rejected the marketplace lender’s argument that Colorado’s usury laws were subject to complete preemption under federal law and therefore the court granted plaintiff’s motion to remand. As a result, Avant and Marlette will be forced to make their arguments that a bank is the “true lender” and that the Colorado Administrator’s usury claims are therefore preempted by federal law, and any other defenses, in Colorado state court.

Second, the federal court dismissed two parallel actions brought to halt the state court proceedings. In separate actions, WebBank and Cross River Bank,4 the banks that partner with Avant and Marlette, each attempted to prevent the enforcement actions from moving forward by filing actions in federal court seeking (1) a declaratory judgment that Section 27 of the Federal Deposit Insurance Act (“FDIA”) expressly preempts Colorado usury laws as to loans originated by WebBank and Cross River, and (2) a permanent injunction against Colorado barring its enforcement of usury laws against the banks or any party associated with loans they originated. Because the enforcements actions against Avant and Marlette had been remanded, the courts held that the Younger abstention doctrine, as articulated by the Supreme Court in Younger v. Harris,5 applied to these challenges, and dismissed the banks’ challenges to the state’s enforcement powers. The Younger abstention doctrine bars federal courts from hearing claims that are subject to concurrent administrative proceedings initiated by a state agency, among others.

In reaching this conclusion, the courts found that the requirements for Younger abstention were met6 and rejected each of WebBank’s and Cross River’s arguments as to why the doctrine should not apply. The banks contended that: (1) they were not parties to the Avant and Marlette actions and were not an alter egos of the non-bank finance companies; (2) the Younger doctrine did not apply to the Avant or Marlette actions because they are enforcement actions; and (3) preemption under Section 27 of the FDIA is “facially conclusive” such that no state interest would be served by allowing the state court to act.

In rejecting these arguments, the courts wrote that although WebBank and Cross River are not parties to the related cases, they also are not strangers to the enforcement actions because they “[have] a close business relationship with Avant [and Marlette]” and their “mutual interests go beyond merely opposing the same policy . . . [seeking] to vindicate the same conduct that is at issue in the enforcement action[s].” The Court also found that Younger abstention applies to civil enforcement actions and that, even if a “facially conclusive” exception to Younger did exist, as WebBank and Cross River had argued, they made no showing that it would apply to the facts of these cases.

Considered alongside the remand of the state enforcement actions against Avant and Marlette, the federal court’s rejection of WebBank and Cross River’s challenges to the state’s enforcement powers is notable. Unlike many prior marketplace lending cases, the litigants were represented by nationally renowned law firms and supported by national trade groups as amici. These recent rulings illustrate the risks that persist in some states for marketplace lenders utilizing the bank origination model. We will continue to closely monitor these developments.

1   NRO Boston LLC and Indelicato v. Kabbage Inc. and Celtic Bank Corp., No. 17-cv-11976 (D. Mass. Oct. 12, 2017).

2   Meade v. Avant of Colorado LLC, No. 17-cv-620 (D. Col. Mar. 9, 2017).

3   Meade v. Marlette Funding, No. 17-cv-575 (D. Col. Mar. 3, 2017).

4   WebBank v. Meade, No. 17-cv-786 (D. Col. Mar. 28, 2017); Cross River Bank v. Meade, No. 17-cv-832 (D. Col. Apr. 3, 2017).

5   401 U.S. 37 (1971).

6   The courts found that the enforcement action was pending in state court, it implicated an important state interest, and there was no showing that Avant or Marlette would not be able to raise their preemption challenges in state court. See WebBank at pp. 4-5; Cross River at pp. 4-5.

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