Dive Brief:

• Colorado's attorney general's office announced a settlement Tuesday with two online lenders — Avant and Marlette Funding — and their partner banks, New Jersey-based Cross River Bank and Utah-based WebBank, in a fight over which companies are considered the "true lender" in a consumer transaction.
• Companies can qualify for a legal safe harbor in Colorado if they comply with a ban on loans with annual percentage rates higher than 36%. Under the settlement, regulators must also be able to examine, review and audit the online lender. The bank also retains the right to approve or deny loans and must control all terms of credit.
• The settlement may serve as a model for other states to institute consumer safeguards. It may also help banks and fintechs navigate a system marked by interest rate laws that vary by state. For example, other online lenders could choose to restructure their business to comply with safe harbor guidelines.

Dive Insight:

Colorado sued the four companies in 2017, asserting Avant and Marlette were charging interest and fees above what the state law allows. Although the companies' partners, WebBank and Cross River, can export the interest rate caps of their home states, Colorado argued Avant and Marlette were the true lenders because they held the predominant economic interest.

Avant and Marlette have since excluded Colorado loans from new securitizations, and WebBank has stopped originating loans in Colorado, American Banker reported.

Under the settlement, Cross River, WebBank, Avant and Marlette will pay $1.05 million altogether, plus a $500,000 contribution to the state's MoneyWi$er program, which supports K-12 financial education in Colorado, according to a press release the state attorney general's office issued Tuesday.

"This agreement protects Colorado consumers and creates a model for how other lenders can comply with Colorado law and treat consumers fairly," Colorado Attorney General Phil Weiser said in the release.

Federal regulators, too, have looked to determine when a bank is the "true lender" — the Office of the Comptroller of the Currency (OCC) last month proposed a rule on the subject. But the guidance-in-waiting may become moot if President Donald Trump loses November's election, and nominee Joe Biden chooses a new comptroller.

The settlement "provides a ton of clarity with respect to this area of the law that has caused a lot of confusion," Roxy Bargoz, general counsel for Avant, told American Banker.