WA: AFC Letter on Request for Comment on Amendments to the Predatory Loan Prevention Act

Rochelle Henderson
Management Analyst
PO Box 41200
Olympia WA 98504-1200

Re: Request for Comment on Amendments to the Predatory Loan Prevention Act—WSR 25-07-018

Dear Ms. Henderson,

The American Fintech Council (AFC)  thanks you for the opportunity to provide comment on the Washington Department of Financial Institution, Division of Consumer Services’ (DFI or the Department) Request for Comment on Amendments to the Predatory Loan Prevention Act (PLPA)—WSR 25-07-018 (Request for Comment).

AFC’s mission is to promote an innovative, transparent, inclusive, and customer-centric financial system by supporting the responsible growth of lending, fostering innovation in financial technology (Fintech), 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. AFC has publicly supported 36 percent rate caps at state and federal levels, which is a key component of our advocacy and of addressing responsible lending. Our members are also lowering the cost of financial transactions, allowing them to help meet demand for high-quality, affordable products.

AFC recognizes and appreciates the Department’s proactive engagement on the issues within the PLPA by issuing the Request for Comment. The perspectives and likely subsequent dialogue on the issues in the PLPA between the DFI and stakeholders presents a true opportunity to amend the PLPA in a manner that would ensure that Washington consumers are served effectively, and that responsible innovation can flourish in the state.

It is important to note that AFC agrees with the PLPA’s underlying principle of protecting Washington consumers from predatory loans. However, we believe that, as passed, harms consumers’ access to credit, established a legally tenuous definition of a “true lender”, and promulgated and unclear standard and inadequate test for evaluating the “true lender” of a loan. To address these concerns and assist the Department in its efforts to amend the PLPA in a pragmatic manner, AFC has detailed several substantive policy considerations below for DFI’s careful consideration.

I. The PLPA Limits Consumers’ Access to Responsible Credit, Particularly Those in Low- and Moderate-Income Communities

As the premier standards-based trade association representing both innovative financial institutions and the fintech companies who help facilitate their lending activities, ensuring responsible access to credit for consumers is of paramount importance. AFC and its members have tirelessly sought to democratize the financial services industry and improve access to credit, especially for communities who have been historically underserved or excluded by the industry. As evidenced in multiple government, industry, and academic reports these activities have provided significant benefits to consumers, particularly those in traditionally underserved areas, such as low- and moderate-income communities.

In principle, AFC agrees with the aims of the PLPA to eradicate payday lending from the state, whether offered through brick-and-mortar locations or online. AFC recognizes that not all fintech companies, nor bank-fintech partnerships, are created equal. To that end, we recognize the ills of those that lend or assist with the lending of loans with interest rates above 36 percent. As such, AFC advocates for loans offered through a bank-fintech partnership to be at a maximum interest rate of 36 percent. AFC believes that providing loans at a maximum interest rate of 36 percent expands credit access to the most consumers, especially those in traditionally underserved areas, such as low- and moderate-income communities, while not overburdening borrowers and thus trapping them in a detrimental debt cycle.

Unfortunately, as passed, the PLPA contains provisions that inherently curtail responsible fintech companies and the innovative banks that power them from offering loans above a 25 percent interest rate.  Notably, the “true lender” tests promulgated in the PLPA—which will be discussed in more detail below—present significant challenges to responsible bank-fintech partnerships seeking to offer loans in Washington State. While some may laud the capping of allowable interest to 25 percent as a consumer benefit, the reality is that lending in Washington State has significantly declined in the months since the PLPA’s enactment. Based on an analysis of AFC member, lending in Washington State since passage of the PLPA has declined by tens of thousands of loans, totaling tens of millions of dollars in lost access to credit for consumers. As noted above, responsible bank-fintech partnerships have provided significant benefits to consumers in traditionally underserved areas, such as low- and moderate-income communities. Thus, limiting the lending operations of AFC member companies, likely has disproportionately harmed consumers who are already the least well-served demographic in the financial services industry.

Given the substantially negative impact that the passage of the PLPA has already had on lending in Washington State, AFC respectfully requests that DFI carefully consider opportunities to amend or implement the PLPA in a manner that will restore the ability for responsible bank-fintech partnerships to offer loans at a maximum interest rate of 36 percent.

