Colorado State Court Affirms “Valid-When-Made” Inapplicable to Non-Banks

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A Colorado state court recently found the “valid-when made” doctrine inapplicable to non-banks in Colorado, ruling that the language of 12 U.S.C. § 1831(d) applies only to “banks” and not to non-bank entities.  Thus, while a state bank may charge the interest rate of its state under 12 U.S.C. § 1831(d), this privilege does not apply to non-bank entities to whom the loan may be transferred.

The case involved a plaintiff arguing that non-banks cannot benefit from the provisions of 12 U.S.C. § 1831(d), including the defendant in this case, a non-bank financial services company.  Plaintiff argued that, since a non-bank could not benefit from the provisions of 12 U.S.C. § 1831(d), then the Colorado interest limits applied, and the non-bank could not charge interest higher than Colorado law allowed. Defendant argued that where the interest rate is valid when made, then that interest rate can be enforced by subsequent holders of the debt.  Defendants also argued that plaintiff’s interpretation of 12 U.S.C. § 1831(d)(a), prohibiting the import of out-of-state interest rates to loans purchased by non-bank entities, such as the defendant, violates the Dormant Commerce Clause and Contracts Clause of the U.S. Constitution.  

The Court’s analysis focused on the language of the statute in finding for the plaintiff.  Use of the terms “state banks” and “branches of banks” emphasized Congressional intent that the ability to import interest rates was not intended to extend to “any approved non-bank lender”, evidenced by a lack of discussion of any non-bank entities.

The question of whether defendant could stand in the shoes of the assignee bank, who can charge the interest rate charged on a loan based on its location, was of most interest to the Court.  The Court here applied a similar analysis as the U.S. Court of Appeals for the Second Circuit applied in Madden v. Midland Finding, LLC.

The case is Martha Fulford, Administrator Uniform Consumer Credit Code v. Marlette, Wilmington Trust, NA, et al. case number 17-30376 (District Court, City and County of Denver, Colorado, June 9, 2020). 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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