Do I Need a License to Make a Loan?
Strategic alliances between banks and fintech companies to offer online loans have been the subject of legal negotiations and court cases over the past few years. Some of these bank alliances have been challenged in the courts by using the “true lender doctrine”. The doctrine states that at the time a loan is originated, the lender (bank) on the face of the loan, is not the true lender. Rather, the true lender is the fintech company that marketed the loan to the end-user. If a true lender challenge is successful, the fintech entity may face civil and criminal penalties for failing to be licensed as a lender under state law, and the loans may be usurious and void in some jurisdictions. There are different strategies that we use to protect the fintech entity. The strategic alliance to share licenses is very document and fact specific. A high interest rate and a vulnerable consumer population will often result in an adverse result in litigation for the fintech entity. Other fintech companies obtain state licenses that it needs to originate, broker, purchase, service or collect the loans. At this point, a license strategy is the best legal practice.
The Office of the Comptroller of the Currency (“OCC”) has published its proposal for how it will address a national Fintech Charter “Fintech Charter”. The Fintech Charter could be used by any entity providing certain financial services, including, money transmitters, check cashers and providers of technology (“Financial Service Centers” or “FSC”). Current OCC regulations allow the OCC to permit “a national bank or a Federal savings association” with a special purpose. The advantage of the national bank charter for a fintech company is that it allows the fintech company to conduct business on a nationwide basis under the National Bank Act (“NBA”). The NBA gives national banks preemption over certain state laws. The key to the Fintech Charter strategy, is the ability to charge the interest rate of the jurisdiction where the lender is domiciled. The FDIC has also discussed third-party lending arrangements.
Many states have responded by litigating against an OCC charter and have made efforts to make their own laws more stringent and/or commercially reasonable to become the “go to” state for licensing. What does this mean to a fintech company? When you engage counsel to set up your licensing plan, be aware that there is reciprocity for some activities. The key is understanding the products and services offered and to be sure you are adequately licensed in all jurisdictions that you do business to make the loans in your revenue model. Please note that I am writing an article about this subject matter in greater depth. There are breaking developments in this area of practice on a fairly frequent basis and my article will discuss the strategies and recent case law.
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