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Special Alert: Maryland Ruling Opens New Front in Battle Over Bank Partnership Model

Special Alert

Clinton R. Rockwell, Jeremiah S. Buckley, Joseph M. Kolar, John P. Kromer, Christopher M. Witeck, Heidi M. Bauer, Walter E. Zalenski, Jeffrey S. Hydrick, Jeffrey P. Naimon

On June 23, the Maryland Court of Appeals affirmed a lower court judgment holding that a non-bank entity assisting consumers obtain loans from an out-of-state bank and then repurchasing those loans days later qualifies as a “credit service business” under the Maryland Credit Services Business Act (MCSBA), requiring a state license among other obligations. CashCall v. Md. Com’r of Financial Reg., No. 24-C-12-007787, 2016 WL 3443971 (Md. Ct. App. June 23, 2016). This holding is of particular importance to marketplace lending platforms that rely on bank partnerships to originate consumer loans because, in addition to requiring a license, the MCSBA prohibits licensees from arranging loans for out-of-state banks above Maryland’s usury ceiling.

In light of the ruling, the MCSBA could provide a roadmap for other states to test the limits of federal law, which specifically authorizes banks to export interest rates permitted by their home state notwithstanding another state’s usury limitations. Perhaps in view of a potential future challenge on federal preemption grounds, the CashCall Court appears to have gone out of its way to state in dictum that the non-bank entity was the “de facto lender” based on its efforts to market, facilitate, and ultimately acquire the loans it arranged. In so doing, the Court provides a strong suggestion that it might have reached the same result relative to the state’s usury laws under the “true lender” theory that has gained some traction in other actions against non-bank entities.

While the most immediate impact of the Court’s ruling is to uphold the state financial regulator’s cease and desist order and $5.65 million civil penalty, the case also creates additional risk and uncertainty for marketplace lending platforms and other FinTech companies seeking to maintain a regulatory safe harbor through the bank partner model. We analyze here the import of this latest case as part of the appreciable tension building as state law theories appear to be increasingly penetrating chinks in the armor of federal preemption principles.

Click here to view the full Special Alert. 

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Join Buckley Sandler attorneys on August 11, 2016 from 2:00-3:00pm ET for a discussion on recent developments related to partnerships between banks and alternative lenders. The lower costs, simpler products, and consumer convenience ushered in by digital lending means it is here to stay. But regulatory turbulence suggests that some mid-course corrections may be required. After a year of historic growth in 2015, the first half of 2016 has seen a series of potentially game-changing events for the marketplace lending industry, including the Supreme Court’s decision not to consider an appeal from the Second Circuit’s ruling in Madden v. Midland Funding, LLC. We will review the implications of Madden and several other recent court decisions and regulatory actions as they relate to federal preemption, “true lender” challenges, state licensing requirements, and other issues.

Questions regarding the matters discussed in this Alert may be directed to any of our lawyers listed below, or to any other Buckley Sandler attorney with whom you have consulted in the past.