Partnerships between banks and fintech companies are a staple of the modern credit industry and have fueled significant growth in the online lending space. A lack of regulatory consistency and predictability, however, arguably hinders growth and innovation in such partnerships. Congress is now poised to lend stability to this market segment with two bills currently pending before it.
Applying varying standards, several courts have concluded that the nonbank partner is the true lender in a bank partnership, and that the nonbank partner must comply with state lender licensing requirements and rate limitations. Likewise, the Second Circuit decision in Madden v. Midland created uncertainty as to whether a nonbank assignee of a loan is permitted to enforce rates contracted for by the originating bank. Two bills currently progressing through Congress address these issues.
The Modernizing Credit Opportunities Act of 2017 (H.R. 4439) (True Lender Bill), introduced to the House of Representatives and referred to the House Financial Services Committee (HFSC) on November 16, 2017, creates statutory guidelines for when a financial institution may be considered the “true lender” to a transaction. No vote has yet been scheduled, but the bill was discussed during a HFSC subcommittee hearing entitled “Examining Opportunities and Challenges in the Financial Technology (Fintech) Marketplace” on January 30, 2018.
The Protecting Consumers’ Access to Credit Act of 2017 (H.R. 3299) (Madden Bill) would overrule the controversial Second Circuit decision in Madden v. Midland and codify the valid-when-made doctrine. The HFSC approved the bill, sending it to the floor of the House on January 30, 2018, and the House voted favorably on the bill on February 14, 2018.
The True Lender Bill’s stated intention is to “clarify that the role of the insured depository institution as lender and the location of an insured depository institution under applicable law are not affected by any contract between the institution and a third-party service provider.” The True Lender Bill adds provisions to the Bank Service Company Act and the Home Owners’ Loan Act that expressly provide that the determination of the location of an insured depository institution or savings association will not be affected by the geographic location of a service provider or the existence of an economic relationship with another person.
The True Lender Bill also states the intention to “clarify that Federal preemption of State usury laws applies to any loan to which an insured depository institution is the party to which the debt is initially owed according to its terms, and for other purposes.” To that effect, the True Lender Bill adds the following statement to section 85 of the National Bank Act, and analogous statements to the rate exportation provisions of the Home Owners’ Loan Act and the Federal Deposit Insurance Act:
A loan, discount, note, bill of exchange, or other debt is made by an association, and subject to [rate exportation] where the association is the party to which the debt is owed according to the terms of the loan, discount, note, bill of exchange, or other debt, regardless of any later assignment. The existence of a service or economic relationship between an association and another person shall not affect the application of this section to the rate of interest upon the loan or discount made, or the note, bill, or other evidence of debt or the identity of the association as the lender under the agreement.
The Madden Bill would amend section 85 of the National Bank Act as well as the Home Owners’ Loan Act, the Federal Credit Union Act, and the Federal Deposit Insurance Act to provide that a loan that is valid when made as to its maximum rate of interest in accordance with this section shall remain valid with respect to such rate regardless of whether the loan is subsequently sold, assigned, or otherwise transferred to a third party, and may be enforced by such third party notwithstanding any state law to the contrary.
The Madden Bill seeks to contextualize Madden as anomalous and justify the valid-when-made doctrine on public policy grounds. The Congressional Findings section of the bill notes the long history of the valid-when-made doctrine. The section also highlights that the doctrine “bring(s) certainty to the legal treatment of all valid loans that are transferred, greatly enhances liquidity in the credit markets by widening the potential pool of loan buyers and reduc(es) the cost of credit to borrowers at the time of origination . . .” The section also cites studies that claim that Madden v. Midland “has already disproportionately affected low- and moderate-income individuals in the United States with lower FICO scores.”
Passage of these bills would lend regulatory stability to an area of the law plagued recently with uncertainty. With certainty, we would expect to see activity in this space to increase, resulting in competition and, most likely, lower-cost loans to consumers.