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Protocol | Fintech

A Trump-era fintech backdoor for high-interest loans is under scrutiny

The Trump administration's "True Lender" rule allowed predatory lending by rent-a-banks, advocates say. Overturning it will create confusion for fintechs, the rule's backers argue. The House is set to review it.

​Sen. Sherrod Brown

Sen. Sherrod Brown is seeking reforms to banking rules that affect fintechs.

Photo: Tasos Katopodis/Getty Images

Members of Congress and consumer advocates are pushing for rollback of a Trump-era "True Lender" rule that supporters say has made consumer lending more competitive and critics say is just a new avenue for predatory lending.

For fintech lenders, much is at stake: The rule allowed bank-fintech partnerships, also known as marketplace lending arrangements, to flourish. A tighter regulatory regime may force some to rethink their product offerings or even their business models.

A House committee is expected to discuss the measure soon at a hearing. The measure recently passed the Senate.

At issue is an October rule change at the Office of the Comptroller of the Currency that clarified that a fintech company or other nonbank could partner with a chartered bank (the "true lender" in the rule) to make loans as long as the bank's name is on the loan agreement. That bright-line test is something the proposed rollback would eliminate — which would create more uncertainty on who the "true lender" is, some in the banking industry say.

The bright-line test under the OCC rule also meant that the banks and their fintech partners could lend at interest rates above a state's interest rate caps, advocates say. The banks, which are actually loaning the money, can do this by "exporting" interest rates from their home states, which is legal under the National Banking Act. (Forty-five states and D.C. have interest rate caps. The median interest rate cap for a two-year, $2,000 loan is 31% APR, according to the National Consumer Law Center.)

Advocates point to numerous examples of online lenders and others partnering with banks to offer interest rates above 100% APR, with some up to 200%.

"The rule says that as long as the bank's name is on the loan agreement, that triggers federal law that preempts state interest rate limits," said Lauren Saunders, associate director at the National Consumer Law Center.

In April, D.C. Attorney General Karl Racine sued OppFi, alleging that the startup charged interest rates of up to 198% and used deceptive marketing. D.C. has a 24% interest rate cap. Racine last year also sued Elevate, another online lender.

In New York, a restaurant owner borrowed $67,000 at a 268% APR from World Business Lenders and its bank partner Axos Bank of Nevada — one of the states without an interest rate cap.

Last year, online lenders Avant and Marlette settled with Colorado's attorney general in a suit that alleged they charged interest rates above the state's 36% cap. The companies, which had lended through banks WebBank and Cross River Bank, agreed to not lend above the state's 36% limit and to pay for Colorado consumer protection efforts and other education programs.

The debate over whether online lenders are actually banks is occurring as a parallel issue has arisen for another type of fintech — neobanks — which have been challenged on whether they can even call themselves banks. Chime recently had to drop the use of the word "bank" from its marketing after a settlement agreement with California regulators.

If this True Lender rule change passes, online lenders would not be able to use the OCC rule as a defense, potentially making it harder to offer these loans.

"The real consequence of not having a bright-line test is you are subject to a patchwork of judicial decisions," said Crystal Kaldjob, a partner at Morrison & Foerster. She believes that the Colorado settlement could become a model for how the issue is regulated in states.

The "true lender" change is being conflated with interest rates, said OppFi's Jared Kaplan. "Banks have a right to lend nationally based on their state domicile, full stop," he said. "This has nothing to do with rates. This has all to do with who is the lender in the transaction."

Banks also have similar relationships working with partners who are mortgage companies and personal and installment lenders, Kaplan said.

Asked about the D.C. case, he said, "We're incredibly confident in the way we work with banks. We look forward to a successful resolution there."

Kaplan doesn't expect the passage of the bill to affect OppFi, as the OCC will revert back to the pre-October way it defined a "true lender." He said OppFi's bank partners are in control of the loans: "No questions asked."

But OppFi offers an example of fintech business models that may come under scrutiny. Several days after its bank partners make the loans, OppFi acquires participation rights in those loans — meaning it buys a portion of profits in the loans.

