Maine’s Governor, Janet Mills, recently signed S.P. 205/L.D. 522, which amended the Consumer Credit Code to protect consumers from predatory and fraudulent lending practices. In particular, the amendments include an anti-evasion provision under which purported bank agents or service providers are deemed “lenders” for the purposes of statute. The amendment contains the following key provisions:
- Covered entities “may not engage in any device, subterfuge or pretense to evade the requirements of this Article, including, but not limited to…making, offering, assisting, or arranging a debtor to obtain a loan with a greater rate of interest, consideration or charge than is permitted by this Article through any method.”
- Loans that violate these provisions are “void and uncollectible as to any principal, fee, interest or charge.”
- A person qualifies as a lender if it:
- holds, acquires or maintains, directly or indirectly, the predominant economic interest in the loan;
- markets, brokers, arranges or facilitates the loan and holds the right, requirement or first right of refusal to purchase the loan or a receivable or interest in the loan; or
- the totality of the circumstances indicate that the person is the lender and the transaction is structured to evade the requirements of this Article.
- The circumstances that would weigh in favor of an entity being deemed the lender include, without limitation, when the entity:
- indemnifies, insures or protects an exempt entity for any costs or risks related to the loan
- predominately designs, controls or operates the loan program, or
- purports to act as an agent or service provider for an exempt entity while acting directly as a lender in other states.
- Lenders who violate these provisions may not furnish information concerning a debt associated with the violation to a consumer reporting agency, nor may it refer the associated debt to a debt collector.
The bill takes effect 90 days after legislative session adjourns. The first special legislation session ended on Jul 19, 2021.
Putting It Into Practice: Maine’s amendment targets bank partnership arrangements based on the “true lender” legal theory that posits that nonbanks “rent” bank charters from banks that carry little or no economic or regulatory risk to, among other things, evade state usury laws. Maine’s “anti-evasion” provisions are significant because the language tracks the same provisions that were recently adopted in Illinois, with similar bills pending in New Mexico (HB 149 and SB 66). Other states have also enacted alternatives to anti-evasion statutes that effectively achieve the same goal, including, for example, provisions of broadly drafted credit repair company laws, which require licensure in many states and prohibit licensed companies from engaging in brokering loans above the state’s maximum permitted interest rate. As a result, while bank partnerships continue to flourish nationwide, the model continues to face various state law challenges.
In short, it appears likely that additional states will follow suit and introduce legislation or engage in enforcement activity geared towards limiting the ability of bank partnerships to evade state interest rate caps. With that context in mind, banks and their nonbank partners should, at a minimum, continue to be vigilant in balancing contractual obligations to ensure that each party in the bank partnership carries its fair share of regulatory and economic risk to avoid the “rent-a-bank” label.