As discussed here, on June 29, Connecticut Governor Ned Lamont signed SB 1033, An Act Concerning Various Revisions to the Banking Statutes, into law. Among other things, the bill: (1) raised the small loan limit from $15,000 to $50,000; (2) expanded the Small Loan Act (SLA) licensure requirement to cover certain brokering and facilitating activities; (3) codified a predominant economic interest test for determining the “true lender” in the SLA; (4) broadened the definition of small loan to include income sharing agreements (ISAs), refund anticipation loans, and pension advances; (5) limited the Annual Percentage Rate (APR) on loans of $5,000 to $50,000 to 25%; (6) redefined APR as an all-in APR calculated similarly to the federal Military Lending Act (MLA); and (7) expanded the definition of finance charge to essentially capture all fees and charges, including optional fees. The revised SLA goes into effect on October 1, 2023.
Earlier this month, the Connecticut Department of Banking issued guidance to help companies comply with the new law. The most controversial aspect of this guidance, was the Department’s inclusion of earned wage access (EWA) products as an example of a covered “small loan”: “Examples of non-traditional loan products generally covered by the Small Loan Lending and Related Activities Act include, but are not limited to, lawsuit settlement advances, inheritance advances, earned wage access advances and income share agreements when those transactions fall within the statutory definition of a ‘small loan’.”
Under the new law, small loan is defined as “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 (i) the amount or value is fifty thousand dollars or less, and (ii) the APR is greater than twelve per cent. . . .” However, the Department seemingly disregards the word “future” in the definition to conclude that an advance on already-earned wages fits within the statutory definition, asserting that “transactions where monies are advanced to consumers for future wages or salary that have been earned but not yet paid, are within the statutory definition of ‘small loan’ when the amount is $50,000 or less and the APR exceeds 12% when taking into account any amounts paid deemed to be finance charges pursuant to P.A. 23-126. “
While EWA products are typically interest free, the Department posited that charges and fees incurred by borrowers in connection with such products such as charges for ancillary products, memberships, or services, amounts offered or agreed to by a borrower to obtain the advance, or voluntary or other fees charged, agreed to or paid by a borrower, including voluntary “tips” would be included in the APR calculation. Thus, the products would fall within the statutory definition of “small loan” if the amount is $50,000 or less and the APR exceeds 12% when taking into account any amounts paid deemed to be finance charges. Further, entities that make small loans to Connecticut borrowers are required to obtain a small loan license.
The Department conceded that there are a variety of “earned wage access” products and invited providers to contact the Department with any fact specific questions, but it is clear the Department wants to regulate EWA products and other emerging products with novel fee structures under the new law.
On September 22, the Department also announced it will take no enforcement actions for unlicensed activity under the revised SLA for companies who apply for a small-loan license by January 1, 2024.
With the revised SLA, Connecticut leap frogs other states seeking to apply regulations designed for loans to innovative products, such as EWA products and ISAs, which aren’t extensions of credit. Connecticut now requires licensure for all products, even ones that are non-recourse or income-contingent. The most troubling aspect of Connecticut’s new law is the expansive definition of finance charges that includes “any amount offered or agreed to by a borrower in furtherance of obtaining credit or as compensation for the use of money, and any fee, voluntarily or otherwise, charged, agreed to or paid by a borrower in connection or concurrent with a small loan.” The new definition essentially includes all fees charges, even penalty fees and optional fees, in its APR, which is capped at 36% for loans under $5,000 and 25% for loans of $5000 to $50,000.