A New York resident, Ronald Bethune, accused LendingClub Corporation of violating the state's usury laws by charging him 29.97 percent interest on his loan—roughly twice the 16 percent limit under New York law and high enough to trigger criminal usury charges. Bethune alleges LendingClub did not have the right to charge an amount above the New York limit, despite using a bank from outside the state in accordance with applicable law and general practices.

What happened

In June 2015, Ronald Bethune completed a loan arranged by LendingClub for a loan of $33,250 at 29.97 percent interest, payable in 60 equal monthly installments. The amount of interest paid on the principal over the five-year period was almost the same as the principal loaned to Bethune.

The defendant's business model is based on "cutting out the banks from the personal consumer loan process, and replacing them with an internet-based matching system where private investors fund private borrowers' personal loans, with [LendingClub] assuming the role of the bank to facilitate and service the loans," according to Bethune's New York federal court complaint.

According to the complaint, LendingClub marketed to and solicited consumers to submit applications for funding, created the application, and established the loan criteria. The defendant then performed the traditional bank function of performing a credit analysis on the borrower and, based on that analysis, set the interest rate and repayment terms for the borrower's promissory note.

The company then made information available to investors to find lenders who could agree to fund a portion of a loan, an entire loan, or a group of loans. Once a lender steps forward, the borrower receives the approved loan amount, with LendingClub holding onto the note as the holder and servicer.

"There is nothing that Plaintiff alleges was illegal or improper about the above-described business model of [LendingClub], with the very significant exception that a large percentage of the notes that [LendingClub] has entered into with individual consumers, including Plaintiff, carry an interest rate that violates the state law where the borrower resides," Bethune alleged.

According to Bethune, LendingClub created a "pass through" sham party known as WebBank to avoid state usury laws and remain unregulated by the government, the plaintiff said. Instead of building in "a legitimate bank" in a state without usury laws, LendingClub "elected to create the illusion that a bank (without usury rate limitations) was lending the funds to the borrowers, so as to attempt to legitimize the otherwise usurious loans," Bethune alleged. This allowed the defendant to "actively circumvent state usury laws, while avoiding a significant share of the income with a legitimate banking institution, or being forced to accept the regulatory and governmental oversight of the marketing, sale, and servicing of its loans."

According to Bethune, until recently, WebBank did not have any bank offices and was fully owned and controlled by a nonfinancial institution. In 2015, it held only $226 million in assets while purportedly funding almost $4 billion in loans for LendingClub, the plaintiff said. WebBank existed simply to act as a funding agent in the state of Utah—which has no usury limits—and then transfer the note after two days to LendingClub.

The defendant was forced to change its practices after a recent Second Circuit Court of Appeals decision in Madden v. Midland Funding, LLC, the plaintiff added, leading to an "enhanced relationship" between LendingClub and WebBank.

Bethune's suit seeks to certify a class of borrowers nationwide with a subclass of New York consumers. In addition to claims that LendingClub violated state usury laws, the complaint seeks to hold the defendant responsible under the federal Racketeer Influenced and Corrupt Organizations Act (RICO) based on the enterprise consisting of LendingClub and WebBank and the predicate acts of a scheme to charge usurious interest rates facilitated by the use of U.S. mail and wire.

Restitution—including disgorgement of all profits and unjust enrichment—as well as actual and exemplary damages and an order enjoining LendingClub from its allegedly improper conduct and practices were requested in the complaint as remedies for the class.

Key takeaways from this case:

• This case is in substance an attack on the way marketplace lending platforms use funding banks. Nothing alleged by the plaintiff is different from the defendant's ongoing business practices.
• The first issue in this case is whether the mandatory arbitration clause with class action waiver will be enforced by the courts. The CFPB has proposed disallowing such practice, but its action is not final in this regard and there is much debate regarding the subject.
• Marketplace lenders legally originate loans using banks such as WebBank, which are state-chartered and FDIC-insured, which enables them to operate in other states and export the interest rate allowed by the home state. This is done through the Federal Deposit Insurance Act and the full faith and credit principle.
• What is interesting about this case is that it attempts to broaden the CashCall v. Morrissey decision from the West Virginia Supreme Court which held that the originating platform was essentially acting as the true lender and that the bank's role was insufficient. This is different than the Madden case which challenges the ability of a nonbank to charge bank interest under federal preemption grounds. In contrast, Bethune challenges that there ever was a real bank.
• What we know about LendingClub and other marketplace lending platforms is that the role of the banks is generally quite robust in comparison to other online lending platforms and that the originating platforms are in close contact with the banks and employ the banks' policies and procedures. Moreover, loans are originated with bank funds, not platform funds. It is questionable whether this case will succeed on the merits.

To read the complaint in Bethune v. LendingClub Corp., click here.