Fintech Fears in Small-Dollar Guidance Much Ado About Nothing

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By Lydia Beyoud

Federal regulators have sought to clarify a small provision on “rent-a-bank” shams in their new guidance encouraging banks to get back into small-dollar lending.

Included in the Office of the Comptroller of the Currency’s May 23 guidance on small-dollar installment loans was a provision stating that loan pricing should comply with applicable state laws. A second line said the OCC would view “unfavorably” any bank partnership established “with the sole goal” of evading lower interest rate caps in a bank’s home state.

Those two sentences raised eyebrows among financial services attorneys concerned the agency might be taking a negative view on bank partnerships with fintech lenders. Multiple attorneys told Bloomberg Law they fielded client calls about the OCC provision shortly after it came out.

OCC officials have said the language was meant to affirm that the agency continues to oppose “rent-a-bank” arrangements that may have involved nonbank lenders attempting to skirt state laws by partnering with a bank solely for the purpose of taking advantage of the bank home states’s more favorably usury rate law.

Such partnerships between banks and payday lenders led regulators to crack down on the practice in the early 2000s. Bona fide partnerships between banks and fintech lenders or other nonbank parties remain acceptable, a senior OCC official told reporters on background during a May 24 press call.

Multiple attorneys have said that’s consistent with their reading of the bulletin. The OCC was likely making an observation and statements of fact “rather than trying to write into the policy any discouragement of any bank-fintech partnership,” Michael Nonaka, a partner at Covington & Burling LLP, told Bloomberg Law.

Sticks Out

But the provision “does stick out” in guidance otherwise intended to encourage banks back into an area of lending where consumer needs aren’t being met, Nonaka added.

Reading the line to indicate a major policy shift on bank-fintech partnerships would be inconsistent “not only with the National Bank Act, it would be inconsistent with case law precedent which has upheld these types of partnerships many, many times,” Catherine Brennan, a partner at Hudson Cook, LLP’s Hanover, Md. office, told Bloomberg Law.

“I would suggest the OCC might be unlikely to signal a major policy shift in one sentence buried at the end of a bulletin,” Brennan added.

Instead, the wording looks intended to underscore that the OCC wants to prevent bank partnerships with payday lenders or sham partnerships in which the bank isn’t engaged in any part of issuing a loan, Sanford Brown, a partner at Alston & Bird LLP in Dallas and former OCC attorney, told Bloomberg Law.

“I think it’s a signal that national banks need to continue to be wary of those relationships,” Brown said.

Clarification Desired

Some attorneys said the OCC should further clarify its views on partnerships. Jeremy Rosenblum, a partner at Ballard Spahr LLP in Philadelphia, described the lines as “troubling language” raising concerns about longstanding federal preemption of state usury caps, according to a May 24 blog.

“The OCC statement obviously could benefit from additional clarification,” Robert Loeb, a partner at Orrick, Herrington & Sutcliffe LLP in Washington, told Bloomberg Law.

Loeb said that his understanding of the OCC’s intent was to warn banks away from sham partnerships or rent-a-charter arrangements in the small-dollar installment loan context. “Such sham arrangement are very different than the mainstream fintech bank partnerships that are prevalent today,” Loeb said.

Formal clarification from the OCC would be helpful, he said. “And it would be even better, if they were concerned about sham arrangements, that they use their own regulatory powers to address such ‘true lender’ issues,” Loeb added.

--With assistance from Evan Weinberger

To contact the reporter on this story: Lydia Beyoud in Washington at lbeyoud@bloomberglaw.com

To contact the editor responsible for this story: Michael Ferullo at mferullo@bloomberglaw.com

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