The Connecticut Department of Banking (the “Department”) issued a guidance letter on September 11, 2023 (the “Guidance”) providing its position regarding the amendments to Connecticut’s Small Loan Lending and Related Activities Act (the “Act”) that become effective on October 1, 2023. We previously blogged about these amendments here.

The Department issued this guidance “to assist industry participants in evaluating the need for licensure and the effect of the various requirements under [the amended law].” The Guidance states the Department’s position regarding the necessity of a license in connection with the making, offering, soliciting, advertising, or receiving payments in connection with certain types of products, including earned wage access advances, lawsuit settlement advances, inheritance advances, and income share agreements.

The Guidance first reiterates the significant changes to the Act:

1. Amount: The dollar limit of “small loans” subject to the small loan regulatory requirements is increased from $15,000 to $50,000.
2. APR Calculation:
   1. APR is to be calculated in accordance with the federal Military Lending Act rather than the Truth in Lending Act.
   2. The following items are “finance charges” for purposes of calculating the APR:
      1. A charge for any ancillary product, membership, or service sold in connection or concurrent with a small loan,
      2. Any amount offered or agreed to by a borrower in furtherance of obtaining credit or as compensation for the use of money, and
      3. Any fee, voluntary or otherwise, charged, agreed to, or paid by a borrower in connection or concurrent with a small loan, including tips, donations, and memberships.
3. True Lender Inclusion: “True lenders” that have partnered with banks to make small dollar loans must hold a Small Loan License.

In connection with the Department’s Guidance on whether it will determine a party to be a “true lender,” and thus subject to the license requirement, the Department states that a partner to a bank will be deemed a “true lender” when any of the following conditions are met:

1. Such person holds, acquires or maintains, directly or indirectly, the predominant economic interest in a small loan (in making this determination, the Department will consider to what extent a lender purchases loans, assumes the risks for originated loans, indemnifies the originating lender, and any other relevant circumstances that show which party holds the predominant economic interest); or
2. Such person markets, brokers, arranges, or facilitates the loan and holds the right, requirement or right of first refusal to purchase the small loans, receivables, or interests in the small loans; or
3. The totality of the circumstances indicate that such person is the lender and the transaction is structured to evade the requirements of the Act.

The Guidance states that “‘True Lender’ arrangements have been the subject of regulatory scrutiny for over a decade,” and that the Department will look to case law and enforcement matters that have construed these factors to determine whether a loan will be subject to the Act and also states that these standards are consistent with legislation recently enacted in other states, citing Illinois, Maine, and New Mexico. The Department notes that persons who service loans made by a bank pursuant to a “true lender “arraignment will no longer be exempt from licensure.

The Guidance also makes clear that a Small Loan License may be required in connection with a variety of non-traditional loan products, including, but 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.” The Guidance specifically addresses earned wage access advances and states:

To determine whether a particular earned wage access product or transaction is within the meaning of ‘small loan’ as defined by the [Act], the Department utilizes well established principles of statutory construction. Those principles dictate that words and phrases not otherwise defined within the statutory scheme must be construed according to their common usage, and if the meaning of such words and phrases is plain and ambiguous, extratextual evidence shall not be considered. Unlike other states’ statutory schemes, Connecticut’s small loan definition only has three components: (1) the $50,000 dollar amount limit, (2) the 12% APR threshold, and (3) the type of transaction, i.e., loan of money, extension of credit, or purchase of, or an advance of money on, a borrower’s future potential source of money.

Accordingly, 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[.]

(Emphasis added)

While charging more than a 12% APR is a prerequisite to applicability, the Guidance emphasizes that voluntary payments such as tips, donations, and memberships will no longer be analyzed on a case-by-case basis to determine whether they are incidental to the extension of credit and therefore finance charges under state law; instead, any such fee “charged, agreed to or paid by a borrower in connection or concurrent with” the extension of credit shall be deemed a finance charge and included in the APR calculation. The Department also acknowledged that there are a variety of different earned wage access products and encouraged providers of such products to contact the Department with any fact specific questions.

Finally, the Guidance reiterates that the effective date of the change is October 1st of this year, and expressly states that licensable activities “include, but are not limited to, making or offering a small loan, receiving principal and interest on a small loan, acquiring a small loan, and generating leads for a small loan.” Of note, the Guidance addresses concerns regarding the activities that trigger licensure after the loan is made, such as servicing and acquisition. This creates the potential for licensable activity to occur on or after October 1, 2023, concerning a loan made before October 1, 2023, that may not have been considered a “small loan” on the date it was made. The Guidance provides that for loans originated and made to borrowers in amounts between $15,000 and $50,000 prior to October 1, 2023, the Department recognizes that the statutory scheme regulating small loans in these amounts was not in effect and therefore did not require licensure for persons servicing or acquiring these loans. As such, the Department will not require licensure for servicing and acquiring such loans post October 1, 2023. However, the Guidance states the new MLA APR calculation will be used in connection with loans of $15,000 or less that are originated before October 1, 2023 to determine whether a license is required in connection with the receipt of payments or the purchase, acquisition, or assignment of such loans.

The Guidance states that the Department will not take enforcement action alleging unlicensed activity in violation of the Act against a person that, as a result of these amendments, newly requires licensure for small loan activities, so long as such person has filed an application for a license on the Nationwide Multistate Licensing System and Registry on or before October 1, 2023. It is important for entities engaged in any business offering products that might be subject to the Act to evaluate how these amendments might impact them.