Federal Court Holds National Bank True Lender of Student Loans

A federal district court in Massachusetts last month dismissed a lawsuit against a student loan trust and found that the national bank who originated the loan, rather than the trust to which the loan was later transferred, was the true lender of the loan.  

The suit arose from a borrower’s allegations that the interest rate charged under the loan agreement violated state usury laws.  The plaintiff claimed that a service provider, who designed and marketed the student loan program and also managed the trust to which the borrower’s loan was transferred immediately after it was originated, was the “true lender” rather than the national bank who originated the loan. 

In determining the national bank was the true lender, the court noted that because the purchase agreement required the bank to fund and fully disburse the loans prior to the transfer and to repurchase the loans in certain circumstances, the bank had the predominant economic interest in the loan.  The national bank is subject to the National Banking Act, which, among other things, preempts conflicting state laws and allows national banks to buy and sell loans.

The court also examined the loan under the “valid when made” doctrine and found that, because the loan was valid under the usury laws of the state in which the bank was chartered at the time the loan was originated, the loan was also valid upon transfer to the out-of-state trust. 

The plaintiffs have appealed the district court’s decision to the U.S. Court of Appeals for the First Circuit.