Background

The loans about which the Administrator complains were all made by WebBank, a federally insured bank chartered by the state of Utah, under an arrangement it had with Avant (the Arrangement). Under the Arrangement, Avant would take applications from consumers electronically, decide which consumers should receive loans and so advise WebBank. WebBank would then make the loans, hold them for up to two business days and then sell them to third-party purchasers, including Avant, Inc. or a nonbank affiliate of Avant, Inc. This Arrangement and similar arrangements between fintech originators and banks are designed in part to eliminate the need for the fintech originator to obtain licenses in every state in which it desires to reach prospective borrowers (although licensing in some states may be unavoidable).

Claims filed in state court may normally be “removed” to Federal Court only if a substantial, disputed question of federal law is presented on the face of the properly pleaded complaint. A limited exception exists in cases where the state law claims are “completely preempted” by federal law, which, the Federal Court notes, only occurs where “federal preemption makes the state law claim necessarily federal in character” and “effectively displaces the state cause of action.”

Shortly after being served with the Administrator’s complaint, Avant timely removed the case to Federal Court asserting federal question jurisdiction “because Congress has completely preempted the state law claims at issue.” This assertion was based on the fact that all of the loans in question were made by WebBank pursuant to the preemptive authority provided by section 27 of the FDIA, which allows WebBank to make loans at interest rates permitted by its home state, notwithstanding that such rates may be greater than the rates permitted by the law of the state where the consumer resides.

The Administrator, however, asserted in her complaint that Avant, not WebBank, was the “true lender” on these loans because “WebBank does not bear the predominant economic interest in the loans.” In this regard, the Administrator alleged, among other things, that Avant pays all of WebBank’s legal fees in the program, bears all of the expenses incurred in marketing the lending program to consumers, determines which loan applicants will receive the loans and bears all costs of making these determinations, ensures that the program complies with federal and state law, and assumes responsibility for all servicing and administration of the loans and all communications with loan applicants and borrowers. The Administrator also asserted that Avant bears all risk of default, agreed to indemnify WebBank against all claims arising from WebBank’s participation in the Arrangement, and, along with the other nonbank entities, collects 99 percent of the profits on the loans.

The Federal Court decision

In its decision, the Federal Court determined at the outset that, although Avant may be able to interpose a defense of federal preemption to the Administrator’s claims, the existence of such a defense does not provide the Federal Court with federal question jurisdiction since the complaint only asserts claims under Colorado law. To deny the Administrator’s motion to remand, the Federal Court must therefore find that the Administrator’s claims are “completely preempted” by federal law.
The Federal Court then examined the relevant case law to see under what circumstances complete preemption has been determined to exist. It found that the Supreme Court recognized complete preemption in only three areas, specifically, cases involving section 301 of the Labor Management Relations Act of 1947, section 502 of the Employee Retirement Income Security Act of 1974 (ERISA), and in actions for usury against national banks under the National Bank Act.

Avant argued that this case fits within the last of these three circumstances, pointing to the fact that section 27 of the FDIA was modeled after and intended to give state banks the same interest rate authority that section 85 of the National Bank Act gave to national banks. The Federal Court, however, rejected this argument, determining that, even if complete preemption exists in actions for usury against state-chartered banks under the FDIA, the Administrator’s complaint is against Avant, not WebBank. Finding no case against a nonbank in which complete preemption was held to exist under facts similar to those present here, the Federal Court granted the Administrator’s motion for removal.

What’s next?

The case now goes back to state court in Colorado, where there is at least a possibility that federal preemption arguments will be accorded less weight than in Federal Court. Regardless, Avant is likely at some point during the state court proceedings to press forward with those arguments. When it does, it will be able to rely on several cases involving similar bank/nonbank lending arrangements that were decided in favor of the nonbank partner based on ordinary preemption defenses. The Administrator will attempt to counter by convincing the court that Avant is the “true lender,” such that WebBank’s entitlement to federal preemption becomes irrelevant. In doing so, she will also be able to cite a number of cases that have so held, virtually all of which involved payday lenders. Whether that will be seen as a distinguishing factor is uncertain.

Significance

This case merits close attention as it proceeds. A verdict against Avant could jeopardize numerous bank/nonbank partnerships, particularly in the fintech sector, that are currently in operation, and prove to be a stumbling block for further fintech expansion in the consumer lending arena. We can advise fintechs and banks contemplating such partnerships on structural arrangements that may better insulate them from enforcement actions like the one pursued by the Administrator in this case.

Client Alert 2018-061