April 14, 2025 • 25 mins
The disapproval of the OCC’s True Lender Rule in 2021 sparked a seismic shift in the fintech lending space, leaving a cloud of uncertainty over the regulatory landscape. As states roll out new true lender definitions and federal guidance remains elusive, the future of bank-fintech partnerships hangs in the balance. In this episode, we dive deep into the disruptive changes reshaping the industry, explore the potential impact of the new administration’s regulatory agenda, and debate what it will take to balance innovation with consumer protection. Tune in for a forward-looking discussion on what’s next for fintech lending in a rapidly evolving regulatory environment.
Hosts: Rachel Morrissey, Money20/20 US
Ian P. Moloney, SVP, Head of Policy and Regulatory Affairs
Guest: Martha O’Malley, Assistant General Counsel, Prosper
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Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Rachel Morrissey (00:04):
Welcome to the Money Pot.
I am Rachel Morrissey.
I am from Money 2020.
I'm our head of content for theUS show and the executive
producer of the podcast, and Iam here with a special series
that we're doing with theAmerican Fintech Council about
all of the things that arereally going on in Washington DC
and the very quick turn ofevents that have happened there
(00:28):
over the last couple of monthsand what's going forward.
Today, we're going to befocusing specifically on
navigating fintech andregulation with the true lender
debate, and so, before we getmuch further, I want to
introduce my co-host, ian PMaloney.
He's the Senior Vice Presidentof Policy and Regulatory Issues
(00:50):
at the American FinTech Council.
How are you, ian?
Ian Moloney (00:52):
I'm doing well, Rachel.
How are you doing today?
Rachel Morrissey (00:55):
Good, are you up for this?
Are you ready to co-host?
Ian Moloney (00:58):
Oh, I am so ready to co-host and I feel like we
should put a little not aparental advisory sticker but
maybe a wonk advisory sticker,because this conversation is
going to get really wonky reallyquick.
But I'm excited for it.
Rachel Morrissey (01:11):
I love wonky.
Our listeners love wonky.
They come to us for wonky, sowe're going there.
So joining us to talk about theTrue Lender debate is Martha
O'Malley.
She's the Assistant GeneralCounsel for Prosper.
How are you doing, Marty?
I'm well, thank you.
How are you, Rachel?
I am good.
We're so glad that you decidedto join us today.
(01:33):
We're excited to talk about allof the different issues around
the nature of the True Lenderdebate.
It's been a really interestinghistory Going over the past 10
years.
It feels like we go back andforth on a pendulum here pretty
quickly, depending on whoever isin charge.
So why don't we start there?
(01:55):
Ian, do you want to kick us offwith the first kind of intro
and idea?
Ian Moloney (02:00):
Yeah, absolutely, and I know, you know, as I
mentioned, it's going to be awonky conversation, but we
should definitely set the grounda little bit, set the stage,
and so, you know, Martha, Ithink it would be helpful.
You know, recognizing, you knowProsper has been in the mix
pretty heavily on True Lenderissues, AFC.
This has been a huge issue forus as well.
(02:20):
Can you just kind of, you know,give us a brief overview of the
issue and any regulatory andlegislative issues?
Martha O'Malley (02:28):
Sure, I'm happy to talk about this.
So Prosper is kind of one ofthe grandparents of fintech
lending.
Prosper began lending in 2006,so it has a very long and
established history in fintechlending.
Prosper is no longer a lender.
Prosper is a bank partner, andthat really sort of ties
(02:51):
directly into the true lenderquestion.
And true lender really affectsthe bank partnership model, and
what that really means is that'sa partnership between the
funding bank that makes andissues and originates the loan
and a partner which may do avariety of services for the bank
(03:12):
, such as marketing oradvertising or servicing the
loan.
For the bank partnership modelhas proven to have a number of
benefits for both the banks andfor consumers, and I think I'll
stop there and sort of talk alittle bit about that and then
(03:36):
we can shift over to TrueLender.
So, for the bank partnershipmodel just really at a high
level, has benefits to banks inthat it allows banks to extend
their lending activities.
It's particularly helpful forcommunity banks so that they can
extend their ability to lendbeyond their brick and mortar
geographical presence.
(03:56):
It's also and there are studiesthat back this up up there are
2018 Basel Committee studiesthat back this up that show that
actually, banks need to movemore and more in this direction
to increase their ability toreach consumers and to meet the
demands of a competitiveenvironment.
On the flip side for consumers,there are a lot of benefits for
(04:19):
consumers.
They're more able to haveconsumer choice.
They're more able to get accessto different products, and it's
been shown through a number ofstudies, particularly a 2018
Philly Fed study that shows thatmore consumers are able to get
access to financial services andproducts through the bank
partnership model.
