Fintech innovation operates in an ever-evolving financial regulatory landscape. Regulators are stepping up scrutiny of non-banks, particularly marketplace lenders, even as the new Consumer Financial Protection Bureau (CFPB) establishes its mandate and rules. This shifting landscape carries regulatory implications for traditional banks weighing fintech partnerships. In this blog series, Mirador will recap the latest regulatory developments with potential impact for bank-fintech partnerships.
Further Uncertainty in Rent-a-Charter Lending
Our last regulatory update reported on the evolving legal status of so-called “rent-a-charter” lending models. A practice originating with credit card issuers and now prevalent with online lenders, “rent-a-charter” involves a nationally chartered bank initiating a loan in a jurisdiction with favorable usury laws (a state with high-caps or no-caps on interest rates). The bank then takes back the loan to service.
What seems like a complicated setup has a very simple goal: preempting states usury laws allowed under the National Bank Act to essentially “export” the higher interest to other states where the caps on interest rates are much lower. Lower-interest states exploited the loophole to attract call-center jobs from credit card issuers, and non-bank online lenders have benefited from the practice as well.
A recent case, Consumer Financial Protection Bureau (CFPB) v. CashCall, Inc., puts the “rent-a-charter” model into greater uncertainty than ever. The court found the “true lender” was the entity that holds the burden and has the benefits of collecting on that loan. For that reason, the CFPB successfully argued that CashCall engaged in unfair and deceptive acts or practices, violating federal law by collecting on a loan with an interest rate above the caps outlined in the laws of the state of the borrower.
This legal uncertainty will likely draw more attention to the rent-a-charter practice when used by online lenders. That being said, there is no question that when the bank issues and services the loan, the bank is the “true lender”. Mirador provides traditional, regulated financial institutions the ability to offer online small business lending services very similar to the easy access and rapid-answer appeal of alternative lenders. With the help of Mirador’s technology, banks frequently looking to rent out their charter for extra earnings can now offer these products to small businesses directly.
Community Banks: The Struggle is Real
On the surface the community banking sector appears healthy, even prosperous with a bank on every corner in most neighborhoods. However, increasingly those banks are mostly branches of much larger banks. In a recent opinion piece published in Politico, Rob Nichols, president and CEO of the American Bankers Association, describes a bleak picture of the community banking sector where consolidations have whittled away at the number of true community banks with no new community banks opening their doors.
Mr. Nichols assigns guilt to overregulation. In his opinion, smaller, community banks lack the expertise and resources to abide by federal regulations. These regulations, directed at bigger institutions, are crippling community banks and they face even more regulation should they grow in size and revenue. According to Nichols, consumers face the most harm from this consolidation trend. Community banks have traditionally been tightly woven to the fabric of their neighborhoods. The bankers and the customers are also neighbors, friends, and trusted colleagues. Community bank sponsor Little League teams, high school score boards and participated in local service projects.
“While [community banks] make nearly a quarter of all bank loans, they account for nearly half of bank small business and commercial real estate loans—and more than two-thirds of agricultural loans from banks,” writes Nichols in Politico. It doesn’t seem like a stretch to assume that the reason small businesses turn to community banks for lending is to borrow from a trusted source, a well-known institution that can provide ongoing advice and assistance when needed.
Community banks need a way to satisfy complex regulations without burning staff time and resources. Mirador offers a viable solution to this dilemma. By providing customizable tools for both borrowers and bankers to automate small business lending, community banks can improve the lending experience in a way that incorporates well-established regulatory safeguards and packages the information necessary to satisfy regulators.