While much attention has been focused on the risks created by Madden v. Midland Funding and the so-called “true lender” issue, a recent Maryland decision illustrates that licensing issues can also pose problems for the bank partner structure used by many marketplace lenders. On October 27, in Maryland Commissioner of Financial Regulation v. CashCall, Inc., the Maryland Court of Special Appeals reversed a lower court order and directed CashCall to cease doing business in Maryland without a Credit Services Business Act license and to pay $5.6 million in penalties in connection with loans already made. While poorly reasoned and perhaps driven by the underlying facts, the decision allowed a state financial regulator to use its licensing powers to effectively shut down an online business that acquired installment loans made by two out-of-state state banks.

The case arises out of a business in which CashCall advertised its website to consumers so they could apply for loans online. The loans were made by the out-of-state state banks at annual rates between 59% and 96%, significantly in excess of the rate permitted by Maryland law, and the banks also charged loan origination fees. Shortly after origination, the banks sold the loans to CashCall, which collected all payments on the loans.

Federal banking laws authorize banks to charge interest at the rate allowed by the law of the state where the banks are located. The Commissioner did not argue that the loans were unlawful (or at least the court did not address the legality of the loans). Rather, the Commissioner argued that CashCall met the statutory definition of a “credit services business,” which includes a person that assists a consumer in obtaining an extension of credit “in return for the payment of money or other valuable consideration.”

In upholding the Commissioner’s determination and resulting sanctions against CashCall, the court rejected CashCall’s contention that, in the absence of a direct payment to it from the consumer, it could not be properly classified as a credit services business. The court ruled that: (1) no direct payment is required where a company (like CashCall in the court’s view) is exclusively engaged in assisting Maryland consumers to obtain loans at rates that would be usurious under Maryland law (if it applied); and (2) in any event, CashCall did receive direct payment in return for services to consumers when it acquired the loans and collected the entire principal on the loans, including the loan origination fee.

The court’s conclusion that CashCall indirectly received fee income from Maryland consumers is highly questionable, since the purchase price for the loans was based on the gross amount of the loans, including the origination fee. Accordingly, the banks and not CashCall reaped the economic benefit of the origination fee.

Not only should CashCall have won on the ground that it received no direct or indirect compensation from Maryland consumers, but three additional potential defenses were not addressed in the opinion. Specifically, the court failed to address the following arguments:

  • Any loan origination services CashCall provided were on behalf of the bank lenders and not the borrowers.

  • Loan payments received by CashCall were in return for its purchase of the loans and corresponding payment of the purchase price, and not for loan origination services.

  • The Maryland law purports to prohibit a credit services business from assisting a bank in the origination of loans at rates expressly authorized by federal law. Accordingly, the Maryland law conflicts with and is preempted by federal law with respect to the origination of the loans under the CashCall program.

Ballard Spahr’s Marketplace Lending Task Force is nationally recognized for counseling marketplace lending businesses in both the peer-to-peer and small business spaces. We offer soup-to-nuts guidance, working with startup alternative lenders, long-established market leaders, institutional investors, and others. We document and advise on the structure and strategy of bank, platform, and investor relationships, assist in concluding account servicing arrangements, and provide extensive consumer regulatory advice and state licensing guidance.

For more information, contact CFS Practice Leader Alan S. Kaplinsky, CFS Practice Leader Jeremy T. Rosenblum, Marketplace Lending Task Force Leader Scott M. Pearson, or John D. Socknat.

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