Insight

Fintech Law: A Dynamic Space

If a true lender challenge is successful, the Fintech company may face significant civil and criminal penalties for failing to be licensed as a lender, and the loans may be usurious and void in some jurisdictions.

Fintech Law
Catherine M. Brennan

Catherine M. Brennan

November 10, 2017 12:06 PM

For many years, banks have partnered with Fintech companies to offer online loans to consumers. Some of these bank partnerships have been challenged by consumer advocates through so-called “true lender” litigation in state and federal courts, by state regulators, and through criminal prosecutions.

The crux of the true lender challenge is that, at the time a loan is originated, the lender on the face of the loan paper, the bank, is not the true lender. Rather, the true lender is the Fintech company that marketed and sold the financial product or service to the consumer.

If a true lender challenge is successful, the Fintech company may face significant civil and criminal penalties for failing to be licensed as a lender, and the loans may be usurious and void in some jurisdictions.

In the face of this threat to online lending, Fintech companies have taken different approaches. Some carefully construct their partnerships to ensure that the bank only originates loans that would not subject the Fintech company to a licensing requirement. Other Fintech companies obtain state law licenses that it might need to originate, broker, purchase, service, or collect the consumer loans. Still others pursue legislative change to ensure that Fintech companies are either exempt from existing requirements or fall into newly created categories of licensee.

At the federal level last December, the Office of the Comptroller of the Currency (OCC) published its proposal for how it will address the growing calls for a national Fintech charter. The paper, titled “Exploring Special Purpose National Bank Charters for Fintech Companies,” had been eagerly awaited as a possible way to enjoy the same preemption authority of national banks over various state licensing, usury, and disclosure requirements. The OCC indicated that it believes its proposal would accommodate fair access to banking products and fair treatment of customers as well as Fintech companies while preserving the safety and soundness of national banks. The Fintech Charter could be used by any entity providing certain financial services, particularly money transmitters, check cashers, and providers of technology (Financial Service Centers or FSC) to aid in the underwriting and origination of such obligations.

Rather than seek new legislation or rulemaking to advance the goal of the Fintech Charter, the OCC proposed to use its existing authority to charter “special purpose national banks.” Current OCC regulations allow the OCC to permit “a national bank or a Federal savings association with a special purpose.” A “special purpose bank” is one that limits its activities to fiduciary activities or to any other activities within the business of banking. A special purpose bank that conducts activities other than fiduciary activities must conduct at least one of the following three core banking functions: receiving deposits, paying checks, or lending money.

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 subject to the National Bank Act (NBA). The NBA affords national banks broad preemption authority over certain state laws, a key competitive advantage. If the OCC proceeds, a Fintech Charter would look to the relevant statutes, regulations, and federal judicial precedent to determine if or how state law applies. A Fintech Charter could enable a FSC to avoid many of the state laws under which it currently operates. Importantly, the Fintech Charter would not enable FSCs to preempt zoning laws, which are often used to keep FSCs out of certain neighborhoods.

The state response to the Fintech Charter proposal has been decidedly negative. The Conference of State Bank Supervisors and New York State’s Superintendent of Financial Services Maria Vullo both sued the OCC, claiming that the OCC is exceeding its regulatory authority in putting forth the Fintech Charter proposal.

In January 2017, the Colorado Uniform Consumer Credit Code (U3C) administrator filed lawsuits against Marlette Funding and Avant to shut down the bank partnership model they employed within the state, taking the position that consumer loans offered by those online lenders in Colorado cannot exceed the rates permitted for a state-supervised lender; i.e., 21 percent APR. Marlette and Avant partnered with New Jersey-based Cross River Bank and Utah-based WebBank, respectively, to offer consumer loans through an online lending platform. The U3C administrator alleged that once the loans were purchased by Marlette Funding and Avant, they became subject to Colorado rate limitations and were usurious. The U3C administrator also alleged that state banks cannot assign their interest rate preemption authority to non-bank partners when they purchase the loans. The administrator identified the following factors to argue that the non-bank partners had the predominant economic interest in the transactions: the non-bank partners paid the bank’s costs associated with the initiation of the lending program, as well as the marketing costs; the non-bank partners decided which applicants would receive loans, applying lending criteria established by Marlette and Avant and their respective bank partners; and the banks bore little or no risk of financial loss in the event the borrower defaulted on the loan. Cross River and WebBank has since also sued the U3C administrator. Observers of the Fintech space are keenly watching Colorado as a bellwether for how the issues raised by bank partnerships might be resolved.

Whether the Fintech Charter becomes the “go-to” method of operating a FSC remains to be seen. Nevertheless, the OCC’s Fintech proposal may potentially provide a path forward for operators seeking certainty with regard to the application—or non-application—of state laws to their business.

Related Articles

Blurred Lines


by Andrew Kirby

Where does responsible lending end and unconscionability begin? Australian courts have come to vastly different conclusions. An overview of current case law.

Australian Courts Assess Loan Repayment

An Allied Front Against Ransomware


by Abigail L. Peluso, Georgia N. Alexakis, John K. Theis and Patricia Brown Holmes

With the world ever more digitally entwined—particularly as the pandemic has increasingly driven commerce and ordinary business activity more fully online—the threat of ransomware is here to stay. Here’s a primer on the federal government’s response and how the private sector can help.

