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.