DC Attorney General Takes Aim at “True Lender” Rule

Eastern Caribbean Digital Dollar, Jamie Dimon's Shareholder Letter (in pictures!), LendIt Fintech

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DC Attorney General Takes Aim at “True Lender” Rule with OppLoans Caught in the Middle

The Attorney General for Washington, DC, last week sued recently SPAC’d online lender OppFi (OppLoans) for a number of alleged violations; most notably, arguing OppLoans, which partners with FinWise, First Electronic Bank, and Capital Community Bank to originate loans, is the “true lender” and thus is operating without a license and in violation of DC’s 24% APR cap.

The suit also alleges a number of deceptive practices, including in marketing its loans as “fast and easy” and that its loans help consumers build their credit history.

Will the “True Lender” Please Stand Up

For those that don’t anxiously follow the myriad legal developments impacting fintech-bank partnerships, let me try to summarize.

While it is possible in most states for a non-bank lender to obtain a state lending license, most US fintechs that engage in lending do so through a bank partnership (or a “rent-a-bank” or “rent-a-charter” model, depending on one’s point of view.)

There are three main reasons to do this:

  1. Obtaining licenses for each state a fintech wants to lend in can be time consuming and expensive. Each state has its own license application process and state regulatory regime, which typically conducts periodic examinations to see if a lender is in compliance with its state lending law.

    While this sounds reasonable, the result is often that lenders end up with an almost continuous licensing and examination burden.

  2. Consistency of product offerings. Loan amounts and APRs permitted vary by state (as well as other product attributes, required disclosures, and operational details), which introduces additional complexity and expense into operating under a state license framework.

  3. Yes, interest rate preemption. Federal law allows national banks (including state-licensed national banks) to “export” their home state interest rate to borrowers in other states.

    By partnering with a national licensed bank, a fintech can leverage that preemption to write loans at the bank’s “home state” interest rate nationally (this is why so many partner banks are in Utah).

These are highly regulated partnerships where the bank’s license is on the line. Nearly every aspect of these programs can be subject to scrutiny and review, both by the bank itself and the bank’s regulators — product design, disclosures, underwriting, marketing materials, collection practices, compliance management system, and so on.

OppLoans is by no means the only fintech leveraging such partnerships, including to lend at rates above states’ usury caps.

FinWise, the bank named in the DC suit, also partners with RISE, Upstart, and LendingPoint, among others.

Recently IPO’d Affirm partners with Celtic Bank and Cross River to write loans at APRs as high as 30%. Until recently, fintech 1.0 pioneer LendingClub partnered with WebBank to write loans at rates as high as 35.89% APR. LendingClub now uses its own license stemming from its acquisition of Radius Bank; rates still are as high as 35.89%.

These practices haven’t gone without challenge in the past. In an attempt to create more legal certainty for fintech-bank partnerships, the OCC and FDIC, under Trump appointees, issued rules affirming the “valid when made” doctrine and the OCC issued a rule to determine when a national bank or federal savings association is the “true lender.”

This Congressional Research Service report provides a great summary of the various legal issues and rules.

The recently issued OCC rule defines the “true lender” as:

“The rule specifies that a bank makes a loan and is the true lender if, as of the date of origination, it (1) is named as the lender in the loan agreement or (2) funds the loan.”

All is not settled, however, as the DC and multiple state attorneys general have sued to block the “true lender” rule and Democrats in the House and Senate have begun the process to use the Congressional Review Act to invalidate the OCC’s rule (the outcome is uncertain, given Democrat’s razor thin control of the Senate).

Back to DC’s Case Against OppLoans

Did you follow all that? OK, good.

DC’s arguments that OppLoans is the “true lender” are quite straightforward. The suit states (emphasis added):

“OppFi is the true lender of OppLoans. OppFi has the predominant economic interest in OppLoans, bears the risk of poor loan performance, and funds the expenses for the provision of the loans.”

And further states (emphasis added):

“FinWise’s risk and reward in conjunction with these loans is minimal. Both FinWise’s fees and its expenses are capped under its agreements with OppFi. OppFi’s assumption of the risk and purchase of the receivables is guaranteed through their agreements with FinWise”

However, DC’s case acknowledges that FinWise funds the loans, which are then purchased as receivables by an OppLoans special purpose vehicle (SPV), a standard practice in bank-fintech partnerships, regardless of interest rate. 

Under the rules as they stand now, this would seem to clearly make FinWise the “true lender.”

DC’s case seems less about trying to prove that OppLoans is the “true lender” under the rules as they stand today, but rather an attempt to challenge the rules themselves — despite a direct challenge to said rule by the same DC Attorney General’s office.

Based on DC’s argument, other fintech lenders offering loans at APRs above 24% (including Affirm and Upstart, for example) could potentially be considered the “true lender” and in violation of DC’s 24% rate cap.

Other Allegations

There are a number of other allegations in the suit, namely that OppLoans was deceptive in how it marketed its loans to DC residents in the following ways (emphasis added):

“(i) misrepresenting the benefits of the loans, including by stating that OppLoans are more affordable than payday loans and by stating that its credit reporting will help consumers build a positive credit history; and

(ii) failing to clearly disclose material facts concerning OppLoans, including that it should only be used in emergencies and that refinancing will result in increased costs.”

While problematic if true, the inclusion of these alleged practices in DC’s case feels more designed to draw attention to and indirectly support its “true lender” claims.

