The Department Guidance confirmed that imposing licensing on certain agents of exempt entities was designed to “codif[y] existing common law ‘true lender’ principles… to require licensure of partners to banks when the following conditions are met”:
- Such person holds, acquires, or maintains, directly or indirectly, the predominant economic interest in a small loan;
- such person markets, brokers, arranges, or facilitates the loan and holds the right, requirement, or right of first refusal to purchase the small loans, receivables, or interests in the small loans; or
- the totality of the circumstances indicates that such person is the lender and the transaction is structured to evade the licensing requirements.
Inclusion of the predominant economic interest standard, consistent with similar recent legislation in other states (including Illinois, Maine, and New Mexico), would potentially require licensing of many fintech providers, as the nonbank partner in a bank partnership will often retain a greater financial interest in the transaction than the bank partner. The Department Guidance also confirms that the Department will consider the true lender factors set forth above, in addition to case law precedent construing such factors, to determine whether loans made on and after October 1, 2023, must comply with the provisions of the Act as amended, including its APR limitations. Additionally, those who service loans made by a bank pursuant to a “true lender” arrangement on and after October 1, 2023, will need to obtain licensure.
The amendments also changed the definition of a covered “small loan” to “any loan of money or extension of credit, or the purchase of, or an advance of money on, a borrower’s future potential source of money, including, but not limited to, future pay, salary, pension income or a tax refund” that was within the amount (now $50,000) and above the rate (12% APR) thresholds under the Act. The Act previously defined a covered “small loan” as “any loan of money or extension of credit, or the purchase of, or an advance of money on, a borrower’s future income” that met the amount and rate thresholds under the Act. The Act also previously defined “future income” to mean “any future potential source of money, [which] expressly includes, but is not limited to, a future pay or salary, pension or tax refund.”
The Department Guidance provided examples of nontraditional loan products that are generally covered by the Act as amended, when within the Act’s amount and rate thresholds. These include but are not limited to lawsuit settlement advances, inheritance advances, earned wage access advances, and income share agreements. While the Guidance conceded that applicability of the Act must be evaluated on a case-by-case basis, the Guidance also noted that “an advance of money on an individual’s future potential source of money of $50,000 or less with an APR greater than 12% will likely be covered by the Small Loan and Related Activities Act.” The Guidance further explained that an earned wage product, or an advance of money on future wages or salary that have been earned but not yet paid, will generally be covered by the Act as amended when the amount is $50,000 or less and the APR exceeds 12% when considering any finance charges. Notably, the Guidance states that “[i]n substance, the revised definition remains the same as the previous iteration concerning the types of transactions considered [covered small loans]” and simply “streamline[d] the small loan definition by removing this intermediary definition [of future income].” Accordingly, although the new definition of covered “small loans,” which is not limited by the term “future income,” may appear broader than the prior iteration, the Department’s position appears to be that the nonloan products identified in the Guidance as subject to the Act were also potentially subject to the Act before the amendments.
The Guidance also expresses a No-Action Position stating that the Department will not take enforcement action alleging unlicensed activity against a person that newly requires licensure for small loan activities under the Act as amended if the person filed an application for licensure by October 1, 2023.