Celtic Bank Faces Another Lawsuit Over SBA Lending Practices
Colorado Prevails in Appeals Challenge on DIDMCA Case, Vought Seeks to Starve CFPB of Funding, Pipe Lays Off About Half of Staff, Coinbase Abandons Acquisition of BVNK
Hey all, Jason here.
Wrapping up this week’s newsletter from my hotel room in Washington, DC, after an extremely enjoyable and productive several days in Bozeman, Montana, for the inaugural Fintech Takes Builders Summit. Big congrats to Alex Johnson and the entire Workweek team on putting on a fantastic and truly differentiated event!
I’m here in DC for a working group session on earned wage access on Monday, followed by the American Fintech Council Policy Summit on Tuesday, where I’ll be speaking on a panel about how to build trust in AI and digital assets.
Following that, I’ll be jetting down to Miami for Simon Taylor’s Fintech NerdCon event, which I’ve enjoyed having the chance to help out with by providing input on the content and speaker line up.
Last but not least, if you’re attending NerdCon and want to join the teams from Oscilar, Kaufman Rossin, and me for a VIP dinner, you can request a spot here.
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Appeals Court Allows Colorado To Block Out-of-State State-Chartered Lenders From Exceeding Its Usury Cap
Last Monday, the Tenth Circuit Court of Appeals reversed the district court’s preliminary injunction in a case filed by several financial services trade groups seeking to block the enforcement of Colorado’s Uniform Consumer Credit Code, which prohibits out-of-state state-chartered banks from making loans to Colorado residents at rates that exceed the state’s usury caps.
The legal battle stems from the June 2023 passage of Colorado H.B. 23-1229, in which the state opted out of the relevant portions of Depository Institutions Deregulation and Monetary Control Act of 1980, commonly referred to as DIDMCA.
The case turns on the phrase “loans made in such State,” with the question being, when a loan is applied for and originated via the internet, “where” is that loan being made: in the state the bank is located, or where the borrower lives?
In a 2-1 decision, the appeals court ruled “loans made in such State” refers to loans “in which either the lender or the borrower is located in the opt-out state.”
In his dissenting opinion, Judge Rossman argued that the best reading is that a loan is “made” in the lender’s state — where the bank is chartered or performs “non-ministerial” loan functions, as this is consistent with DIDMCA’s intent of ensuring parity between state- and nationally-chartered banks.
The practical effect of the ruling is that, barring an appeal, out-of-state state-chartered banks either need to make loans that comply with Colorado’s UCCC to borrowers in the state or cease lending to Colorado residents altogether.
Besides Colorado, Iowa and Puerto Rico are the only other jurisdictions that have exercised their ability to opt out of the relevant portion of DIDMCA. This actually came up in a 2023 Iowa case against a lender that partnered with TAB Bank to originate loans to borrowers in the state that exceeded Iowa’s usury caps.
Minnesota, Nevada, Rhode Island, Oregon, and the District of Columbia have introduced measures that would have seen them opt out of DIDMCA, but none of the measures were successfully adopted.
Consumer advocacy groups applauded the appeals court’s decision, with the National Consumer Law Center’s senior policy counsel, Andrew Kushner, saying, “The Tenth Circuit decision faithfully applies statutory text, and honors Congress’s intent, to give every state the power to protect its residents from predatory out-of-state loans. With this clear guidance from a federal appellate court, other states can now follow Colorado’s lead to catch lenders trying to evade their usury laws.”
Industry trade group the American Fintech Council, a plaintiff in the suit, lamented the court’s decision, releasing a statement from CEO Phil Goldfeder, which said in part, “The ruling by a two-to-one panel of the Tenth Circuit is just another step in the long legal process and while we are disappointed, we are not deterred… This decision puts Colorado consumers—especially low- and moderate-income families—at risk of being cut off from safe, regulated financial services at a time when they need them most.”
AFC and the other plaintiffs plan to continue to litigate the case while concurrently working with Congress to reiterate the original intent behind DIDMCA.
Celtic Bank Faces Another Lawsuit Over SBA Lending Practices
Celtic Bank, linked to what appears to be the largest-ever SBA7(a) program fraud, is facing another lawsuit related to its SBA lending practices.