So I want to set the stage thatthere are a lot of benefits to
(04:42):
financial services in having thebank partnership model.
So you may ask and I promise tokeep this relatively brief,
that's great.
How does true lender play intothat?
And the true lender doctrinereally is the theory that the
true lender of loan is not thebank but is instead the fintech
(05:07):
partner.
And the true lender seeks torecharacterize the fintech
partner as the lender through acouple of catchphrases that
you'll hear over and over againwhich is either the predominant
economic interest or thetotality of the circumstances,
and it attempts to apply thesetests or apply regulatory
requirements to recharacterize apartner as the back.
Rachel Morrissey (05:33):
Okay.
So this is interesting becausethe history of it, the history
of this, of the regulationaround this, has kind of flipped
back and forth.
(05:55):
Initially, during the firstTrump administration, there was
a rule put out by the OCC thatmade it kind of uniform
nationally, that there was arule that was the financial
services and fintech was verymuch in favor of right Because
it did exactly what you did,which, what you were talking
about, which is it allowed forthese bank fintech partnerships
to really flourish in this way?
And then the Bidenadministration came in and they
(06:17):
became concerned with predatorybehaviors that were possible
because of the nature of therule and Congress passed
legislation against it and Bidensigned it and nature of the
rule, and Congress passedlegislation against it and Biden
signed it and they killed thatrule.
And so now we're back into thewhat's going to happen next
model, like how's the pushbackgoing to go?
Is this going to get reversedagain?
(06:37):
How will it get reversed?
Do I have that right?
Is that a fair summary of theevents or the major events of
the last little while?
Martha O'Malley (06:49):
I think at a high level.
That's a fair summary.
I think in each of those prongsthere's a lot of additional
detail, but I think that's fineto set the stage.
Rachel Morrissey (06:59):
Okay, good, okay, so let's look at this In
lieu of the federal fix, stateshave taken their own approach
deciding the true lender issue,and there's certain states like
Washington, new Mexico andIllinois that have pursued
fairly similar laws related totrue lender, while the
traditional regulatory leadersof California and New York have
(07:21):
pursued different activities onthis issue.
So, based on your understandingof the state regulatory
landscape, how do you see theidea of regulatory diffusion
occurring on the true lenderissue?
Martha O'Malley (07:34):
Sure, so I think there are several avenues
that the states have taken and,if I can sort of delve a little
bit back into history, we seethe first state legislative
regime enacted in 2011 inGeorgia, and Georgia was the
first state to codify apredominant economic interest in
(07:55):
the totality of thecircumstances test, and then
from there the activity shiftedlargely to the courts, and you
see actions in Delaware, you seeactions in West Virginia, you
see actions in different placesin the courts, but, starting in
the early 2020s, you seeactivities at the state level in
(08:18):
the 2021, 2022, 2023 area, andthose statutes fall, generally
speaking, into two buckets.
One bucket is state regulationsthat, based on anti-evasion
provisions, attempt to use theactivities that a partner might
(08:39):
engage in, like marketing,arranging or brokering the loans
, or holding or acquiring thepredominant economic interest,
to use those activities torecharacterize the partner as
the lender, and that's been putinto statutes in states like
Illinois, maine, new Mexico,washington State.
(09:02):
There's another avenue that wesee relatively frequently, which
is to impose licensingrequirements on the bank partner
, and these may be your normallicensing requirements or the
licensing may take effect aroundcertain loan sizes and certain
interest rates of the productissued by the bank, and we see
(09:25):
that in certain states again inthe 2021 area, but we see that
in states like Wyoming, nebraska, connecticut and Wisconsin.
So we see those two avenues.
There are other avenues that wesee sort of in Maryland, we saw
an action in the early 2020s torequire the bank to be licensed
(09:46):
by the state, which is a veryunusual action for a state to
take.
And then we also see, morerecently in the last couple of
years, actions by the states toopt out of the federal banking
regime, what's called the DIMACAopt out.
So there are a number ofdifferent avenues that that we
(10:07):
see being taken by the states.
Ian Moloney (10:09):
So I think that's something that really you know.
I know we've been thinkingabout a lot at AFC and you know
that sort of patchwork naturethat you see developing.
I mean, these are the bucketsthat you mentioned.
You know are very different inhow they impact the industry.
So I'm wondering if you couldjust give us a sense of you know
(10:30):
when you're partnering withyour banks and when you're, you
know, helping to put out theseloans.
How do these different statelaws really impact the work that
you're doing at Prosper andthen also with your bank
partners?
Martha O'Malley (10:46):
Yeah, so it's a really important impact.
So, to set the stage, webelieve in responsible,
innovative marketing and accessto credit for consumers and we
take that stance with our bankpartner.
