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.
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 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.