How these deals are structured has often been a key part of how courts determine who the "true lender" is, said Kaldjob. Online lenders typically go out and find the customers and manage the relationship with the customer, though the bank is actually funding the loans.

Some courts view the bank as the "true lender," while others view the online lender as having "predominant economic interest" as the "true lender." The factors that determine this include:

  • Whether the nonbank pre-funds the loan, which essentially means the nonbank funds the loans;
  • The length of time that a bank holds the loan before selling it;
  • And whether the fintech buys some or all of the loan after a holding period.

The American Bankers Association and other banking groups oppose the bill, saying that using the Congressional Review Act to pass this replacement rule will make it harder to make changes later.

The White House supports the change and eight state attorneys general sued in January to overturn the rule.

House Financial Services committee chair Maxine Waters has expressed support for the bill. But some House Democrats are pushing back against it, according to the American Prospect.

Neither a true borrower nor a true lender be

The reason that fintechs like OppFi exist is that traditional banks aren't filling a massive need for these types of smaller, short-term loans for people with lower credit scores, Kaplan said. "Traditional banks rely on FICO credit score" to underwrite, he said. "They don't understand how to figure out creditworthiness based on alternative data techniques like cash flow."

OppFi is offering loans to people who can't get loans at a bank and would otherwise go to a payday lender, tribal lender or auto-title lender, which all charge much higher interest rates and hidden fees, Kaplan said.

Big banks generally don't want to do these smaller loans because they say they can't make money on them. However, U.S. Bank recently began offering small loans with an APR of about 70.7%.

The proposed lender-rule rollback does not address interest rates directly, its advocates acknowledge, but it makes sky-high interest rates harder to offer by addressing the definition of who the lender is in the fintech-bank relationship.

Actually changing the interest rate caps, or prohibiting exporting of interest rates, would require changing the National Banking Act, a big legislative lift. The proposed change more narrowly addresses the "true lender" rule. Sen. Sherrod Brown has said he plans to introduce a broader bill addressing interest rates.

"This rent-a-bank problem highlights the need for a national interest rate limit that includes banks," said NCLC's Saunders.
Protocol | Fintech

Amazon wants a crypto play. Its history in payments is not encouraging.

It missed chances to be PayPal, Square and Stripe — so is this its chance to miss being Coinbase, too?

Amazon wants to be a crypto player.

Image: NurPhoto/Getty Images

The news that Amazon was hiring a lead for a new digital currency and blockchain initiative sent the price of bitcoin soaring. But there's another way to look at the news that's less bullish on bitcoin and bearish on Amazon: 13 years after Satoshi Nakamoto's whitepaper appeared on the internet, Amazon is just discovering cryptocurrency?

That may be a bit unkind, but the truth is sometimes unkind. And the reality is that Amazon has a long history of stumbles and missed opportunities in payments, which goes back more than two decades to the company's purchase of internet payments startup

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Owen Thomas

Owen Thomas is a senior editor at Protocol overseeing venture capital and financial technology coverage. He was previously business editor at the San Francisco Chronicle and before that editor-in-chief at ReadWrite, a technology news site. You're probably going to remind him that he was managing editor at Valleywag, Gawker Media's Silicon Valley gossip rag. He lives in San Francisco with his husband and Ramona the Love Terrier, whom you should follow on Instagram.

Over the last year, financial institutions have experienced unprecedented demand from their customers for exposure to cryptocurrency, and we've seen an inflow of institutional dollars driving bitcoin and other cryptocurrencies to record prices. Some banks have already launched cryptocurrency programs, but many more are evaluating the market.

That's why we've created the Crypto Maturity Model: an iterative roadmap for cryptocurrency product rollout, enabling financial institutions to evaluate market opportunities while addressing compliance requirements.

