OH: AFC Letter Regarding Ohio Department of Financial Institution’s Recent Bank Partnership Alert

Kevin R. Allard
Superintendent
Division of Financial Institutions
Ohio Department of Commerce
77 S High Street, 20th Floor
Columbus, OH 43215

Dear Superintendent Allard:

On behalf of the American Fintech Council (AFC), I am writing to inquire about the Department of Financial Institution’s (DFI or the Department) recently issued Bank Partnership Alert, entitled “Important Bank Partnership and 2025 Licensure Information”, hereafter referred to as the “Guidance”. Based on our reading of the Guidance and engagement with our members, we have learned of numerous issues with the interpretation and application of the Guidance, as well as the harmful effects that the Guidance will likely have on Ohio consumers, which are discussed further below. We would greatly appreciate the Department’s assistance in clarifying its positions on these matters.

AFC’s mission is to promote an innovative, transparent, inclusive, and customer-centric financial system by fostering responsible innovation in financial services and encouraging sound public policy. AFC members are at the forefront of fostering competition in consumer finance and pioneering ways to better serve underserved consumer segments and geographies. Our members are also improving access to financial services and increasing overall competition in the financial services industry by supporting the responsible growth of lending and lowering the cost of financial transactions, allowing them to help meet demand for high-quality, affordable financial products.

In response to the recently issued Guidance, we have received multiple inquiries from our members requesting clarity on the Department’s position and rationale for the Guidance. It is our understanding that the Department’s Guidance is a substantial departure from its own previous interpretations of the Small Loan Act’s (SLA) application to fintech partners. In fact, we have heard that the Department explicitly informed fintech companies registered under the General Loan Law (GLL) who partnered with banks in lending activities that they did not need to obtain an SLA license because the fintech companies’ activities were already covered under the GLL. As evidenced by the Guidance and subsequent interactions by our members with the Department, we understand that the current DFI position has completely reversed its long-standing interpretation regarding the need for fintech companies to be licensed under the SLA and the provisions that would apply to the fintech companies. To that end, we respectfully request clarity on the Department’s rationale for reversing its interpretation.

Beyond the need to understand the Department’s rationale for its new interpretation, we have also received multiple requests from our members to understand the practical implications and compliance requirements related to the Guidance. We therefore respectfully request clarity on the following items:
• Should the Guidance stand, by what date do affected companies have to apply and to be approved for a license under the SLA?
• How long will the DFI’s approval process take for a complete license application?
• How long do unlicensed companies have to comply with the requirements under SLA licensure?

Further, per the Guidance, we understand the application of the SLA to be on the brokering activities and not on the loan itself. Carrying this understanding further, we believe that the provisions of the SLA would be preempted by federal law and subsequent valid-when-made rules promulgated by the Office of the Comptroller of the Currency and Federal Deposit Insurance Corporation.3 Moreover, banks control the loan throughout the process, as they are the originating entity. In accordance with the aforementioned preemptive authority applied to loans made in the State of Ohio, we believe that the interest rate cap promulgated in the SLA would therefore not apply to the loans, regardless of the activities of the fintech company within a bank-fintech partnership. The federal authority for FDIC insured depository institutions to apply their home state law would dictate the same conclusion for the other substantive requirements imposed under the SLA, such as principal balance restrictions.

In addition, under the SLA, there is no provision that explicitly regulates the ability of a third-party, such as a fintech company, from purchasing a loan and collecting money on the interest paid upon that loan. The SLA also expressly exempts depository institutions from its provisions, reflecting that the legislature did not intend to give the Department authority to use the SLA to regulate such loans or their terms.4 To ensure that our views properly reflect the jurisdictional and practical limitations of the SLA, we respectfully request that you confirm the accuracy of our view and clarify any inaccuracies based on the Department’s current interpretation.

This abrupt reversal of the Department’s perspective is on its face arbitrary and capricious in nature due to the procedural deficiencies of the Department’s efforts, as well as the practical issues associated with industry compliance. In principle, issuing any new or novel interpretation requires proper engagement with the public through a formal rulemaking process in strict adherence with the Ohio Administrative Procedure Act.5 To pursue an interpretation that is a significant departure from well-established precedent, as is done by the Guidance, without proper engagement with the public strips those impacted by the interpretation of their democratic rights to proactively engage in their government’s decision-making. Encouraging public comment on important changes to Guidance fundamentally strengthens their validity and provides the necessary opportunity to improve the Department’s regulatory activities through open and honest public discourse. To that end, we believe that if the Department intends to maintain the interpretations put forward in the Guidance, then it should seek public engagement through a formal rulemaking or legislative process.

DFI’s novel interpretation in the Guidance not only harms the innovative banks and fintech companies operating in Ohio, but, more importantly, the Ohioans they serve with responsible credit options. By implementing the interpretation of the SLA’s application to fintech companies, as is found in the Guidance, fintech companies may not find it economically viable to operate in Ohio; thus, removing a prominent source of responsible credit from consumers and decreasing competition in the market. In turn, consumers, particularly those who have been historically underserved, will lose access to responsible credit options.

In practice, the reversal of the Department’s original interpretation that fintech companies do not need to obtain an SLA license will limit access to safe and affordable credit for Ohio families and cause significant regulatory burdens to affected companies. In addition to compliance costs associated with obtaining a new, previously unnecessary, license, responsible fintech companies could be required to adjust their business models due to loan amount and interest requirements under the SLA or commence litigation to vindicate their rights under federal law. To understand the Department’s perspective, we respectfully request that the DFI discuss how it views the burden stemming from the new interpretation found in the Guidance.

Beyond the regulatory burdens and consumer harms discussed above, the challenges associated withthe Guidance is further amplified when placed in the context of the extremely limited timeframe that the Department afforded affected companies to comply with the new interpretation and subsequent licensing application requirements. If the Department does not agree to rescind the Guidance due to the procedural and practical deficiencies stated above, we ask that the Department grant a 120-day extension on submission of the application for those companies affected by the new interpretation. Providing such an extension is consistent with the timeframes afforded by other states when new licensing requirements are imposed and would help ensure that affected companies have the necessary time to conduct prudent due diligence and abide by the licensing application requirements.

As evidenced by the above discussion, we are concerned about the impact that the Guidance may have on the industry, and we believe additional clarity is needed from the Department. We appreciate the Department’s consideration of our requests and look forward to hearing from you and your staff regarding the aforementioned issues in advance of the Department’s license renewal deadline.

Sincerely,

‍

Ian P. Moloney
SVP, Head of Policy and Regulatory Affairs
American Fintech Council

Cc: Yosef Schiff, Assistant Division Counsel, Division of Financial Institutions, Ohio Department of Commerce