This time, MCM High Income Fund, an asset manager, is alleging that Celtic failed to meet its obligations under the Small Business Administration’s Preferred Lender Program by failing to do appropriate due diligence and failing to properly underwrite seven SBA loans the fund purchased.
According to MCM High Income Fund’s complaint, filed in U.S. District Court for the Western District of Tennessee earlier this month, of 362 SBA7(a) loans that it has purchase from Celtic between 2013 and 2022, the seven loans in question are the only loans to prepay.
When a borrower prepays, the fund is prohibited from reselling the loan, thus forfeiting “the significant premium it invested” in purchasing the loan “and would have otherwise been able to recoup had the loan not been prepaid, along with additional lost profits from the loan’s resale.”
While in lending, in general, prepayments are a common occurrence, due to the qualification criteria and underwriting process for SBA loans, they should be nearly non-existent, the plaintiff argues.
According to the complaint, “[u]nder the SBA’s rules and guidelines, if a bank/lender knows or should know that a borrower is simply using an SBA7(a) loan as a bridge loan (i.e., a short-term financing solution until longer-term financing is secured or an existing obligation is settled), the bank/lender is prohibited from approving the loan application for that borrower.”
The complaint argues that, while prepays of SBA7(a) loans are “highly unlikely,” they can occur if a borrower subsequently obtains substantial funds, if a borrower decides to sell the business, or “if there was fraud involved at the time the lender approved the borrower’s SBA7(a) loan application.”
While it may sound like a small number, the complaint argues that a single lender originating seven loans that subsequently prepaid in such a short timeframe is “statistically improbable, highly suspicious, and indicate[s] the possibility of an intentional or negligent pattern and practice on the part of the lender.”
MCM High Income Fund argues that Celtic knew or should have known that the borrowers were ineligible for approval under SBA rules and guidelines.
The fund alleges Celtic committed breach of contract, fraud, negligence, and related allegations. MCM High Income Fund is seeking restitution and compensatory and punitive damages in amounts to be determined at trial.
Acting CFPB Director Vought Moves to Starve Bureau of Funds, Effectively Forcing a Shutdown
The U.S. Department of Justice submitted a memorandum from its Office of Legal Counsel as part of a court filing in the ongoing lawsuit that may determine the fate of the Consumer Financial Protection Bureau.
The document, filed as part of the NTEU vs. Vought case in the U.S. District Court for the District of Columbia, notifies the Court and parties to the suit that the CFPB expects to exhaust its current funding sometime early next year and that it is the OLC’s opinion that drawing further funds from the Federal Reserve would be illegal.
The OLC memo spells out that Dodd-Frank authorizes the CFPB to draw its funding from the “combined earnings of the Federal Reserve System,” rather than through the typical Congressional appropriations process.
However, the memo argues, it is the CFPB’s position that the Fed’s “combined earnings” should be calculated by “offsetting various outlays against the Federal Reserve’s revenues and that because the Federal Reserve’s outlays exceed its revenues, there are no funds available from the CFPB’s congressionally authorized source of funding.”
Absent funding via this mechanism, the Bureau’s acting director, Russ Vought, is required by law to prepare a report for the President and congressional appropriation committees identifying the “funding needs of the Bureau” — which would then be up to Congress to appropriate.
According to the filing, once the CFPB exhausts its current funding, employees would be prohibited from working, even on a voluntary basis, until additional funding is allocated by Congress (or, per the OLC’s logic, until the Federal Reserve’s earnings exceed its outlays).
Everything Else: SMB Lender Pipe Lays Off About Half Its Staff, Coinbase/BVNK Deal Falls Through
Revenue-based small business lender Pipe, once valued at $2 billion, has laid off about half its staff, according to multiple sources familiar with the matter. That would equate to more than 200 people, based on headcount data available on LinkedIn.
A company spokesperson confirmed the reduction in force in an emailed statement:
“We can confirm that Pipe has made the difficult decision to shift to a leaner org structure. Pipe’s business is strong and growing rapidly, but we need to put a stronger focus on profitability, operating efficiency, and our core product set in order to scale our business in the right way. This will better equip us to continue supporting our partners and the small businesses they serve.”