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Caitlin Barnett, Chainanalysis
Caitlin’s legal and compliance experience encompasses both cryptocurrency and traditional finance. As Director of Regulation and Compliance at Chainalysis, she helps leading financial institutions strategize and build compliance programs in order to adopt cryptocurrencies and offer new products to their customers. In addition, Caitlin helps facilitate dialogue with regulators and the industry on key policy issues within the cryptocurrency industry.
Protocol | Enterprise

How Google Cloud plans to kill its ‘Killed By Google’ reputation

Under the new Google Enterprise APIs policy, the company is making a promise that its services will remain available and stable far into the future.

Google Cloud CEO Thomas Kurian has promised to make the company more customer-friendly.

Photo: Michael Short/Bloomberg via Getty Images 2019

Google Cloud issued a promise Monday to current and potential customers that it's safe to build a business around its core technologies, another step in its transformation from an engineering playground to a true enterprise tech vendor.

Starting Monday, Google will designate a subset of APIs across the company as Google Enterprise APIs, including APIs from Google Cloud, Google Workspace and Google Maps. APIs selected for this category — which will include "a majority" of Google Cloud APIs according to Kripa Krishnan, vice president at Google Cloud — will be subject to strict guidelines regarding any changes that could affect customer software built around those APIs.

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Tom Krazit

Tom Krazit ( @tomkrazit) is Protocol's enterprise editor, covering cloud computing and enterprise technology out of the Pacific Northwest. He has written and edited stories about the technology industry for almost two decades for publications such as IDG, CNET, paidContent, and GeekWire, and served as executive editor of Gigaom and Structure.

Amazon job opening points to plan to accept crypto payments

The news sparked a rally in the values of bitcoin and other cryptocurrencies.

Amazon may be planning to let customers pay for orders with cryptocurrencies.

Photo: David Ryder/Getty Images

Amazon is looking to hire a digital currency and blockchain expert suggesting a plan to let customers accept cryptocurrencies as payments.

The tech giant's job opening says Amazon is looking for "an experienced product leader" to help develop the company's "digital currency and blockchain strategy and roadmap" Amazon is looking for product leader with expertise in blockchain, distributed ledger, central bank digital currencies and cryptocurrency.

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Benjamin Pimentel

Benjamin Pimentel ( @benpimentel) covers fintech from San Francisco. He has reported on many of the biggest tech stories over the past 20 years for the San Francisco Chronicle, Dow Jones MarketWatch and Business Insider, from the dot-com crash, the rise of cloud computing, social networking and AI to the impact of the Great Recession and the COVID crisis on Silicon Valley and beyond. He can be reached at or via Signal at (510)731-8429.

Protocol | Policy

Big Tech tried to redefine terrorism online. It got messy fast.

The Global Internet Forum to Counter Terrorism announced a series of narrow steps it's taking that underscore just how fraught the job of classifying terror online really is.

Erin Saltman is GIFCT's director of programming.

Photo: Paul Morigi/Flickr

A little over a month after the Jan. 6 riot, the tech industry's leading anti-terrorism alliance — a group founded by Facebook, YouTube, Microsoft and Twitter — announced it was seeking ideas for how it could expand its definition of terrorism, which had for years been more or less synonymous with Islamic terrorism. The group, called the Global Internet Forum to Counter Terrorism or GIFCT, had been considering such a shift for at least a year, but the rising threat of domestic extremism, punctuated by the Capitol uprising, made it all the more clear something needed to change.

But after months of interviewing member companies, months of considering academic proposals and months spent mulling the impact of tech platforms on this and other violent events around the world, the group's policies have barely budged. On Monday, in a 177-page report, GIFCT released the first details of its plan, and, well, a radical rethinking of online extremism it is not. Instead, the report lays out a series of narrow steps that underscore just how fraught the job of classifying terror online really is.

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Issie Lapowsky

Issie Lapowsky ( @issielapowsky) is Protocol's chief correspondent, covering the intersection of technology, politics, and national affairs. She also oversees Protocol's fellowship program. Previously, she was a senior writer at Wired, where she covered the 2016 election and the Facebook beat in its aftermath. Prior to that, Issie worked as a staff writer for Inc. magazine, writing about small business and entrepreneurship. She has also worked as an on-air contributor for CBS News and taught a graduate-level course at New York University's Center for Publishing on how tech giants have affected publishing.

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