The panel essentially ruled that the California escrow rule was
indeed a consumer protection statute, and applied the analysis
that follows if it does indeed fall into that category of state laws.
Importantly, the panel rejected the 2011 preemption rules of the
OCC. This means that the ruling could open the door to a bevy
of preemption battles and financial services class actions. This
decision was the first express rebuke of the OCC’s current preemption rules at the federal circuit court level.
Bank of America sought additional review by the Supreme
Court by filing a Petition for Writ of Certiorari in August of 2018.
The Petition was denied review on November 19, 2018—meaning
the Ninth Circuit Court of Appeals decision will stand.
Meade v. Avant (Colorado)
At first blush, this case deals with a bank (WebBank of Utah)
originating a loan that was later sold to a non-bank (Avant of
Colorado, LLC, incorporated in Delaware, and its subsidiary
Avant, Inc. a Colorado Supervised Lender). It also deals with
the application of usury laws in Colorado and what law applies.
This includes whether a federal law preemption applied when the
loan was made, and if so, whether that travels with the loan. It
also includes the implications of the sale to a non-bank versus a
federally or state chartered financial institution. Under the specific
facts of the case, preemption doesn’t really matter; what is actually
at play here is an action against a non-bank with tangential ties
(at best) to a federally insured state non-member bank.
An Administrator of the Colorado Uniform Consumer Credit
Code examined Avant and alleged that the company had violated
Colorado’s statutory limits on excessive finance and delinquency
charges under Colorado Revised Statutes. It also alleged that
the “choice of law” provisions, requiring application of Utah
law in the terms of the loans, were unlawful under Colorado
law. The Administrator brought an action in a Denver court to
enforce compliance examination findings and require Avant
to issue refunds and apply Colorado law in loan agreements.
Avant responded that their agreement with WebBank preempted
Colorado finance charge limits and choice of law restrictions.
Avant relied heavily on Section 27 of the Federal Deposit Insurance Act (because WebBank is a state non-member bank
regulated by the FDIC.)
It is somewhat settled law that a national bank cannot be subject
to a state usury claim due to the National Bank Act. Whether this
is absolutely true for FDIC banks is unclear—here, the courts are
split—meaning some federal courts find preemption and others
do not. The same preemption does not apply to a non-bank entity,
even where there is a “close relationship” with a state or national
bank, per Beneficial National Bank v. Anderson.
It is argued in the case that WebBank is not “the true lender
of the Avant Loans”—i.e. that it isn’t really the lender when it
“sells” the loans to Avant. Here the facts as agreed upon by the
parties are persuasive. Consider the following points, as detailed
in the opinion: WebBank does not bear the predominant eco-
nomic interests in the loans. Avant paid all legal fees and the
implementation fee to initiate the lending program, marketing
expenses, and underwrote the loan. Avant also bears all costs of
making these determinations, as well as taking full responsibility
for compliance, servicing, and administration of the loan. Avant
”assumes all responsibility for communications with applicants
and consumers post-origination, bears all risk of default, and
indemnifies WebBank against all claims arising from the program.
Avant retains 99% of the profits on the loans, where WebBank
retains only 1%. And this is really the central issue—even though
WebBank’s name may be on some parts of the process, they are
not really the lender.
The facts sink the preemption argument. It comes down to this:
if the bank (WebBank) was truly the lender, then a preemption
analysis would be appropriate, and might even prevail. Here, WebBank isn’t really the lender, and where the lender is a non-bank, it is
a moot point whether the potential FDIC preemption rules apply.
The takeaway? If the bank isn’t really the lender for all intents
and purposes, and the relationship is one where the non-bank has
no other relationship with the bank, the analysis will have little to
do with preemption rules as they apply to federal or state banks.
Understand, preemption does not mean that all state laws are supplanted. Any entity, whether federally regulated or not, is subject
to the general laws of a state that do not conflict with federal law
and are governed by the laws of a particular state in regard to
their daily course of business.
There are also cases where there may be a conflict, however
the federal regulatory authority intentionally does not challenge
the applicability of a state law to a federally regulated entity.
Such is the case where national banks of New York are subject to
New York fair lending laws. In the case Cuomo v. Clearing House
Assn., L.L.C. from 2009, the court found that the institution was
subject to those laws where they were not preempted, although
the court also took issue with the method of investigation employed by the New York Attorney General—finding the type of
administration investigation undertaken was preempted by the
National Bank Act.
As discussed above, there are areas of law such as consumer
protection where congressional action has explicitly reserved state
preemption—which again has implications for Compliance Management System (CMS) enhancements, including specific controls,
for state consumer protection laws in each applicable state.
Finally, understand the basics of preemption and know that an
analysis of whether federal law supersedes state law is very fact
specific, and may not follow the same logic as a similar situation
in a different federal court district. ■
ABOUT THE AUTHOR
MARGARET “MAGGIE” WEIR WESTBY, ESQ., CRCM, is an experienced regulatory compliance and legal professional with more
than 25 years’ of experience in leadership roles with multiple
financial institutions and consulting groups. Maggie is a practicing attorney and adjunct faculty for the J.D. and LL.M. programs at
Boston University School of Law. She regularly teaches programs
on a variety of legal and compliance topics for the Massachusetts
Bankers Association and is faculty for the American Bankers
Association National Compliance School. Maggie can be reached at