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.
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.