Uncertainty Persists for Banks and Fintechs

This case, while ostensibly about the rates OppLoans charges in DC, potentially goes far beyond one company. Most non-bank fintechs that engage in lending do so via a bank partnership model and, yes, export rates from favorable states like Utah.

The real problem here is the continuing uncertainty of the legal viability of this model — making it difficult for fintechs and banks operating in the space. Instead of having a clear set of guidelines, participants in these partnerships must do their best to weigh costs, benefits, and risks based on uncertain outcomes of Congressional, regulatory, and state actions.

OppFi’s Response

Asked about the case, Jared Kaplan, CEO of OppFi, provided the following statement:

“OppFi provides outsourced services to state-regulated, FDIC-insured banks to help banks provide simple, affordable and safe loans and a top-rated experience to millions of everyday consumers who lack access to traditional credit products. 

OppFi vehemently disagrees with the District of Columbia’s claims and intends to defend itself vigorously against this lawsuit, which OppFi believes lacks any merit, ignores well-established federal lending laws and for which OppFi believes it has good defenses.

We are surprised that the Attorney General of DC is looking to further limit a consumer's access to credit during this pandemic.”

Eastern Caribbean Central Bank First Currency Union to Launch Digital Currency

When thinking of fintech hotspots, the Eastern Caribbean isn’t the first place that comes to mind. But with persistent low bank account penetration, digital platforms offer the opportunity to expand inclusion for consumers through expanded access and lower costs.

I actually lived in the region, in St. Lucia, serving as a Peace Corps Volunteer from 2008-2010. And while I did have a bank account, nearly every transaction was in person and in cash — whether paying my rent, water bill, mobile bill, etc. In the village of 2,000 in which I lived, I can’t think of a single merchant that accepted electronic or card payments, nor was there an ATM nor bank branch.

The announcement is notable as it is the first multi-nation currency union to launch a blockchain-powered central bank digital currency (CBDC) or “digital dollar.”

The Eastern Caribbean dollar is used in 8 countries; the one-year pilot of “DCash” kicked off Wednesday, with the digital currency going live in St. Lucia, Grenada, Antigua and Barbuda, and St. Kitts and Nevis.

The project aims to achieve a 50% reduction in physical cash usage by 2025.

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Jamie Dimon’s JPMorgan Chase Shareholder Letter: In Pictures

Jamie Dimon seems to be channeling his inner Warren Buffet in his shareholder letter this year. The longtime JPMorgan Chase CEO attempts to meet the moment, opining on everything from the role of the corporate citizen to the fallout from the COVID pandemic to American exceptionalism and competitiveness in the face of a rising China.

The entire letter is certainly worth a read, but weighing in at ~66 pages, you will need to carve out some extra time (you read that right, 66 pages just for the shareholder letter itself, the entire annual report comes in at 360 pages). For those wanting a “reader’s digest” version, here are some highlights from the shareholder letter — in pictures:

JPMC’s overall stock performance (under Dimon, naturally) has trounced that of the S&P 500 and S&P Financials index:

Dimon, who in January said incumbent banks should be “scared shitless” by the threats presented by fintech, continues that theme in his shareholder letter.

He has become increasingly vocal about the threat JPMC and the legacy banking system face from fintech and Big Tech. The word choices here are intentional and continue a narrative of fintechs/big tech as less regulated and potentially dangerous (emphasis added):

“Banks already compete against a large and powerful shadow banking system. And they are facing extensive competition from Silicon Valley, both in the form of fintechs and Big Tech companies (Amazon, Apple, Facebook, Google and now Walmart), that is here to stay. As the importance of cloud, AI and digital platforms grows, this competition will become even more formidable. As a result, banks are playing an increasingly smaller role in the financial system.”

He supports this claim with a comparison of the size of banks vs “shadow banks” and Big Tech companies — though I’d note that little of the market cap of Google, Apple, Facebook, and Apple is presently derived from financial services-related offerings.

A favorite and often disingenuous critique for banks of fintechs is that they are “unregulated” (I’ve worked at a few fintechs and beg to differ.)

While regulatory requirements are different, much of this derives from the differences in the activities fintechs are engaged in (eg, not holding insured customer deposits) — these differences also come with drawbacks (more complexity in lending and higher cost of capital, for instance).

If this supposed regulatory arbitrage were so beneficial, why is there such a trend of fintechs seeking to become highly regulated banks? SoFI, LendingClub, Varo, Revolut, Square, among others, are all in some stage of procuring a banking license.

In his discussion of macro trends, one that stood out to me was the sharp decline in loans as a percent of deposits since the onset of the crisis.

One must remember that a bank’s deposits are a liability on its balance sheet; it’s only to the extent those deposits can be deployed as interest income producing loans that they’re attractive.

With the jump in deposits tied to reduced consumer spending and stimulus payments, banks like JPMC have seen deposit volumes swell while credit risk underwriting has become more complicated. The resulting sharp dip in the loan-to-deposit ratio has put a crimp in some banks’ earnings.

Again looking at the macro picture, Dimon looks at the size of quantitative easing in the US vs. other G4 nations (less) and fiscal support in the form of deficit spending (more):

Finally, an illustration of the regulatory complexity for multi-line consumer-and-investment banks like JPMC, which interacts with ~7 federal regulators and numerous state regulatory authorities across its various consumer, business, and institutional products and services:

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