A recent federal court decision refusing to dismiss Pennsylvania racketeering claims against companies alleged to have partnered with a state bank to market Internet loans illustrates the risks inherent in these relationships and the importance of proper structuring.
While involving loans with triple-digit interest rates, the decision is noteworthy for marketplace lenders that partner with banks to originate loans at much lower rates. Most significantly, the defendants' inability to use federal preemption to obtain a dismissal of the Pennsylvania Attorney General's (AG) claims demonstrates the need for marketplace lenders to be prepared to defend their bank partnerships against "true lender" challenges by revisiting the partnerships' structure, documentation, and compliance controls with legal counsel.
In Commonwealth of Pennsylvania v. Think Finance, Inc., et al., the Pennsylvania AG, working with a well-known private plaintiffs’ firm, claimed that the companies and their individual principal had engaged in a "rent-a-bank" scheme in which a Delaware state bank "acted as the nominal lender while the non-bank entity was the de facto lender—marketing, funding and collecting the loan." The AG alleged that the defendants had violated the Pennsylvania Corrupt Organizations Act (COA), under which "racketeering" includes collecting money on loans made at annual interest rates greater than 25 percent "where not otherwise authorized by law."
The defendants argued that the AG's COA and other state law claims based on the alleged "rent-a-bank" scheme should be dismissed because they were preempted by Section 27(a) of the Federal Deposit Insurance Act, the state-bank analog to Section 85 of the National Bank Act, which applies to national banks. Relying on the Third Circuit's 2005 decision in In re Community Bank of Northern Virginia, the Court in Think Finance ruled that, even though the AG's complaint contained usury claims, preemption did not apply, among other reasons, because the complaint did not make any claims against the bank.
The Court distinguished the Eighth Circuit’s 2000 decision in Krispin v. May Dep't Stores, in which the Eighth Circuit held that federal law preempted state law limits on charges imposed by a non-bank after it acquired credit card receivables from its affiliated national bank. According to the Court, even though there were no claims against the national bank in Krispin, the decision was distinguishable because of the AG's allegations that the defendants were the de facto lender and the absence of a close relationship between the bank and the defendants in the instant case.
In Think Finance, the defendants' alleged involvement in high-cost lending, together with allegations that they engaged in a "rent-a-tribe" scheme as well as a "rent-a-bank" scheme, may have contributed to both the AG's interest in the defendants' activities and the court's denial of their motion to dismiss. Nevertheless, we have observed a significant uptick in state regulatory focus on marketplace lending in recent months. The California Department of Business Oversight recently announced that it has launched an inquiry into the marketplace lending industry that is directed not only to consumer and small business lenders, but also to merchant cash advance providers.
In addition, a recent Maryland decision involving a ruling by the state's Commissioner of Financial Regulation illustrates that state licensing laws can pose problems for the bank partner structure and highlights the need for marketplace lenders to review their compliance with such laws. These state law developments come on the heels of the risks for marketplace lenders created by Madden v. Midland Funding, LLC.
