Fintech focus: an “overriding economic interest”. . . In Illinois and Maine – technology
In light of the expected increased regulatory scrutiny of fintechs involved in banking partnerships, both Illinois and Maine recently enacted laws that impose restrictions on fintechs on loan partnerships with banks. Each law increases the penalties associated with granting credit that violates applicable usury or licensing regulations, and includes a tax evasion prevention provision that codifies certain elements of the legal doctrine of “overriding economic interest”. These new federal laws should be seen in the context of (1) the recent repeal of the OCC’s “True Lender” rule, which was intended to simplify banking partnership standards and establish a Bright Line True Lender standard, and (2) the “Valid-if” rules finalized by the FDIC and the OCC in 2020. The new state laws not only affect fintechs providing services to banks in connection with banking partnerships, but also apply, as explained below, to companies that buy or have the right to acquire loans (or an interest in such loans) .
Illinois Predatory Loan Prevention Act
The Illinois Loan Prevention Act (PLPA), which came into effect upon becoming effective, extends the Annual Maximum Military Percentage (MAPR) from 36% of the Federal Military Loans Act (MLA) to “any person or entity that offers or grants credit to a consumer in Illinois.” It is also making compliant changes to the Illinois Consumer Installment Loans Act and Payday Loan Reform Act to apply the same MAPR cap of 36%. It is important that the tax evasion prevention provisions of the PLPA provide that a company: a Lender subject to the PLPA if it (i) purports to act as an agent or service provider for another entity exempted from the PLPA, and in addition to other requirements (ii) “directly or indirectly the predominant economic interest in the loan.”
The penalties for violating the PLPA are severe ($ 10,000 per violation). The Illinois Department of Financial and Professional Regulation published frequently asked Questions, which provides guidance on the scope and meaning of the law and clarifies that the PLPA applies to installment loans, buy now, pay later, retail hire purchase agreements, and income-sharing agreements.
Maine Act to protect consumers from predatory lending practices
Not long after Illinois enacted the PLPA, Maine enacted one Law to protect consumers from predatory lending practices (Law). The law amends the Maine Consumer Credit Code (MCCC), which imposes licensing and other requirements related to consumer credit, to add a tax evasion prevention provision and increase penalties related to violating certain regulated consumer lender regulations.
More specifically, the new tax evasion prevention provision in the law provides that a person Lender Subject, among other things, to licenses and requirements relating to consumer credit (z) if the person:
- holds, acquires or retains, directly or indirectly, the predominant economic interest in loan;
- markets, brokers, arranges, or facilitates the credit or has the right, requirement, or right of first refusal to purchase the credit or debt or interest on a loan; or
- the entirety of the circumstances suggests that the person is the lender and the transaction is structured to circumvent the requirements of the MCCC, including the approval requirement.
With respect to the entirety of the circumstances, the MCCC, as amended, clarifies that the circumstances in favor of a person being considered a lender include when the person (i) avoids the corporations from all costs or risks related to the Credit exempts; (ii) primarily designs, controls, or operates the Loan Program; or (iii) purporting to act as an agent or service provider in another capacity for an Exempt entity while acting directly as a lender in other jurisdictions.
In addition to the fines already in place under the MCCC, the law specifically provides that penalties for granting credit in breach of the MCCC’s lending license requirement include: 2) Restrictions on providing information about the credit by the lender to consumer credit agencies and forwarding the claim to a debt collection agency.
Key findings and implications
The new Illinois and Maine laws codify certain aspects of the “prevailing economic interest” test used by some courts and state agencies to claim that fintechs who partnered with banks are the “real lenders” in these agreements are and therefore state licensing and usury requirements. None of the laws explicitly address which factors are taken into account when determining whether a fintech has an overriding economic interest in the loan. It is clear, however, that these statutes are specifically designed to limit the ability of fintechs to work with banks to launch a nationwide loan program without gaining independent authority to offer the loan program. Fintechs that work with a bank in one state but are licensed as lenders in other states should be aware of this.
Due to the general nature of this update, the information provided herein may not be applicable in all situations and should not be performed in certain situations without specific legal advice.
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