We also prosper as amarketplace, so we have
institutional investors thatparticipate on our platform and
(11:07):
our investors take that stanceas well.
We're all very concerned thatwe should adhere properly to
both federal and state laws.
So how that plays out, inresponse to your question is we
may voluntarily not allow theproduct to be issued through our
platform above a certaininterest rate if a state has a
(11:30):
cap.
So, very simply, like the Maddenstates are a good example, like
the Madden decision is stilllaw in New York, connecticut and
Vermont.
So one thing we might do is sayokay, we're going to assume
that the Madden rates are therates that will be available for
products issued through ourplatform, rates that will be
(11:53):
available for products issuedthrough our platform.
Or there might be another state, say, for example, washington
State, that might impose arequirement.
We might think that we're notactually subject to that
requirement, but we mightnonetheless impose a cap on the
product issued through ourplatform so as to avoid having
to have that conversation oravoid the regulatory scrutiny,
(12:14):
which is time consuming andpotentially expensive, and what
that means is that there may beconsumers in those states that
we will not reach, because wesimply don't want to take the
regulatory risks and we won'textend our products to those
museums.
Rachel Morrissey (12:29):
So, just so our listeners have a better
sense, I mean, could you just,in a very short kind of term,
outline what the Madden approachis specifically like, just so
people get an idea of what thatmeans when they're listening to
this?
If you're not talking toWashington insiders or people
who are following this tightly,how would you describe that?
Martha O'Malley (12:52):
Yeah.
So, as Ian said, this will getvery wonky very quickly.
Um, I will try and encapsulateit because the Madden decision
sort of approached it from aslightly different angle, which
was the idea that a bank thathad lawfully made its loan and
then sold it to a non-bank party, that the non-bank party could
(13:15):
not carry the interest rate onthe loan that was issued by the
bank.
And this is sort of challengedby banks and it's called the
valid when made doctrine, whichis a longstanding doctrine that
says that the purchaser of aloan validly made is entitled to
the rights and benefits of thatloan.
The Madden decision, writ large, really upset that certainty of
(13:39):
the valid when made doctrineand it is in effect from a
judicial interpretation in NewYork, connecticut and Vermont.
But there is a federalregulation that says that loans,
when issued through a bank, areinvalidly made, the rights and
(14:01):
benefits due in order to thesubsequent purchaser of the loan
.
So the valid when made doctrineis similar to the true lender
doctrine but it really goes tothe person who purchases the
loan.
The true lender doctrine goesto the person who makes the loan
.
Ian Moloney (14:19):
I think you're kind of circling back to the points,
marty, that you were makingaround the costs and the impact
on consumers.
I mean, it seems like those aretwo very significant
considerations for prospering,kind of, for the industry
overall, and so, thinking aboutall these different states, all
the different potential costs,and kind of how you're able to
(14:42):
serve or not serve certainconsumers, which is the benefit
of fintech, right, you want tobe able to serve those that have
been historically underserved,you know, do you think it's time
for a federal fix?
You know, I mean, we have thevalid when made fix, and so it
seems natural that, even withall the politics and the issues
that have happened previously,there still needs to be a
(15:04):
federal fix.
And, if so, like what does thatlook like for you?
What's the path forward?
Martha O'Malley (15:10):
I think a federal fix would be really
beneficial.
I think it would be beneficialfor a couple of reasons,
including providing certainty.
I think the current regulatoryregime is fragmented and
complicated and overlapping.
I think no one really benefitsfrom that kind of uncertainty.
So I think a federal regulation, or federal legislation even,
(15:33):
would provide incrediblecertainty.
That would be really helpful tosettle this issue and allow the
states and allow others tofocus on issues that are
important to them.
There are state regulationsthat around servicing or around
collections.
There are privacy laws.
There are other areas where thestates can focus their efforts
(15:55):
in their supervisory activities.
The partners are all subject tothose state requirements, and
so a federal law that would, ora federal regulation that would
provide clarity, certainty,level the playing field, would
really be beneficial both toparticipants in the market and
to consumers.
Rachel Morrissey (16:17):
So what would be the limits that you would put
on federal legislation If youwanted states to be able to
focus on certain things and thefederal legislation to be
focused on other things?
Where would you kind of want todraw the line so that the
federal fix wasn't kind ofoverdone or underdone, like if
(16:41):
we're looking for just right andwe're Goldilocks looking for
just right, where does that sit?
Martha O'Malley (16:46):
I think a federal rule could rely on
existing federal supervisorystructures.