II. The PLPA Presents a Legally Tenuous Framework That Could Be Invalidated If Challenged

As passed, the PLPA establishes an unclear standard for which entity within a bank-fintech partnership constitutes the “true lender” of the loan. The novel legal tests in the PLPA, namely the “Predominant Economic Interest” (PEI) and the “Totality of the Circumstances” (TOC) tests, stand contrary to long-standing precedence finds that financial institutions, who originate the loans in a bank-fintech partnership, are in fact the “true lender”. While Washington State follows several other states in promulgating these tests, there is still a demonstrable legal tenuity that exists in their application. Thus far, there has been little enforcement activity from state regulators charged with implementing and enforcing “true lender” tests.  Should DFI seek to stringently enforce these provisions, it would likely face significant legal challenges that would nullify the PLPA, as it violates federal preemption under existing federal banking laws, which grant express preemption regarding interest rates.  

The provisions of the PLPA fall into direct conflict with established federal banking laws, which grant broad preemptive authority over state laws that curtail or limit the activities of banks chartered outside the state. Specifically, one of the pillars of preemption for banks is their ability to export interest rates allowable in the state that they are chartered. Importantly, under Barnett Bank of Marion Cty., N. A. v. Nelson, 517 U.S. 25 (1996), state laws may not forbid or significantly impair “the exercise of a power that Congress explicitly granted”.  Further, the broad preemption authority granted to nationally-chartered banks under the National Bank Act and clarified by the Barnett Bank case is carried through to state-chartered banks operating in Washington State via existing Washington State law providing parity between nationally- and state-chartered banks.  The Washington Consumer Loan Act (CLA), which was amended by the PLPA, recognizes this broad preemption and explicitly exempts banks from the law.  In addition, when challenged, similarly situated state laws seeking to regulate tax refund anticipation loans that were delivered via partnerships between non-banks and banks have been struck down on the grounds that states did not have the power to block interest rate pre-emption or exportation by out of state banks.

Given the preponderance of the evidence discussed above regarding the legal tenuity of the PLPA, AFC respectfully requests that DFI carefully consider the validity of the PLPA, potential outcomes, and impacts to DFI resources before implementing the PLPA’s provisions or pursuing enforcement action in accordance them.

III. AFC Believes The Washington DFI Should Pursue Amendments to the PLPA That Will Ensure Responsible Bank-Fintech Partnerships Can Operate

Again, AFC recognizes and appreciates the Department’s proactive engagement on the issues within the PLPA by issuing the Request for Comment. In accordance with the Department’s request, AFC has several areas where amendments to the PLPA could prove beneficial for Washington State’s lending environment.

The PLPA amended the CLA in significant ways that, if implemented incorrectly, could dramatically harm Washington State’s lending environment. As evidenced above, responsible fintech companies and the innovative banks who power them have already curtailed their lending operations out of an abundance of caution, thus, severely limiting loans offered in the state. Under the statute, if a loan exceeds Washington State’s 25 percent interest rate cap on loans covered under the PLPA, the “person” making such a loan is viewed as the lender and subject to the requirements under the statute “if, among other things: (a) The person holds, acquires, or maintains, directly or indirectly, the predominant economic interest in the loan; or (b) The totality of the circumstances indicate that the person is the lender, and the transaction is structured to evade the requirements of this chapter.”  In the DFI’s Interim Guidance, it notes that “Any person asserting that they are an agent, service provider, or in some other capacity acting on behalf of an exempt person should consider whether they are subject to licensure pursuant to section 2(3).”  However, AFC believes that this interpretation is harmful to Washington State’s lending environment and ultimately premature, as the statute does not indicate which circumstances constitute the “totality of the circumstances [which] indicate that the person is the lender, and that the transaction is structured to evade the requirements of this chapter”.

In the interest of pragmatic policymaking, DFI should promulgate regulations detailing which factors it considers as underpinning the TOC test under the statute before finalizing its interpretation. AFC believes that the factors constituting the TOC test should ensure that the longstanding view that the bank is the “true lender” of a loan is properly reflected by using the terms of the loan agreement, and entity listed upon those documents, as the primary factor in the TOC test. Given the underlying legal tenuity discussed above, implementing the TOC test in the manner recommended would afford responsible fintech companies and the bank partners who power them the opportunity to operate without issue in Washington State and mitigate the significant legal risks associated with the PLPA.

