Reflecting the expected heightened regulatory scrutiny of fintechs engaged in bank partnerships, both Illinois and Maine recently enacted laws that place restrictions on fintechs engaged in lending partnerships with banks. Each law increases the penalties associated with originating loans in violation of applicable usury limits or licensing requirements and contains an anti-evasion provision that codifies certain elements of the judicial “predominant economic interest” doctrine. These new state laws should be viewed in the context of (1) the recent repeal of the OCC’s “true lender” rule, which was intended to simplify the standards governing bank partnerships and establish a bright-line true lender standard, and (2) the “valid-when-made” rules finalized by the FDIC and the OCC in 2020. The new state laws impact not only fintechs providing services to banks in connection with bank partnership arrangements, but, as discussed below, also apply to entities that purchase or have the right to purchase loans (or an interest in such loans).
The Illinois Predatory Loan Prevention Act (PLPA), which became effective upon enactment, extends the 36% maximum military Annual Percentage Rate (MAPR) of the federal Military Lending Act (MLA) to “any person or entity that offers or makes a loan to a consumer in Illinois.” It also makes conforming amendments to the Illinois Consumer Installment Loan Act and the Payday Loan Reform Act to apply the same 36% MAPR cap. Importantly, the PLPA’s anti-evasion provision provides that an entity is a lender subject to the PLPA where it (i) purports to act as an agent or service provider for another entity that is exempt from the PLPA, and, among other requirements, (ii) “holds, acquires, or maintains, directly or indirectly, the predominant economic interest in the loan.”
The penalties for violating the PLPA are severe ($10,000 per violation). The Illinois Department of Financial and Professional Regulation issued FAQs, which provide guidance on the scope and meaning of the law, and make clear that the PLPA applies to installment loans, “buy-now-pay-later” arrangements, retail installment sales contracts, and income share arrangements.
Not long after Illinois enacted the PLPA, Maine enacted an Act to Protect Consumers against Predatory Lending Practices (Act). The Act amends the Maine Consumer Credit Code (MCCC), which imposes licensing and other requirements in connection with consumer lending, to add an anti-evasion provision and increase the penalties associated with violating certain provisions governing supervised consumer lenders.
More specifically, the new anti-evasion provision in the Act provides that a person is a lender subject to, among other things, licensing and requirements related to consumer loans (e.g., finance charge restrictions and disclosure requirements) notwithstanding the fact that the person purports to act as an agent or service provider for another entity that is otherwise exempt (e.g., banks), if the person:
With respect to the totality of circumstances prong, the MCCC as amended clarifies that the circumstances that will weigh in favor of a person being deemed a lender include when the person (i) indemnifies exempt entities from any costs or risks related to the loan; (ii) predominantly designs, controls, or operates the loan program; or (iii) purports to act as an agent or service provider in another capacity for an exempt entity while acting directly as a lender in other states.
In addition to the monetary penalties that already exist under the MCCC, the Act specifically provides that the penalties for making loans made in violation of the MCCC’s lending license requirement include (1) considering loans made in violation of restrictions as void and uncollectible, and (2) restrictions on the lender furnishing information about the loan to consumer reporting agencies and referring the debt to a debt collector.
The new Illinois and Maine laws codify certain aspects of the “predominant economic interest” test used by some courts and state authorities to hold that fintechs engaged in lending partnerships with banks are the “true lender” in those arrangements and, therefore, are subject to state licensing and usury requirements. Neither statute expressly addresses what factors will be considered to determine whether a fintech has a predominant economic interest in the loan. However, it is clear that these statutes are specifically designed to restrict the ability of fintechs to partner with banks to launch a nationwide lending program without obtaining independent authority to offer the lending program. Fintechs partnering with a bank in one state but obtaining a license as a lender in other states should take note.