Fintechs play an important role in consumer financial services, providing innovative products and consumer interfaces to increase access to financial products, respond to consumer preferences, and improve transparency.

To facilitate go-to market strategies, many fintechs partner with banks in marketplace lending arrangements.

Because regulators and consumer advocacy groups remain skeptical of these arrangements, fintechs should carefully consider the contours of the arrangement when structuring the agreements.

They should also prioritize their own compliance programs to minimize opportunity for regulator oversight.

Regulatory Suspicion Over Lending Partnerships

Federal and state regulators and consumer advocacy groups have long been suspicious of lending partnership models.

They are particularly concerned about whether partnership models are being used to evade state interest rate limits, remembering past arrangements between payday lenders and banks—under which banks were added to the lending documents without real involvement in the lending transaction. The naysayers came to view these arrangements as rent-a-bank schemes.

Historically, two categories of challenges have been raised to challenge these relationships. One, as argued in Madden v. Midland Funding LLC, opponents argue that the loan is essentially invalid after being sold, transferred, or assigned to a third-party nonbank, even if the loan was valid when made.

Two, opponents argue that the loan was not valid when made, because the bank was not the “true lender.” For the second category, courts apply a multifactor test, which can vary by jurisdiction, to determine which entity is deemed the true lender.

For a time, federal regulators endeavored to provide clarity in this space through the rulemaking process, but those efforts have been followed by additional uncertainty.

In June and July 2020, the Office of the Comptroller of Currency and the Federal Deposit Insurance Corporation issued final rules stating that the interest on a loan is “not affected by the sale, assignment, or other transfer of the loan.”

The OCC also issued a “true lender rule” in Oct. 2020 to establish a rule for determining which entity made the loan. Congress later repealed that rule. Now the question is left subject to differing case law across jurisdictions.

More recently, the Consumer Financial Protection Bureau’s activity has indicated that the current administration views these partnerships with the skepticism of the past and perhaps a renewed fervor for challenging such models.

For example, earlier this summer Zixta Martinez, deputy director of the CFPB, focused on what she termed “rent-a-bank schemes” where lenders “make claims that the bank, rather than the nonbank, is the lender.”

She said the CFPB is “taking a close look at this issue.” This spring, the CFPB also announced that it would use its authority to supervise “larger participants” in nonbank markets for consumer financial products and services.

Just a few months prior, the CFPB issued orders to five fintechs offering “buy now, pay later” credit to obtain information about the risks and benefits of the industry.

Federal Trade Commission Involvement

Meanwhile, the Federal Trade Commission has placed the tech industry in its crosshairs. Recent enforcement activity has included several actions related to advertising by financial services companies.

The FTC has also requested comment on wide-ranging topics related to tech, including in the financial services arena and on issues such as algorithmic discrimination and accuracy.

Without uniform and specific parameters to guide relationships between fintechs and banks, what can fintechs do to minimize the likelihood of regulators pejoratively labeling their businesses as a rent-a-bank model?

• Empower the bank to make the ultimate credit decision, even though the nonbank may provide specific terms under which it will engage in a financial transaction with the bank
• Structure the relationship so that the bank retains an interest in the consumer account and/or financial risk in the transaction
• Consider state interest rate limits when structuring programs and products
• Consider the time period before which a loan or accounts receivable is acquired from the bank, including timing of the borrower’s first payment
• Review the scope of any indemnification for legal or regulatory expenses
• Avoid blanket language that requires the nonbank entity to purchase “all loans” from a nonbank
• Avoid any representation that the arrangement is solely or primarily for the purpose of sheltering the fintech from consumer protection laws
• Avoid misrepresentations in communications with borrowers about the existence of the partnership between the nonbank and the bank

Even when a bank partnership relationship uses a structure that maximizes the factors that support a finding that the bank is a true lender, fintechs should not abdicate regulatory compliance oversight.

Both the CFPB and the FTC have demonstrated a keen focus on the growing role that tech plays in developing and deploying new products and programs. Robust commitment to consumer protection and compliance programs that implement a compliance-focused tone from the top will serve fintechs well in weathering this period of scrutiny.

This article does not necessarily reflect the opinion of The Bureau of National Affairs, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

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Kelley Barnaby is a partner in Alston & Bird’s Litigation & Trial Practice and co-chair of the Financial Services Litigation team, focusing her practice on consumer protection and unfair competition litigation and enforcement matters for clients in financial services and health care.