Secondly, AFC has long advocated that the PEI test is an improper policy tool for determining the “true lender” in a bank-fintech partnership, as it does not recognize the nuances of the partnership. To that end, AFC believes that the DFI should, at a minimum, ensure that the PEI test is secondary to the TOC test, and define the PEI test in a manner that would allow bank-fintech partnerships to easily operate in a manner that fits their unique business models. For example, DFI could define “predominant” threshold as constituting 100 percent of the loan’s economic interest. Ensuring that the PEI test remains secondary to the TOC test, when properly determined, and constructing a threshold that will allow responsible bank-fintech partnerships to operate in a manner reflective of their business models will help ensure that Washington State’s lending environment does not become harmed further by the passage of the PLPA.

* * *

AFC appreciates the opportunity to submit comment on the Department’s Request for Comment on Amendments to the Predatory Loan Prevention Act. It is our sincere hope that DFI will use the perspectives provided within this letter to craft pragmatic, effective, and efficient regulations that will help ensure responsible bank-fintech partnerships can operate in Washington State. AFC welcomes continued engagement with the DFI on how to craft regulations, guidance, and programs that encourage the development of responsible innovation through bank-fintech partnerships for the benefit of Washington consumers.

Sincerely,

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

[1] AFC’s membership spans technology platforms, non-bank lenders, banks, payments providers, loan servicers, credit bureaus, and personal financial management companies.
[2] See Federal Reserve Bank of Philadelphia, Which Lenders Are More Likely to Reach Out to Underserved Consumers: Banks versus Fintechs versus Other Nonbanks, (2021), page 29, available at https://www.philadelphiafed.org/-/media/frbp/assets/working-papers/2021/wp21-17.pdf,; Federal Reserve Bank of St. Louis, Unsecured Personal Loans Get a Boost from Fintech Lenders,(2019), available at https://www.stlouisfed.org/publications/regional-economist/second-quarter-2019/unsecured-personal-loans-fintech; Federal Reserve Bank of San Francisco, Community Development Innovation Review, Fintech,Racial Equity, and an Inclusive Financial System, (2021), available at https://www.frbsf.org/wp-content/uploads/sites/3/fintech-racial-equity-inclusive-financial-system.pdf. See also, U.S.Department of the Treasury, Impact of New Entrant Non-Bank Firms on Competition in Consumer Finance Markets, (2022), pages 75-79, available at https://home.treasury.gov/news/press-releases/jy1105.  
[3] Per DFI guidance, “[l]icensees are permitted to make a loan “at a rate that does not exceed twenty-five percent per annum as determined by the simple interest method of calculating interest owed.”’Washington Department of Financial Institutions, “Consumer Loan Act: Interim Guidance, CLA-24-02”, (Dec. 13, 2024), available at https://dfi.wa.gov/sites/default/files/cla-24-02-dec-13-24.pdf. RCW 31.04.105(1).
[4] Savoie, Robert Weston, “True Lenderand Rate Exportation: Reviewing the Major 2023 Legislation”, Business LawToday, American Bar Association, (Apr. 5, 2024), available at https://www.americanbar.org/groups/business_law/resources/business-law-today/2024-april/true-lender-and-rate-exportation-reviewing-the-major-2023-legislation/#:~:text=The%20laws%20typically%20establish%20several,a%20lender%20in%20another%20state.
[5] Section 85 of the National Bank Act,12 U.S.C. § 85 and Section 27 of the Federal Deposit Insurance Act, 12 U.S.C. §1831d.
[6] Barnett Bank of Marion Cty., N. A.v. Nelson, 517 U.S. 25 (1996).
[7] See, RCW 30A.04.215.
[8] RCW 31.04.025(4).
[9] See, Pacific Capital Bank, N.A. v.Connecticut, 542 F.3d 341, 346-347 (2d Cir. 2008) and Pacific Capital Bank,N.A. v. Milgram, No. 08-0223, 2008 WL 700180 (D.N.J. Mar. 13, 2008).
[10] 2024 Wash. Sess. Laws 249, §2(2),and §3.
[11] Ibid, DFI Interim Guidance.

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