The banks already have a pieceof law that is available to them
it's the Bank Service CompanyAct and it provides that bank
service providers are subject tosupervision and examination as
(17:07):
an adjunct of the bank itself,and it provides that the bank
may engage in activities throughservice companies and to allow
it to promote its products, andso a law that sort of
reincorporates and reinforcesthat banks can do this through
the Bank Service Company Actwill protect banks' traditional
(17:28):
powers to pursue theirtraditional activities through
service providers to the bankand clearly brings that through
the bank supervisory regime.
Rachel Morrissey (17:43):
I mean, I think that makes a great deal of
sense.
So how much would clarityaround that particular layer of
federal oversight versus?
(18:03):
You know you were mentioningsome of the different layers the
states would then possibly addto it?
The states would then possiblyadd to it.
How much would that reallyshift the clarity for the
fintech community?
I know it will.
I just want to know what do youexpect that to do?
Martha O'Malley (18:23):
I think it would provide clarity that a
bank engaging a non-bank toperform these activities are the
powers of the bank and it doesnot re-characterize the partner
as the lender.
So if you clearly designatethat area as the banked acting,
(18:44):
in and of itself it prevents there-characterization of the
partner as somehow being alender.
So it would to use a superwonky legal term it would
preempt all of the statestatutes that are modeling the
activities of the bank versusthe activities of the partner.
So I think it would really sortof effectively put an end to
(19:09):
this mixing together of who'sdoing what and make it very
clear that it is the bank doingthese things.
But the bank remains the lendereven as it engages a partner to
perform non-lending activities.
Ian Moloney (19:23):
So kind of keying in on the preemption aspect,
which I know is very importantin today's discussion.
It's very important, kind of,in the broader political
discussion that's going on.
What would a federal fix reallydo to the existing state laws
that have already passed, andwhat would you see as potential
(19:44):
challenges out there if folkswere to pursue, either through
regulation or legislation, afederal fix?
Martha O'Malley (19:57):
Yeah.
So I think that, on the upside,a federal fix would, as I
mentioned, provide clarity forthe actors in the space, for the
banks, for the partners and forconsumers.
There are actors who might bedisadvantaged by this, so, for
example, well-meaning statelegislators who had acted to
(20:19):
protect their consumers.
They may see this as infringingon their powers to protect the
consumers in their states, and Ithink the answer to that is a
lot of education about how thiswould actually ultimately
benefit the consumers, not onlyin their states, but also in all
(20:39):
states.
And so there are, you know,well-meaning legislators and
well-meaning advocates who wantto protect consumers, and they
may initially be displeased,frankly, by the federal
government coming in and sort ofoverriding some of their
efforts.
(20:59):
But I think it's important toremember that we're all trying
to get to the same goalresponsible access to credit for
American consumers and gettingthere through a platform of
clarity and regulatory certaintywill help all of them.
A clear, even tide raisesaccess to credit for all
(21:20):
consumers, to borrow a metaphor.
Rachel Morrissey (21:25):
It's a good metaphor borrow away.
Um, I do have one a little umquestion around.
That is is do you guys have anyresearch or do you have any
sensibility about what kind ofoverall improvements this would
be for the consumers?
Um, because, at the end of theday, if all of this back and
(21:47):
forth is about how much do weprotect the consumer from any
kind of predatory lending andthen how much do we actually are
we keeping them fromresponsible lending that would
benefit them, then, you know, dowe have any numbers that could
kind of clarify that has?
Martha O'Malley (22:07):
penetrated areas that have lost traditional
bank branches and has allowedconsumers to obtain credit at
(22:30):
lower rates than products issuedthrough traditional banks.
There's also a 2018 study bythe Federal Reserve Bank of New
York that says that reallyfocused on mortgage lending, but
it said that technologicalinnovations by mortgage lenders
improve the efficiency of themortgage lending market and
(22:51):
benefits to consumers includedthings like timely processing,
quicker responses to fluctuationin demand and overall lower
levels of consumer delinquency.
And then, on the flip side,there are some sort of negative
(23:31):
consequences to consumers, whichbasically said that the number
of providers in Illinois shrunkby approximately 40%.
Now, I think not everyone wouldsay that's a terrible thing.
That may have been the point ofthe act and that's fine, but my
point generally is that theseregulations do have effects on
(23:52):
the consumer market, and so,where we draw those lines, it'd
be better to have them as auniform federal presence rather
than have access to creditrestricted state by state.
Rachel Morrissey (24:05):
Thank you so much for being with us today,
Marty.
You've been great.
That's about all the time wehave, Ian.
Do you have any final questionsyou want to ask before we?
Ian Moloney (24:14):
wrap this.
I think Marty coveredeverything so well and really
framed up the conversation, sothank you very much for joining.
Rachel Morrissey (24:22):
She didn't, even if you do ask hard
questions.
