Future For Fintech Bank Partnerships

Rent-A-Bank for Fintech's Future

Who is sailing the boat?

True Lender Laws and Fintech "Rent-a-Bank" Partnerships

The Office of the Comptroller of the Currency (OCC) issued the True Lender Rule in October 2020. The rule stated that a bank is a "true lender" if it meets one of two conditions:

·        The bank is named as the lender in the loan agreement on the date of origination.

·        The bank funds the loan.

In June 2021, the House passed a joint resolution to repeal the True Lender Rule by a vote of 218-208. The Senate passed the resolution by a vote of 52-47 on May 11, 2021. 

The Truth in Lending Act (TILA) applies to most types of consumer credit, including car loans, home mortgages, credit cards, and home equity line of credit. TILA does not tell banks how much interest they may charge or whether they must grant a consumer loan. 

 The relationship between True Lender laws and fintech or fin-tech lenders who "rent a bank" are complex.

True Lender Laws:

• These are state or federal laws designed to identify the true lender in loan transactions involving partnerships between banks and non-bank lenders (fintechs).
• The goal is to ensure proper regulation and consumer protection by applying relevant laws (like interest rate caps) to the entity with the true economic interest in the loan.
• There are two main approaches:
• Bright-line test: Identifies the "true lender" based on specific criteria, like who funds the loan or is named in the agreement. (e.g., OCC's 2020 "True Lender Rule")
• Totality of the circumstances test: Considers various factors like funding source, risk distribution, and marketing to determine the true lender.
• States like Connecticut, Illinois, and New Mexico have enacted their own True Lender laws, often targeting "rent-a-bank" models.

Fintech "Rent-a-Bank" Partnerships:

• Fintechs partner with banks to offer loans under the bank's charter, allowing them to bypass certain regulations or offer higher interest rates in states where the fintech wouldn't be licensed.
• The bank "rents" its charter but may not have substantial economic risk in the loan.

How True Lender Laws Impact "Rent-a-Bank" Models:

• True Lender laws can challenge "rent-a-bank" arrangements by identifying the fintech as the true lender based on factors like:
• Who markets and originates the loan?
• Who retains most of the profit or risk?
• Who controls loan servicing?
• If the fintech is deemed the true lender, it might need to:
• Obtain appropriate licenses in relevant states.
• Comply with consumer protection laws like interest rate caps.
• This can make "rent-a-bank" models less attractive for fintechs.

Current Landscape:

• The OCC's "True Lender Rule" was vacated in 2022, creating uncertainty.
• Several states are enacting their own True Lender laws, leading to a patchwork regulatory landscape.
• The future of "rent-a-bank" models under these evolving laws remains uncertain.

True Lender laws aim to identify the true economic owner of a loan, potentially impacting fintechs that rely on "rent-a-bank" partnerships. As these laws develop, the landscape for both fintechs and consumers is likely to evolve. Will other states develop detailed regulation? I expect yes.

Some places to research and follow besides emailing your Senator or Congressperson:

National Conference of State Legislatures (NCSL): This organization tracks legislation across all states. Searching for keywords like "fintech," "rent-a-bank," "true lender," "disclosure," and "consumer protection" on their website.

• State-Specific Legislative Websites: Every state has its own website where you can search for introduced bills and track their progress. I see about 80 bills in progress.
• Industry News Sources: News outlets focusing on fintech and financial regulations might report on upcoming legislation with potential impacts on these companies.
• Legal Alert Services: Some legal services offer alerts on specific topics like banking or consumer protection. They might highlight relevant legislation as it emerges.

 

Lending Club, Affirm, Stripe, BlueVine, Divvy, Gusto, Intuit, Veem, Kabbage, Coinbase, Upstart, Marlette, Rocket Loans, Upgrade, New Rez partner with Cross River BankAffirm also with Evolve Bank & Trust

Marqeta, VISA, Mastercard:  Evolve Bank & Trust 

 Stripe: also as some use more than one source depending on product Goldman Sachs

Upgrade, Robinhood, Monzo, Brex, Marqeta, Ramp, TeamPay, Marqueta, Cash App, Galileo, Zelle, Privacy lock link with Sutton Bank

Most of these relationships are fluid and changing. The consumer might not know who they can call or blame.

#BAAS

 

Rent-a-bank and fintech partnerships have not made promised profits for the banks. Twenty percent of banks participating saw a 5% or more increase in loan volume from partnerships, and half as many have realized at least a 5% gain in non-interest income. This is even when the bank created the product, underwrites to their own rules and doesn’t make exceptions.

Big box banks have not built new technology. Few know where to aim their research. AI apps can be set up in weeks, but what is the tool that is exactly going to patch into their system by API and what will be secure? Banks are still thinking about safety deposit boxes and walk in clients.

Rent-a-bank is not regulated in most states today. But as consumers report to the CFBP and their state regulators, expect this model to disappear in fines and laws.

Many fintech websites that fail to disclose the actual rate, the APR, the product qualifications… Many of them offer mortgage products without persons licensed in any state. 

The consumer clicks and signs up, enters bits of personal information that are not secure and open to hacking, then bingo just like a slot machine the digital money is approved. This isn’t going to end well. I'm not big on gambling. I believe pay day apps that charge a person with low income and fragile finances 36-40% is not going to last.

This is not legal advice. This is merely my opinion.

What do you think?