Minnesota recently enacted the Commerce Omnibus Finance Bill, which includes amendments to several provisions of Minnesota law related to consumer loans and financial institutions. 

Interest Rate Caps on Consumer Small Loans and Short-Term Loans

Minnesota laws related to consumer small loans and consumer short-term loans (as those terms are defined under Minnesota law) are amended to define the annual percentage rate (APR) for the covered loans to be an all-in rate including all fees and charges, as follows:

“Annual percentage rate” means a measure of the cost of credit, expressed as a yearly rate, that relates the amount and timing of value received by the consumer to the amount and timing of payments made.  Annual percentage interest rate includes all interest, finance charges, and fees.  The annual percentage rate must be determined in accordance with either the actuarial method or the United States Rule method.

APR was previously undefined in these laws.  (We assume that the term “annual percentage interest rate” used in the second sentence is a typographical error and meant instead to state the term being defined: “annual percentage rate.”)

The new law establishes a 50% cap on the all-in APR that “consumer small loan lenders” and “consumer short-term lenders” may charge, and requires any such lender that charges an all-in APR exceeding 36% to make an ability to repay determination.  A “consumer small loan” is a consumer loan in which $350 cash or less is advanced to a borrower, and a “consumer short-term loan” is a consumer loan with a principal amount or advance on a credit limit of $1,300 or less and requires a minimum payment within 60 days of loan origination or credit advance of more than 25% of the principal balance or credit advance.  The amendments also require industrial loans and thrift companies to comply with these requirements.  These amendments become effective January 1, 2024.

Anti-Evasion Requirements for Consumer Small Loans and Short-Term Loans

Additionally, the new laws prevent evasion with these all-in APR cap requirements by “making, offering, assisting, or arranging for a debtor to obtain a loan with a greater rate or amount of interest, consideration, charge, or payment than is permitted by this section through any method, including mail, telephone, Internet, or any electronic means, regardless of whether a person has a physical location in Minnesota.”  The anti-evasion provision codifies the predominant economic interest test and the totality or the circumstances, as follows:

A person is a consumer small loan lender subject to the requirements of this section notwithstanding the fact that a person purports to act as an agent or service provider, or acts in another capacity for another person that is not subject to this section, if a person: (1) directly or indirectly holds, acquires, or maintains the predominant economic interest, risk, or reward in a loan or lending business; or (2) both: (i) markets, solicits, brokers, arranges, or facilitates a loan; and (ii) holds or holds the right, requirement, or first right of refusal to acquire loans, receivables, or other direct or interest in a loan.

A person is a consumer small loan lender subject to the requirements of this section if the totality of the circumstances indicate that a person is a lender and the transaction is structured to evade the requirements of this section.  Circumstances that weigh in favor of a person being a lender in a transaction include but are not limited to instances where a person:

(1) indemnifies, insures, or protects a person not subject to this section from any costs or risks related to a loan;

(2) predominantly designs, controls, or operates lending activity;

(3) holds the trademark or intellectual property rights in the brand, underwriting system, or other core aspects of a lending business; or

(4) purports to act as an agent or service provider, or acts in another capacity, for a person not subject to this section while acting directly as a lender in one or more states.

Minnesota is not the first state to enact anti-evasion legislation seeking to curb bank-model lending. Within the past three years, consumer lending laws, including broad anti-evasion language intended to recharacterize non-bank facilitators of bank-made loans as the “true lenders,” have been adopted in

• Illinois, signed and effective in March 2021;
• Maine, approved by the Governor June 21, 2021 and effective 90 days after the end of the legislative session;
• Hawaii, effective January 2022; and
• New Mexico, effective January 1, 2023.

Other states with earlier forms of anti-evasion laws on the books include Georgia, Nevada, and New Hampshire.

Some state regulators are pursuing “true lender” recharacterization even in the absence of statutory authority.  For example, the California Department of Financial Protection and Innovation (DFPI) is taking an enforcement position attempting to recharacterize a non-bank as the “true lender” of loans made through a bank-model partnership; and complaints recently brought against fintechs involved in bank-model lending by the Attorney General of the District of Columbia have resulted in at least two settlements (See here and here).

On the federal front, the CFPB has decried “rent-a-bank schemes”, and the prudential regulators recently have taken steps indicating a heightened focus on bank-fintech partnerships, including the FDIC’s consent order with Cross River Bank and interagency guidance on risk management in third-party relationships.

Other Significant Changes in the Omnibus Bill

The Omnibus Bill also amends the following laws:

• Money transmitter laws, replacing existing laws in their entirety (effective August 1, 2023);
• Mortgage originators and servicer licensing laws, adding new definitions, exclusions, financial condition, and corporate governance provisions (effective August 1, 2023);
• Student loan borrower bill of rights, adding student loan advocate (effective August 1, 2023);
• Collection and credit services laws, adding several new sections to prohibit coerced debt, require debtors to provide notice to a debt collector of the coerced debt, and provide related debtor and creditor remedies (effective January 1, 2024); and
• Banks and credit unions with more than $1 billion in assets to submit an annual climate risk disclosure survey (beginning in July 2024).

We are working with state agencies and clients to navigate the impact of these revised laws.

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