I think she batted pretty wellon that.
I think she did a great job, sothank you so much.
I want to thank you so much forbeing here today and, ian,
thank you so much for co-hostingwith me.
I look forward to co-hostingthe next one with you as well.
We've got one more that you andI are going to be doing
(24:44):
together as part of this series,and I want to thank our
audience.
Please go ahead and write usany ideas that you have for
podcasts at podcastmoney2020.com, and have a great day.
Welcome to the Money Pot.
I am Rachel Morrissey.
I am from Money 2020.
I'm our head of content for theUS show and the executive
producer of the podcast, and Iam here with a special series
that we're doing with theAmerican Fintech Council about
all of the things that arereally going on in Washington DC
and the very quick turn ofevents that have happened there
(00:28):
over the last couple of monthsand what's going forward.
Today, we're going to befocusing specifically on
navigating fintech andregulation with the true lender
debate, and so, before we getmuch further, I want to
introduce my co-host, ian PMaloney.
He's the Senior Vice Presidentof Policy and Regulatory Issues
(00:50):
at the American FinTech Council.
How are you, ian?
Ian Moloney (00:52):
I'm doing well, Rachel.
How are you doing today?
Rachel Morrissey (00:55):
Good, are you up for this?
Are you ready to co-host?
Ian Moloney (00:58):
Oh, I am so ready to co-host and I feel like we
should put a little not aparental advisory sticker but
maybe a wonk advisory sticker,because this conversation is
going to get really wonky reallyquick.
But I'm excited for it.
Rachel Morrissey (01:11):
I love wonky.
Our listeners love wonky.
They come to us for wonky, sowe're going there.
So joining us to talk about theTrue Lender debate is Martha
O'Malley.
She's the Assistant GeneralCounsel for Prosper.
How are you doing, Marty?
I'm well, thank you.
How are you, Rachel?
I am good.
We're so glad that you decidedto join us today.
(01:33):
We're excited to talk about allof the different issues around
the nature of the True Lenderdebate.
It's been a really interestinghistory Going over the past 10
years.
It feels like we go back andforth on a pendulum here pretty
quickly, depending on whoever isin charge.
So why don't we start there?
(01:55):
Ian, do you want to kick us offwith the first kind of intro
and idea?
Ian Moloney (02:00):
Yeah, absolutely, and I know, you know, as I
mentioned, it's going to be awonky conversation, but we
should definitely set the grounda little bit, set the stage,
and so, you know, Martha, Ithink it would be helpful.
You know, recognizing, you knowProsper has been in the mix
pretty heavily on True Lenderissues, AFC.
This has been a huge issue forus as well.
(02:20):
Can you just kind of, you know,give us a brief overview of the
issue and any regulatory andlegislative issues?
Martha O'Malley (02:28):
Sure, I'm happy to talk about this.
So Prosper is kind of one ofthe grandparents of fintech
lending.
Prosper began lending in 2006,so it has a very long and
established history in fintechlending.
Prosper is no longer a lender.
Prosper is a bank partner, andthat really sort of ties
(02:51):
directly into the true lenderquestion.
And true lender really affectsthe bank partnership model, and
what that really means is that'sa partnership between the
funding bank that makes andissues and originates the loan
and a partner which may do avariety of services for the bank
(03:12):
, such as marketing oradvertising or servicing the
loan.
For the bank partnership modelhas proven to have a number of
benefits for both the banks andfor consumers, and I think I'll
stop there and sort of talk alittle bit about that and then
(03:36):
we can shift over to TrueLender.
So, for the bank partnershipmodel just really at a high
level, has benefits to banks inthat it allows banks to extend
their lending activities.
It's particularly helpful forcommunity banks so that they can
extend their ability to lendbeyond their brick and mortar
geographical presence.
(03:56):
It's also and there are studiesthat back this up up there are
2018 Basel Committee studiesthat back this up that show that
actually, banks need to movemore and more in this direction
to increase their ability toreach consumers and to meet the
demands of a competitiveenvironment.
On the flip side for consumers,there are a lot of benefits for
(04:19):
consumers.
They're more able to haveconsumer choice.
They're more able to get accessto different products, and it's
been shown through a number ofstudies, particularly a 2018
Philly Fed study that shows thatmore consumers are able to get
access to financial services andproducts through the bank
partnership model.
So I want to set the stage thatthere are a lot of benefits to
(04:42):
financial services in having thebank partnership model.
So you may ask and I promise tokeep this relatively brief,
that's great.
How does true lender play intothat?
And the true lender doctrinereally is the theory that the
true lender of loan is not thebank but is instead the fintech
(05:07):
partner.