Federal Government’s Response to Ransomware

Hey, Big Lender


by Catherine M. Brennan and Latif Zaman

A contentious proposed federal rule would establish “true lender” guidelines for banks and third parties. Does Colorado show the way forward?

Financial Institution

A Legal Guide for Businesses During COVID-19


by Roy D. Oppenheim

Oppenheim Law creates a useful guide for problems small to medium-sized businesses may face during this time of uncertainty.

COVID-19 Legal Information for Businesses

ITN Weekly Roundup: Petition Denied Against Emmy-Winning Show


by Best Lawyers

A look at the headlines featuring Best Lawyers listed lawyers for the week of July 22.

Olivia de Havilland's Petition Against FX Den

In the News Weekly Roundup: Lawyers and the Gig Economy


by Best Lawyers

Locke Lord is expanding its London office; Bodman attorney elected to The Federalist Society; Comings and goings at Schiff Hardin.

In the News: Latest Statistics on the Gig Eco

In the News Weekly Roundup: Millennials in the Legal Profession


by Best Lawyers

A roundup of relevant news, partnerships, and publications from our listed law firms.

In the News Roundup: Millennial Lawyers

Trending Articles

Presenting The Best Lawyers in Australia™ 2025


by Best Lawyers

Best Lawyers is proud to present The Best Lawyers in Australia for 2025, marking the 17th consecutive year of Best Lawyers awards in Australia.

Australia flag over outline of country

The 2024 Best Lawyers in Spain™


by Best Lawyers

Best Lawyers is honored to announce the 16th edition of The Best Lawyers in Spain™ and the third edition of Best Lawyers: Ones to Watch in Spain™ for 2024.

Tall buildings and rushing traffic against clouds and sun in sky

Best Lawyers Expands Chilean 2024 Awards


by Best Lawyers

Best Lawyers is pleased to announce the 14th edition of The Best Lawyers in Chile™ and the inaugural edition of Best Lawyers: Ones to Watch in Chile™, honoring the top lawyers and firms conferred on by their Chilean peers.

Landscape of city in Chile

Best Lawyers Expands 2024 Brazilian Awards


by Best Lawyers

Best Lawyers is honored to announce the 14th edition of The Best Lawyers in Brazil™ and the first edition of Best Lawyers: Ones to Watch in Brazil™.

Image of Brazil city and water from sky

Announcing The Best Lawyers in South Africa™ 2024


by Best Lawyers

Best Lawyers is excited to announce the landmark 15th edition of The Best Lawyers in South Africa™ for 2024, including the exclusive "Law Firm of the Year" awards.

Sky view of South Africa town and waterways

The Best Lawyers in Mexico Celebrates a Milestone Year


by Best Lawyers

Best Lawyers is excited to announce the 15th edition of The Best Lawyers in Mexico™ and the second edition of Best Lawyers: Ones to Watch in Mexico™ for 2024.

Sky view of Mexico city scape

How Palworld Is Testing the Limits of Nintendo’s Legal Power


by Gregory Sirico

Many are calling the new game Palworld “Pokémon GO with guns,” noting the games striking similarities. Experts speculate how Nintendo could take legal action.

Animated figures with guns stand on top of creatures

The Best Lawyers in Portugal™ 2024


by Best Lawyers

The 2024 awards for Portugal include the 14th edition of The Best Lawyers in Portugal™ and 2nd edition of Best Lawyers: Ones to Watch in Portugal™.

City and beach with green water and blue sky

The Best Lawyers in Peru™ 2024


by Best Lawyers

Best Lawyers is excited to announce the landmark 10th edition of The Best Lawyers in Peru, the prestigious award recognizing the country's lop legal talent.

Landscape of Peru city with cliffside and ocean

How To Find A Pro Bono Lawyer


by Best Lawyers

Best Lawyers dives into the vital role pro bono lawyers play in ensuring access to justice for all and the transformative impact they have on communities.

Hands joined around a table with phone, paper, pen and glasses

Presenting the 2024 Best Lawyers Family Law Legal Guide


by Best Lawyers

The 2024 Best Lawyers Family Law Legal Guide is now live and includes recognitions for all Best Lawyers family law awards. Read below and explore the legal guide.

Man entering home and hugging two children in doorway

Announcing The Best Lawyers in New Zealand™ 2025 Awards


by Best Lawyers

Best Lawyers is announcing the 16th edition of The Best Lawyers in New Zealand for 2025, including individual Best Lawyers and "Lawyer of the Year" awards.

New Zealand flag over image of country outline

The Best Lawyers in Colombia™ 2024


by Best Lawyers

Best Lawyers is honored to announce the 14th edition of The Best Lawyers in Colombia™ for 2024, which honors Colombia's most esteemed lawyers and law firms.

Cityscape of Colombia with blue cloudy sky above

Announcing The Best Lawyers in Japan™ 2025


by Best Lawyers

For a milestone 15th edition, Best Lawyers is proud to announce The Best Lawyers in Japan.

Japan flag over outline of country

Announcing the 2024 Best Lawyers in Puerto Rico™


by Best Lawyers

Best Lawyers is proud to announce the 11th edition of The Best Lawyers in Puerto Rico™, honoring the top lawyers and firms across the country for 2024.

View of Puerto Rico city from the ocean

The Best Lawyers in Singapore™ 2025 Edition


by Best Lawyers

For 2025, Best Lawyers presents the most esteemed awards for lawyers and law firms in Singapore.

Singapore flag over outline of country