In our June 2023 edition of Licensing Link, we
discussed the significant changes that the Connecticut General
Assembly made to the Connecticut Small Loan Act during its
legislative session. Those changes became effective on October 1,
and the Connecticut Department of Banking (“Department”)
recently issued formal guidance summarizing important features of
the new law and the Department’s interpretation of the
amendments. Companies that engage in consumer loan activities in
Connecticut should take note of the guidance as they determine
whether their activities are subject to the new Small Loan Act.
Below we summarize the material changes that went into effect
October 1 and the Department’s guidance regarding the
changes.
Change to APR Calculation
The Small Loan Act requires a license to perform a broad variety
of activities with respect to “small loans,” including
not only making loans but also performing lead generation and
customer acquisition, arranging or brokering loans, servicing
loans, or purchasing loans (although the law does provide some
limited fact-specific exemptions for some activities). As of
October 1, the Small Loan Act now applies to non-mortgage consumer
loans of $50,000 or less with APR exceeding 12%. Previously, the
law only applied to consumer loans of $15,000 or less with APR
exceeding 12%. In addition, the new law provides that the APR
threshold is determined using a “military APR”
calculation that is consistent with the federal Military Lending
Act. Under the amended Small Loan Act, this APR calculation
includes not only the fees that constitute a “finance
charge” for purposes of calculating the APR under the Truth in
Lending Act but also (i) any charges for any ancillary product,
membership or service sold in connection or concurrent with a small
loan; (ii) any amount offered or agreed to by a borrower in
furtherance of obtaining credit or as compensation for the use of
money; and (iii) any fee, voluntary or otherwise, that is charged,
agreed to or paid by a borrower in connection or concurrent with a
small loan. Notably, the Department suggested in its guidance that
it may decline to adopt a “voluntariness” analysis when
determining whether a fee must be included in the APR calculation
under the Small Loan Act and that even voluntary “tips”
or gratuities may constitute finance charges that must be
considered when calculating the APR on a Connecticut consumer
loan.
Application to Loans of $50,000 or Less
The Department recognized that the increased dollar amount
threshold under the amended Small Loan Act can create confusion
about whether the amended licensing requirements apply to persons
servicing and purchasing loans of more than $15,000 but less than
$50,000. A person who began servicing a loan in an original amount
of greater than $15,000 but less than $50,000 prior to October 1
may suddenly find themself conducting licensable activity under the
amended Small Loan Act even though that same loan was not subject
to the Small Loan Act when it was made. The Department helpfully
resolves this issue by offering guidance that it will not require a
license to purchase or service loans in original principal amounts
between $15,000 and $50,000 that were made prior to October 1,
2023, even if the APR exceeds 12%. However, if the loan was
originated prior to October 1, 2023, and was in an original
principal amount of $15,000 or less, then the Department will
require a license to purchase or service the loan if the APR on the
loan would have exceeded 12% under the new, more inclusive
“military APR” calculation. That being said, the
Department indicated that it will take a “no action”
position against companies that are required to be newly licensed
under the amended Small Loan Act, so long as the companies have
filed an application for a Small Loan Company license on or before
October 1, 2023.
Anti-evasion Provision
One of the key features of the amended Small Loan Act is the
adoption of a “true lender” standard that
re-characterizes nonbanks performing certain activities with a bank
partnership model as the lender for purposes of regulation under
the Small Loan Act. (We previously addressed the new
“anti-evasion” provision in depth in our June 2023
edition of Licensing Link, so we do not re-hash that analysis in
this edition.) The Department’s guidance on the
“anti-evasion” provision notes that the Department
“will consider the true lender factors set forth in Section
36a-556(d) [of the Small Loan Act], and caselaw precedent
construing such factors, to determine whether loans made on and
after October 1, 2023, should be exempt or comply with [the Small
Loan Act], including APR limitations.” The guidance also
clarifies that these persons are not exempt from licensure: (i) a
person who performs “front-end” services for
bank-originated small loans, whether or not that person is the
“true lender,” and (ii) a person who services small loans
made under a bank partnership where the servicer is subject to
“true lender” re-characterization.
Application to “Non-Traditional” Products
In addition to the new “anti-evasion” provision and
changes to the licensing threshold, the amended Small Loan Act now
applies to “any loan of money or extension of credit, or the
purchase of, or an advance of money on, a borrower’s future
potential source of money, including, but not limited to, future
pay, salary, pension income or a tax refund” if the
transaction is in an amount of $50,000 or less and has an APR
exceeding 12%. In its guidance, the Department stated that it
interprets the amended Small Loan Act to “likely” apply
to “non-traditional loan products”—such as
litigation funding agreements, inheritance advances, earned wage
access products, and income share agreements—if they bear an
effective APR exceeding 12%, although it recognizes that this
determination will be made on a case-by-case basis.
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