And the true lender seeks torecharacterize the fintech
partner as the lender through acouple of catchphrases that
you'll hear over and over againwhich is either the predominant
economic interest or thetotality of the circumstances,
and it attempts to apply thesetests or apply regulatory
requirements to recharacterize apartner as the back.
Rachel Morrissey (05:33):
Okay.
So this is interesting becausethe history of it, the history
of this, of the regulationaround this, has kind of flipped
back and forth.
(05:55):
Initially, during the firstTrump administration, there was
a rule put out by the OCC thatmade it kind of uniform
nationally, that there was arule that was the financial
services and fintech was verymuch in favor of right Because
it did exactly what you did,which, what you were talking
about, which is it allowed forthese bank fintech partnerships
to really flourish in this way?
And then the Bidenadministration came in and they
(06:17):
became concerned with predatorybehaviors that were possible
because of the nature of therule and Congress passed
legislation against it and Bidensigned it and nature of the
rule, and Congress passedlegislation against it and Biden
signed it and they killed thatrule.
And so now we're back into thewhat's going to happen next
model, like how's the pushbackgoing to go?
Is this going to get reversedagain?
(06:37):
How will it get reversed?
Do I have that right?
Is that a fair summary of theevents or the major events of
the last little while?
Martha O'Malley (06:49):
I think at a high level.
That's a fair summary.
I think in each of those prongsthere's a lot of additional
detail, but I think that's fineto set the stage.
Rachel Morrissey (06:59):
Okay, good, okay, so let's look at this In
lieu of the federal fix, stateshave taken their own approach
deciding the true lender issue,and there's certain states like
Washington, new Mexico andIllinois that have pursued
fairly similar laws related totrue lender, while the
traditional regulatory leadersof California and New York have
(07:21):
pursued different activities onthis issue.
So, based on your understandingof the state regulatory
landscape, how do you see theidea of regulatory diffusion
occurring on the true lenderissue?
Martha O'Malley (07:34):
Sure, so I think there are several avenues
that the states have taken and,if I can sort of delve a little
bit back into history, we seethe first state legislative
regime enacted in 2011 inGeorgia, and Georgia was the
first state to codify apredominant economic interest in
(07:55):
the totality of thecircumstances test, and then
from there the activity shiftedlargely to the courts, and you
see actions in Delaware, you seeactions in West Virginia, you
see actions in different placesin the courts, but, starting in
the early 2020s, you seeactivities at the state level in
(08:18):
the 2021, 2022, 2023 area, andthose statutes fall, generally
speaking, into two buckets.
One bucket is state regulationsthat, based on anti-evasion
provisions, attempt to use theactivities that a partner might
(08:39):
engage in, like marketing,arranging or brokering the loans
, or holding or acquiring thepredominant economic interest,
to use those activities torecharacterize the partner as
the lender, and that's been putinto statutes in states like
Illinois, maine, new Mexico,washington State.
(09:02):
There's another avenue that wesee relatively frequently, which
is to impose licensingrequirements on the bank partner
, and these may be your normallicensing requirements or the
licensing may take effect aroundcertain loan sizes and certain
interest rates of the productissued by the bank, and we see
(09:25):
that in certain states again inthe 2021 area, but we see that
in states like Wyoming, nebraska, connecticut and Wisconsin.
So we see those two avenues.
There are other avenues that wesee sort of in Maryland, we saw
an action in the early 2020s torequire the bank to be licensed
(09:46):
by the state, which is a veryunusual action for a state to
take.
And then we also see, morerecently in the last couple of
years, actions by the states toopt out of the federal banking
regime, what's called the DIMACAopt out.
So there are a number ofdifferent avenues that that we
(10:07):
see being taken by the states.
Ian Moloney (10:09):
So I think that's something that really you know.
I know we've been thinkingabout a lot at AFC and you know
that sort of patchwork naturethat you see developing.
I mean, these are the bucketsthat you mentioned.
You know are very different inhow they impact the industry.
So I'm wondering if you couldjust give us a sense of you know
(10:30):
when you're partnering withyour banks and when you're, you
know, helping to put out theseloans.
How do these different statelaws really impact the work that
you're doing at Prosper andthen also with your bank
partners?
Martha O'Malley (10:46):
Yeah, so it's a really important impact.
So, to set the stage, webelieve in responsible,
innovative marketing and accessto credit for consumers and we
take that stance with our bankpartner.
We also prosper as amarketplace, so we have
institutional investors thatparticipate on our platform and
(11:07):
our investors take that stanceas well.
We're all very concerned thatwe should adhere properly to
both federal and state laws.
So how that plays out, inresponse to your question is we
may voluntarily not allow theproduct to be issued through our
platform above a certaininterest rate if a state has a
(11:30):
cap.
