Madden v. Midland Funding isn’t the only recent legal case that raises questions about the “rent a bank” business model employed by many marketplace lenders.
On Aug. 31, the U.S. District Court for the Central District of California ruled that CashCall was the true lender onb loans issued by Western Sky Financial, a type of tribal lender. The court sided with the Consumer Financial Protection Bureau, which charged that Western Sky Financial’s loans violated usury laws in 16 states – and that its partnership with a tribal banking institution in South Dakota did not provide CashCall with federal pre-emption over state statutes.
This does not bode well for online lenders such as Lending Club that rely on third parties to underwrite loans that they then purchase, rather than take out banking licenses in a patchwork of individual states. Without federal pre-emption, they too could be subject to a patchwork of individual state laws – and their loans uncollectable, according to participants at IMN’s ABS East conference.
Richard Nieman, head of regulatory affairs at Lending Club, thinks that such comparisons are a stretch, however. At a panel on marketplace lending, he dismissed comparisons to CashCall’s business model as not one of apples to oranges, but “oranges to orangutans.”
While CashCall charging predatory APRs of 300% for loans through a questionable arrangement with a tribal lender, Lending Club and its partner bank cap APRs at 36% for borrowers who are primarily using the funds to finance out of high cost credit card debt.
“This is an example where courts are going to use whatever the facts are to get at those irresponsible lenders,” Nieman said.
The Madden V Midland case, which was similarly unsettling to marketplace lenders, nearly made it the Supreme Court, but justices declined to hear the case this summer, While many participants felt this left the industry in the lurch, the outcome could have been even worse, “it avoided an even worse outcome,” according to Alan Birnbaum, an analyst with Moody’s Investors Service.