On March 23, SB 1033, An Act Concerning Various Revisions to the Banking Statutes, was given a favorable report by the Legislative Commissioners’ Office and sent to the Connecticut Senate. With this bill, Connecticut hopes to join several other states that have set strict rate caps on consumer loans, including Illinois, New Mexico, Colorado and California, and those that expressly provide for a predominant economic interest test for true lender purposes.
Among other things, the bill proposes to: 1) raise the small loan limit from $15,000 to $50,000; 2) expand the Small Loan Act (SLA) licensure requirement to cover certain brokering and facilitating activities; 3) codify a predominant economic interest test in the SLA; 4) broaden the definition of small loan to include income sharing agreements (ISAs), refund anticipation loans, and pension advances; 5) limit the APR on loans of $5,000 to $50,000 to 25%; 6) redefine APR as an all-in APR calculated pursuant to the federal Military Lending Act (MLA); and 7) define finance charge more broadly.
The proposals to raise the small loan limit to $50,000 and revise definitions appear intended to capture a variety of quasi-credit products, such as contingent obligations, and fintech providers that facilitate bank program loans. SB 1033 is sponsored by the House Banking Committee and, if passed, would take effect on October 1, 2023.
The proposal also includes requirements for:
- Service Provider/Agent Licensing. Requires additional persons to obtain small loan licenses. Specifically, even if a person would otherwise be exempt under the Connecticut General Banking Statute the proposed bill would require licensure for any person who:
- Holds, acquires or maintains, directly or indirectly, the predominant economic interest in a small loan;
- Markets, brokers, arranges or facilitates the loan and holds the right, requirement or first right of refusal to purchase the small loans, receivables or interests; or
- The totality of the circumstances indicate that such person is the lender and the transaction is structured to evade the SLA. In evaluating the totality of the circumstances, the regulator would consider whether the entity:
- Indemnifies, insures or protects exempt persons for costs or risks related to the small loan;
- Predominantly designs, controls or operates a small loan program; or
- Purports to act as an agent/service provider for an exempt person in Connecticut while acting as a direct lender in another state.
- Vehicle Installment Contracts. Raises the limit for sales finance company’s installment contracts on vehicles (from $50,000 to $75,000) and equipment (from $16,000 to $25,000).
- According to testimony from the Connecticut Department of Banking, raising these limits captures more consumers as prices have increased due to inflation.
- Sales Finance Company. Redefines sales finance company to include receiving payments of principal and interest from a retail buyer under a retail installment contract or installment loan contract.
- GAP Waivers. Defines guaranteed asset protection (GAP) waivers and allows consumers to cancel these agreements for full refunds or credits to balances owed upon cancellation.
- Mortgage Lead Generators. Prohibits licensed mortgage professionals from engaging in the services of unlicensed lead generators and from assisting or aiding and abetting any person in the in the conduct of business as a lead generator unless they are licensed.
Troutman Pepper will continue to monitor developments in the proposed amendments.