So, very simply, like the Maddenstates are a good example, like
the Madden decision is stilllaw in New York, connecticut and
Vermont.
So one thing we might do is sayokay, we're going to assume
that the Madden rates are therates that will be available for
products issued through ourplatform, rates that will be
(11:53):
available for products issuedthrough our platform.
Or there might be another state, say, for example, washington
State, that might impose arequirement.
We might think that we're notactually subject to that
requirement, but we mightnonetheless impose a cap on the
product issued through ourplatform so as to avoid having
to have that conversation oravoid the regulatory scrutiny,
(12:14):
which is time consuming andpotentially expensive, and what
that means is that there may beconsumers in those states that
we will not reach, because wesimply don't want to take the
regulatory risks and we won'textend our products to those
museums.
Rachel Morrissey (12:29):
So, just so our listeners have a better
sense, I mean, could you just,in a very short kind of term,
outline what the Madden approachis specifically like, just so
people get an idea of what thatmeans when they're listening to
this?
If you're not talking toWashington insiders or people
who are following this tightly,how would you describe that?
Martha O'Malley (12:52):
Yeah.
So, as Ian said, this will getvery wonky very quickly.
Um, I will try and encapsulateit because the Madden decision
sort of approached it from aslightly different angle, which
was the idea that a bank thathad lawfully made its loan and
then sold it to a non-bank party, that the non-bank party could
(13:15):
not carry the interest rate onthe loan that was issued by the
bank.
And this is sort of challengedby banks and it's called the
valid when made doctrine, whichis a longstanding doctrine that
says that the purchaser of aloan validly made is entitled to
the rights and benefits of thatloan.
The Madden decision, writ large, really upset that certainty of
(13:39):
the valid when made doctrineand it is in effect from a
judicial interpretation in NewYork, connecticut and Vermont.
But there is a federalregulation that says that loans,
when issued through a bank, areinvalidly made, the rights and
(14:01):
benefits due in order to thesubsequent purchaser of the loan
.
So the valid when made doctrineis similar to the true lender
doctrine but it really goes tothe person who purchases the
loan.
The true lender doctrine goesto the person who makes the loan
.
Ian Moloney (14:19):
I think you're kind of circling back to the points,
marty, that you were makingaround the costs and the impact
on consumers.
I mean, it seems like those aretwo very significant
considerations for prospering,kind of, for the industry
overall, and so, thinking aboutall these different states, all
the different potential costs,and kind of how you're able to
(14:42):
serve or not serve certainconsumers, which is the benefit
of fintech, right, you want tobe able to serve those that have
been historically underserved,you know, do you think it's time
for a federal fix?
You know, I mean, we have thevalid when made fix, and so it
seems natural that, even withall the politics and the issues
that have happened previously,there still needs to be a
(15:04):
federal fix.
And, if so, like what does thatlook like for you?
What's the path forward?
Martha O'Malley (15:10):
I think a federal fix would be really
beneficial.
I think it would be beneficialfor a couple of reasons,
including providing certainty.
I think the current regulatoryregime is fragmented and
complicated and overlapping.
I think no one really benefitsfrom that kind of uncertainty.
So I think a federal regulation, or federal legislation even,
(15:33):
would provide incrediblecertainty.
That would be really helpful tosettle this issue and allow the
states and allow others tofocus on issues that are
important to them.
There are state regulationsthat around servicing or around
collections.
There are privacy laws.
There are other areas where thestates can focus their efforts
(15:55):
in their supervisory activities.
The partners are all subject tothose state requirements, and
so a federal law that would, ora federal regulation that would
provide clarity, certainty,level the playing field, would
really be beneficial both toparticipants in the market and
to consumers.
Rachel Morrissey (16:17):
So what would be the limits that you would put
on federal legislation If youwanted states to be able to
focus on certain things and thefederal legislation to be
focused on other things?
Where would you kind of want todraw the line so that the
federal fix wasn't kind ofoverdone or underdone, like if
(16:41):
we're looking for just right andwe're Goldilocks looking for
just right, where does that sit?
Martha O'Malley (16:46):
I think a federal rule could rely on
existing federal supervisorystructures.
The banks already have a pieceof law that is available to them
it's the Bank Service CompanyAct and it provides that bank
service providers are subject tosupervision and examination as
(17:07):
an adjunct of the bank itself,and it provides that the bank
may engage in activities throughservice companies and to allow
it to promote its products, andso a law that sort of
reincorporates and reinforcesthat banks can do this through
the Bank Service Company Actwill protect banks' traditional
(17:28):
powers to pursue theirtraditional activities through
service providers to the bankand clearly brings that through
the bank supervisory regime.
Rachel Morrissey (17:43):
I mean, I think that makes a great deal of
sense.
