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Hudson Cook spoke on merchant cash advance and small business lending developments.

Our presentation is here: lend360-hudson-cook-breakfast-presentation

 

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California District Court Issues Favorable Bank Partnership Decision

The U.S. District Court for the Central District of California issued an opinion supporting the bank partnership model, less than a month after a judge in the same district issued a decision that questioned the concepts on which the bank model is based.

In Beechum v. Navient Solutions Inc., the court granted a motion to dismiss a lawsuit brought by Jamie Beechum and others against Navient Solutions, the Student Loan Marketing Association and the SLM Corporation. The consumer-plaintiffs obtained private student loans in 2003 and 2004 from Stillwater National Bank and Trust Company, a national bank. The bank subsequently sold the loans to a securitization trust established to hold the loans, while Navient Solutions, the Student Loan Marketing Association and the SLM Corporation serviced the loans. Beechum and others sued, claiming that the nonbank entities were the true lenders on the loan. Continue reading “California District Court Issues Favorable Bank Partnership Decision”

Connecticut Small Loan Statute Changes Impact Bank Partnerships

Effective July 1, 2016, amendments to Connecticut’s small loan statutes impact entities that partner with banks to originate loans in the Nutmeg state. Under the amendments, nonbank lead generators, most servicers and most nonbank purchasers of certain “small loans” of $15,000 or less with an annual percentage rate that exceeds 12% are subject to licensure. The amendments define “generating leads” as(A) engaging in the business of selling leads for small loans; (B) generating or augmenting leads for small loans for other persons for or with the expectation of compensation or gain; or (C) referring consumers to other persons for a small loan for or with the expectation of compensation or gain for such referral.

FDIC Seeks Feedback on Third-Party Guidance

The Federal Deposit Insurance Corporation seeks feedback on the guidance it gives to its member banks that work with outside partners to originate loans, including vendors involved in bank partnerships. On July 29, the Federal Deposit Insurance Corporation requested comments on its proposed third-party lending guidance that outlines the risks that may be associated with third-party lending as well as the expectations for a risk-management program, supervisory considerations, and examination procedures related to third-party lending. Under the proposed guidance, third-party lending is an arrangement in which a bank relies on an outside source to perform a significant aspect of the lending process, such as originating loans for third parties, originating loans through third parties or jointly with third parties, and originating loans using platforms developed by third parties. The draft guidance supplements and expands on previously issued guidance and would apply to all FDIC-supervised institutions that engage in third-party lending programs. Comments on the guidance will be accepted until September 12, 2016.

Consumer Bank Partnerships In Jeopardy in Maryland

In late June, the Maryland Court of Appeals, Maryland’s highest court, affirmed in  Maryland Commissioner of Financial Regulation v. CashCall, Inc. that a non-bank partner cannot promote loans originated by a bank unless the nonbank partner is licensed as a credit services business and the loans comply with substantive Maryland law. Court of Appeals, No. 80, September Term 2015 (June 23, 2016), affirming Court of Special Appeals, No. 1477, September Term 2013 (October 27, 2015).  The decision hampers the ability of nonbank partners to market loans on behalf of a bank in Maryland unless they acquire a credit services business license. Continue reading “Consumer Bank Partnerships In Jeopardy in Maryland”

New York Bill Calls For Study of Online Small Business Loans

In what likely signals the first step in an ongoing campaign to regulate small business lending in the Empire State, New York Assembly Bill 10440, introduced May 27, 2016, would requires the Superintendent of Department of Financial Services to study and issue a report on online small business lending products and platforms that originate from lenders licensed by New York state or advertised to small businesses within the state. The study mandate would capture all online lenders advertising to New York merchants, whether they originate the loans through a bank partnership or directly as an unlicensed lender relying on the law of another state.

