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Business Law Today

April 2023

Mendes Hershman Winner Abstract: Port in a Storm: Colorado’s “Safe Harbor” Settlement as a Template for Online Lending Reform

Zachary Hunt

Mendes Hershman Winner Abstract: Port in a Storm: Colorado’s “Safe Harbor” Settlement as a Template for Online Lending Reform Rousseau

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The Mendes Hershman Student Writing Contest is a highly regarded legal writing competition that encourages and rewards law students for their outstanding writing on business law topics. Papers are judged on research and analysis, choice of topic, writing style, originality, and contribution to the literature available on the topic. The distinguished former Business Law Section Chair Mendes Hershman (1974–1975) lends his name to this legacy. Read the abstract of this year’s second-place winner, Zachary R. Hunt of Cornell Law School, Class of 2024, below. The full article is forthcoming in Volume 109 of the Cornell Law Review, scheduled for publication in December 2023.

Innovations in financial technology have enabled nonbank firms to market, originate, and service consumer loans entirely online via web-based lending platforms. These online lenders promote themselves as a faster, disintermediated alternative to traditional lending that leverages technology to provide borrowers with convenient and near‑instantaneous access to a wider variety of credit products. Yet despite its claimed advantages, the online lending industry remains perpetually entangled in litigation and controversy surrounding its prevailing business model. Most prominently, lawmakers, regulators, and courts are sharply divided as to whether online lending platforms should be able to escape otherwise applicable state usury laws by “partnering” with chartered depository institutions to originate high-interest loans. Experts also question the (mis)alignment of incentives between parties at each stage of the lending process, particularly given that the online lender performs a traditionally bank‑like role in the transaction but typically bears no economic interest in the loans it originates. In response, this Note argues that a recent settlement between Colorado authorities and two online lenders offers a uniquely practicable template for resolving these interrelated challenges by applying pressure to the incentive mechanisms that lead online lenders to originate high-risk—and therefore high-interest—loans that state usury laws would ordinarily prohibit.