“True lender” uncertainty remains

The agencies explicitly do not address the validity of certain bank-fintech partnership models that remain subject to “true lender” challenges and regulatory scrutiny while the proposed rules seek to remediate the legal uncertainty resulting from the Madden decision. 3 The lender that is“true issue has arisen within the context of particular lending arrangements between a bank and a non-bank entity, which experts have actually referred to as “rent-a-charter” or “rent-a-bank” schemes. These experts argue that the “rent-a-charter” model—in which the non-bank entity typically markets the mortgage, makes the credit choice and directs its bank-partner to originate and temporarily hold such loan before buying it through the bank—improperly permits the non-bank entity to profit through the broad security associated with exportation doctrine regarding the loan’s rate of interest also to claim its very own exemption from relevant state loan provider certification and usury limits by perhaps perhaps maybe not acting due to the fact loan provider. These experts genuinely believe that the non-bank entities should be thought about the “true lender” into the deals as the bank just isn’t adequately involved in the financing system and will not get the advantages and take the potential risks anticipated of a lender that is true. Nevertheless, such a structural view of bank-fintech partnerships could be extremely simplistic. Used, the type of these partnerships is nuanced and their structures is extremely adjustable for a case-by-case foundation.

The foundation associated with the “true loan provider” challenge could be traced back once again to the Georgia legislature’s efforts in 2004 to avoid specific payday lenders from circumventing state’s usury laws by stepping into financing programs with out-of-state banking institutions. Subsequently, personal plaintiffs and state regulators have pursued lender that is“true challenges against different bank-partnership programs beyond payday financing for violations of state usury and consumer protection rules . Some courts have started to examine the economic realities of such lending arrangements by considering a variety of factors designed to determine which entity is the actual lender in the transaction as a result. While courts have actually used differing analytical approaches, their analyses generally look for to determine which of this bank or its non-bank partner holds the “predominant financial interest” into the loan and it is, hence, the “true loan provider.”

Much like Madden, “true lender” litigation significantly increases appropriate and company dangers for non-banking entities buying loans originated by banking institutions. If effective, a “true lender” challenge exposes the non-bank entity to significant charges for usury and unlicensed financing also threatens the legitimacy and enforceability associated with the loan under state legislation. In order to mitigate such dangers, non-bank and bank lovers have actually moved towards more participation-based partnership structures when the bank just offers a participation interest as much as a specific portion for the loan receivables in to the non-bank partner. The lack of formal agency guidance or rulemaking concerning true lender issues perpetuates legal uncertainty for banks and non-banks that participate in such lending arrangements while increased bank involvement in the lending program provides a better fact pattern to defend against “true lender” challenges.

Legislative perspective

Several efforts had been produced in the final Congress to pass through legislation to remediate the uncertainty that is legal by Madden. Of note, the Financial SELECTION Act (H.R.10) plus the Protecting Consumers’ usage of Credit Act (H.R.3299), both introduced in 2017, could have invalidated the Madden choice making the “valid-when-made” doctrine federal legislation for loans made under different federal statutes by regulated banking institutions. 4 Despite collecting significant help, proposed legislation to correct the Madden decision stalled into the Senate.

Recently, the united states Treasury Department required a legislative treatment for the Madden decision in a July 2018 report suggesting that Congress enshrine the “valid-when-made” doctrine in federal legislation and specify that a partnership by having a fintech firm doesn’t negate the bank’s status once the “true loan provider.” Federal legislation may likely provide the many definitive way to offer an obvious and well-settled standard for the treating bank-fintech origination models. Because of the present environment in Congress, nevertheless, it really is not likely that Madden or “true loan provider” legislation would gather adequate bipartisan help in order to become legislation when you look at the near term. The proposed rules would nevertheless offer an improved, albeit imperfect, basis on which industry participants may reasonably rely to challenge Madden-type claims while not as effective as legislative action.

1 E.g., a nationwide bank, cost cost cost cost savings relationship, state-chartered bank, or even a branch of a non-US bank. 2 Madden stressed the project of that loan by a nationwide bank. Nevertheless, the doubt developed by your decision stretched to state-chartered banking institutions, whilst the federal legislation conditions regulating state banks’ authority with regards to rates of interest are modeled after and interpreted regularly with matching parts of the nationwide Bank Act. 3 The FDIC’s proposition particularly states that the agency continues to see “unfavorably” the practice of partnering having a bank when it comes to single objective of evading a reduced rate of interest limit and state certification demands. This policy is in keeping with roles taken because of the OCC. 4 comparable efforts had been designed to supply a legislative fix towards the lender” challenge that is“true. Such efforts, nonetheless, additionally neglected to gather enough support in Congress.