The study must address – at a minimum – the following:

(a) whether online lenders are offering credit at reasonable and transparent  interest rates and charging reasonable and transparent fees and  payment terms;

(b) whether lenders  offer  inclusive  and  non-discriminatory  credit access and observe fair lending practices;

(c) what type of underwriting is conducted before issuing credit;

(d)  whether lenders report loan repayment information to major credit bureaus and consult the borrower’s credit data when underwriting a loan;

(e) whether lenders are offering small businesses the opportunity  for further financial and business planning and the opportunity to establish a more traditional, long-term banking access to credit; and

(f)  a  review  of  any other products or practices the superintendent deems relevant to small business access to capital.

The study must be completed by January 1, 2018.

The New York legislature adjourns June 16, so it seems unlikely that the bill would be approved this session.

New York-2015-A10440-Introduced

Court Upholds Class Action Waiver in MCA Lawsuit

The U.S. District Court for the Eastern District of Pennsylvania recently denied a motion to certify a class of Korean and other Asian businesses that alleged that the merchant cash advance transactions into which they entered with GOT Capital LLC violated the Racketeer Influenced and Corrupt Organizations Act. The plaintiff merchants, who originally filed a complaint asserting violations of virtually every consumer credit law, argued that GOT Capital specifically targeted them because of their status as Korean-American and Asian-American businesses in Pennsylvania, New York, New Jersey, Texas, California and the United Kingdom. GOT Capital opposed the motion for class certification by pointing out that the merchant cash advance agreement contained the following class action waiver clause: Continue reading “Court Upholds Class Action Waiver in MCA Lawsuit”

Solicitor General Issues Brief in Madden

In response to the U.S. Supreme Court’s request, the Solicitor General submitted its brief in connection with the petition for certiorari in Madden v. Midland Funding, giving insight into the government’s view of national bank preemption. The brief addresses the question of whether the National Bank Act, which preempts state usury laws regulating the interest a national bank may charge on a loan, continues to have preemptive effect after the national bank has sold or otherwise assigned the loan to another, nonbank entity. The Solicitor General rejected the analysis of the U.S. Court of Appeals for the Second Circuit in Madden, characterizing the appellate court’s conclusion that  applying state usury laws to assignees of national banks does not significantly interfere with the bank’s power to sell its loans as an “unduly crabbed conception of (National Bank Act) preemption.” Although the Solicitor General noted that the Madden decision was incorrect, and that state usury laws should not apply to loans made by national banks, it urged the Supreme Court to reject the petition for certiorari because Madden would be a “poor vehicle for resolution” of the question presented.

Solicitor General Brief in Madden

 

CFPB Issues Title Lending Report

The Consumer Financial Protection Bureau today signaled that it is targeting the title loan business. The CFPB released a report that demonstrates that 20% of borrowers who obtain a single-payment auto title loan have their car or truck seized by their lender when they default. According to the CFPB’s research, lenders renew more than four-in-five of these loans on the due date because borrowers could not otherwise repay the loan. The report examined nearly 3.5 million anonymized, single-payment auto title loan records from nonbank lenders from 2010 through 2013. The CFPB concluded from its study that these auto title loans have issues similar to payday loans, including high rates of consumer reborrowing, which can trigger high costs in fees and interest.

Treasury Issues Online Marketplace Lending White Paper

The U.S. Department of Treasury issued its much-anticipated marketplace lending white paper. The white paper, Opportunities and Challenges in Online Marketplace Lending, makes several recommendations to encourage safe growth and access to credit through the continued developments of online marketplace lending, including:

1. Support for more robust small business borrower protections and effective oversight;

2.  Ensuring a sound borrower experience and back-end operations;

3.  Promotion of a transparent marketplace for borrowers and investors;

4.  Expanding access to credit through partnerships that ensure safe and affordable credit;

5. Supporting the expansion of safe and affordable credit through access to government-held data; and

6.  Facilitate interagency coordination through the creation of a standing working group for online marketplace lending.

Treasury consulted with staff from other agencies including the Consumer Financial Protection Bureau (CFPB), Federal Deposit Insurance Corporation (FDIC), Board of Governors of the Federal Reserve System (FRB), Federal Trade Commission (FTC), Office of Comptroller of the Currency (OCC), Small Business Administration (SBA), and Securities and Exchange Commission (SEC).

The white paper is available online here.