On May 21, the Massachusetts Attorney General entered into an Assurance of Discontinuance ("AOD") with a California-based fintech alleging that it was the "true lender" of its consumer installment loans.Under the terms of the settlement, the fintech is required to pay $625,000 in restitution, request deletion of tradelines on credit reports for loans reported to credit bureaus, and cease doing business in the state.
The fintech, which partnered with a Utah-based bank, made short-term, small dollar loans to Massachusetts consumers with interest rates that exceeded the state's rate cap.The Massachusetts AG alleged the fintech made loans with an annual APR that routinely exceeded 100%.Under Massachusetts law, loans greater than $6,000 (commercial or consumer) are generally subject to a 20% interest rate cap with limited exceptions and require the state AG's approval to charge an amount greater than 20%. See Mass. Gen. Laws Ann. ch. 271, § 49(a). Moreover, consumer loans under $6,000 are subject to a 12% rate cap, which can be increased to 23% once a small loan company license is obtained. See Mass. Gen. Laws ch. 140, § 96.
The fintech argued that the bank made the loans and is not the true lender.The state disagreed and listed a host of factors that indicated the fintech was the true lender (see below).While this is not the first time that the Massachusetts AG has implicitly rejected the bank partnership model, this appears to be a rare instance where the AG has actually expressly indicated in the settlement agreement its view that the fintech is the "true lender."
Notably, the Massachusetts AG also deemed all the loans to be "unfair" or "deceptive," which is a significant development as it presents an alternative theory for enforcement against bank partnership arrangements that we have not seen regulators pursue in other true lender cases. Importantly, under the Massachusetts AG's view, the allegations of unfairness or deception could be made against the non-bank regardless of interest rate based on, among other things, the 7 factors that the AOD lays out:
- has a 90% participation interest in the loans,
- takes most of the risk of non-performance of the loans,
- protects the bank against the risk of non-performance of the loans,
- does the marketing and provides customer service for the loans,
- provides the underwriting model for the loans,
- takes responsibility for monitoring risk, including fraud and credit risk for the provision of the loans, and
- owns the trademark for the fintech.
Putting It Into Practice: This action by the Massachusetts AG puts all bank partnerships operating in Massachusetts on notice, especially those charging interest rates that are above the state usury limitations noted above. But while the interest rate on fintech loans made through bank partnerships remain a critical component in enforcement actions, there now appear to be other bases upon which the Massachusetts AG may seek to shut down bank partnerships that operate a model with similar features.Lenders operating in Massachusetts should take appropriate actions to limit regulatory, legal, and reputational risks in the wake of this action.
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