More “true lender” laws are coming, as legislative bodies in Washington, Maryland, and the District of Columbia have introduced bills that would severely impact bank partnership arrangements. 

If adopted, the “true lender” legislation, similar to laws that have been enacted in other states, would characterize a person as the “lender” of a loan, if the person (1) holds the predominant economic interest in a loan originated through a bank partnership, (2) markets, brokers, arranges, facilitates, or services the loan and holds the right or right of first refusal to acquire the loan or an interest in the loan; or (3) the totality of the circumstances indicate that the person is the lender. The legislation would codify the true lender test into law, and bank partnerships that lend to consumers in those jurisdictions would be subject to substantive licensing and compliance obligations.

In addition, the Washington D.C. legislation would also result in the District opting out of the Depository Institutions Deregulation and Monetary Control Act (DIDMCA), which permits state-chartered banks to contract for the interest rate permitted by the state in which the bank is located and export that state’s interest rate to other states. If the legislation passes, out-of-state state-charged banks would be subject to the District’s 24% interest rate cap, and Washington, D.C., would join Iowa, Puerto Rico, and Colorado as states that have opted out of the DIDMCA’s interest rate exportation authority.

Putting it into Practice: The spread of “true lender” laws across the nation shows no sign of slowing down. Florida (previously discussed here) and Connecticut have introduced legislation and guidance codifying the true lender test. More states are expected to follow and bank partnerships should pay close attention.