Fintech
Massachusetts AG’s True Lender Settlement Forces Fintech Out of State
Massachusetts AG Forces Fintech Out of State as Part of ‘Real Lender’ Deal.
On May 21, the Massachusetts attorney general inserted in an Assurance of Discontinuance (“AOD”) with a California-based fintech claiming to be 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 cancellation of trade lines 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 small-dollar, short-term loans to Massachusetts consumers with interest rates that exceeded the state’s maximum limit. The Massachusetts AG said the fintech made loans with an annual APR that typically exceeded 100%. Under Massachusetts law, loans over $6,000 (commercial or consumer) are generally subject to a 20% interest rate cap with limited exceptions and require state AG approval to charge more than 20%. See Mass. Gen. Read Ann. Postal Code. 271, § 49(a). Additionally, consumer loans under $6,000 are subject to a maximum rate of 12%, which can be increased to 23% once you obtain a small lending company license. See Mass. Gen. Read chap. 140, § 96.
The fintech argued that the bank made the loans and is not the real lender. The state disagreed and listed a number of factors that indicated fintech was the real financier (see below). While this is not the first time the Massachusetts AG has implicitly rejected the banking partnership model, this appears to be a rare case where the AG actually specifically stated in the settlement agreement his view that fintech is the “true lender”.
Notably, the Massachusetts AG also found all of the loans to be “unfair,” which is a significant development as it presents an alternative theory for enforcement of banking partnership agreements that we have not seen regulators pursue in other cases of real lenders. Importantly, in the Massachusetts AG’s view, claims of unfairness could be made regardless of the interest rate based on the 7 factors set out by the AOD:
- has a 90% stake in the loans,
- assumes most of the risk of loan default,
- protects the bank from the risk of credit default,
- handles marketing and provides customer service for loans,
- provides the loan underwriting model,
- takes responsibility for monitoring risk, including fraud and credit risk for the provision of loans, and
- owns the fintech brand.
Putting it into practice: This action by the Massachusetts AG puts all banking partnerships operating in Massachusetts on notice, especially those charging interest rates in excess of the state usury limits noted above. But while the interest rate on fintech loans made through banking partnerships remains a key component in enforcement actions, there now appear to be other bases on which the Massachusetts AG could seek to shut down banking partnerships that operate a model with similar characteristics. Lenders operating in Massachusetts should take appropriate actions to limit regulatory, legal and reputational risks as a result of this action.