So how much would clarityaround that particular layer of
federal oversight versus?
(18:03):
You know you were mentioningsome of the different layers the
states would then possibly addto it?
The states would then possiblyadd to it.
How much would that reallyshift the clarity for the
fintech community?
I know it will.
I just want to know what do youexpect that to do?
Martha O'Malley (18:23):
I think it would provide clarity that a
bank engaging a non-bank toperform these activities are the
powers of the bank and it doesnot re-characterize the partner
as the lender.
So if you clearly designatethat area as the banked acting,
(18:44):
in and of itself it prevents there-characterization of the
partner as somehow being alender.
So it would to use a superwonky legal term it would
preempt all of the statestatutes that are modeling the
activities of the bank versusthe activities of the partner.
So I think it would really sortof effectively put an end to
(19:09):
this mixing together of who'sdoing what and make it very
clear that it is the bank doingthese things.
But the bank remains the lendereven as it engages a partner to
perform non-lending activities.
Ian Moloney (19:23):
So kind of keying in on the preemption aspect,
which I know is very importantin today's discussion.
It's very important, kind of,in the broader political
discussion that's going on.
What would a federal fix reallydo to the existing state laws
that have already passed, andwhat would you see as potential
(19:44):
challenges out there if folkswere to pursue, either through
regulation or legislation, afederal fix?
Martha O'Malley (19:57):
Yeah.
So I think that, on the upside,a federal fix would, as I
mentioned, provide clarity forthe actors in the space, for the
banks, for the partners and forconsumers.
There are actors who might bedisadvantaged by this, so, for
example, well-meaning statelegislators who had acted to
(20:19):
protect their consumers.
They may see this as infringingon their powers to protect the
consumers in their states, and Ithink the answer to that is a
lot of education about how thiswould actually ultimately
benefit the consumers, not onlyin their states, but also in all
(20:39):
states.
And so there are, you know,well-meaning legislators and
well-meaning advocates who wantto protect consumers, and they
may initially be displeased,frankly, by the federal
government coming in and sort ofoverriding some of their
efforts.
(20:59):
But I think it's important toremember that we're all trying
to get to the same goalresponsible access to credit for
American consumers and gettingthere through a platform of
clarity and regulatory certaintywill help all of them.
A clear, even tide raisesaccess to credit for all
(21:20):
consumers, to borrow a metaphor.
Rachel Morrissey (21:25):
It's a good metaphor borrow away.
Um, I do have one a little umquestion around.
That is is do you guys have anyresearch or do you have any
sensibility about what kind ofoverall improvements this would
be for the consumers?
Um, because, at the end of theday, if all of this back and
(21:47):
forth is about how much do weprotect the consumer from any
kind of predatory lending andthen how much do we actually are
we keeping them fromresponsible lending that would
benefit them, then, you know, dowe have any numbers that could
kind of clarify that has?
Martha O'Malley (22:07):
penetrated areas that have lost traditional
bank branches and has allowedconsumers to obtain credit at
(22:30):
lower rates than products issuedthrough traditional banks.
There's also a 2018 study bythe Federal Reserve Bank of New
York that says that reallyfocused on mortgage lending, but
it said that technologicalinnovations by mortgage lenders
improve the efficiency of themortgage lending market and
(22:51):
benefits to consumers includedthings like timely processing,
quicker responses to fluctuationin demand and overall lower
levels of consumer delinquency.
And then, on the flip side,there are some sort of negative
(23:31):
consequences to consumers, whichbasically said that the number
of providers in Illinois shrunkby approximately 40%.
Now, I think not everyone wouldsay that's a terrible thing.
That may have been the point ofthe act and that's fine, but my
point generally is that theseregulations do have effects on
(23:52):
the consumer market, and so,where we draw those lines, it'd
be better to have them as auniform federal presence rather
than have access to creditrestricted state by state.
Rachel Morrissey (24:05):
Thank you so much for being with us today,
Marty.
You've been great.
That's about all the time wehave, Ian.
Do you have any final questionsyou want to ask before we?
Ian Moloney (24:14):
wrap this.
I think Marty coveredeverything so well and really
framed up the conversation, sothank you very much for joining.
Rachel Morrissey (24:22):
She didn't, even if you do ask hard
questions.
I think she batted pretty wellon that.
I think she did a great job, sothank you so much.
I want to thank you so much forbeing here today and, ian,
thank you so much for co-hostingwith me.
I look forward to co-hostingthe next one with you as well.
We've got one more that you andI are going to be doing
(24:44):
together as part of this series,and I want to thank our
audience.
Please go ahead and write usany ideas that you have for
podcasts at podcastmoney2020.com, and have a great day.
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