State of the States Q4

Looking back at 2023, the fintech industry has seen a variety of new laws and regulations to enhance consumer protection and level the playing field. Not all laws and regulations are created equally, from predominant economic interest clauses and an unprecedented DIDMCA  (Depository Institutions Deregulation and Monetary Control Act) “opt out” in an effort to eliminate high interest lenders and position novel activities, products, and services into an existing regulatory framework. Without regular communication with industry participants, regulators and legislators are not incentivized to craft and enact responsible laws and regulation that protects consumers and fosters innovation in areas most in need.

Responsible Actors Feel the Pressure

Eliminating high interest lending in all forms will continue to be a top priority for consumer groups just as it has been for market participants impacted by policies that may not fully address the full impact on consumers and responsible lenders who serve them. We are seeing a push for predominant economic impact (PEI) clauses in legislation to eliminate rent-a-bank schemes and irresponsible pay day and installment lending. Responsible actors like Cross River leverage the bank-fintech partnership model and maintain a portion of loans on its balance sheet and make themselves available to consumers should any customer service issues arise. PEI clauses may also complicate a bank’s ability to sell a loan on the secondary market. PEI clauses for loans above 36% are a welcomed compromise, as they force bad actors to retain loans that have extremely high interest rates, potentially increasing their risk profile and forcing them to impose stronger underwriting standards.

In Colorado, discussions are still underway regarding the impact of the DIDMCA opt out and the interest rate limits that remain in the state for community banks and their fintech partners. The impact of access to responsible credit will continue to be felt by consumers in the high interest rate environment that we are seeing today.  Market participants are hopeful that an agreement can be made between policymakers and consumer advocacy groups to limit the negative impact on consumers. It remains unknown how the results of such efforts will play out, with responsible parties coming to the table with alternatives that allow market participants to continue to provide financial services and products to Coloradans that are supported by policymakers and consumer groups alike.

Before proposing changes to the marketplace lending and bank partnership model that allows market participants to provide responsible [credit] products to millions of consumers each year, we urge all policymakers to allow responsible lenders to have a seat at the table to craft responsible and comprehensive laws and regulations for both market participants and consumers.

A Sound Alternative to Pay Day Loans

Pay day lending continues to be a thorn in the fintech space; the rates and terms are often considered predatory, yet individuals turn to these products when they have nowhere else to go. Earned wage access (“EWA”) is a novel offering that is not new to the industry but has been seeing more popularity with consumers as the industry grows and integrates with employers. Often lumped in with pay day lenders like installment loans, EWA offerings are not loans and they are free of high interest rates that often accompany pay day loans.

These products give consumers access to the wages they earned ahead of schedule. For example, with an employee who is paid bi-weekly, an offering such as earned wage access allows the employee to access the wages he/she has already earned on a regular basis. There is no loan and the fees are generally lower than other alternatives, with each provider offering a no-or-low cost option as we saw in the recently enacted Nevada legislation¹.

In comparison, a payday loan is lending the money one may earn that collects interest—often rates much higher than the widely accepted industry standard of 36% -- and the individual must pay that loan back in full once paid, or the interest will continue to accrue, creating an endless cycle of debt each paycheck as typically most, if not all of the funds have been expended.

Many regulators and legislators have begun licensing EWA organizations, a move that is generally welcomed by the industry; however, driving this financial product into the existing framework of a consumer loan is problematic: there is no loan, there is no annual percentage rate; a consumer is simply accessing their wages early without a need to pay the entity back. The employer is responsible for depositing those funds to the EWA provider and/or verifying that the funds that are distributed by the EWA provider are accurate and have been accrued as of the time of the request.  

Looking Ahead to 2024

Cross River is looking forward to continued dialogue with regulators and legislators to enact innovative policies across all verticals of the fintech ecosystem. Partnering with consumer advocates to ensure the necessary guardrails are in place for consumers is a top priority for the industry and we welcome future discussions.

^{1 https://www.leg.state.nv.us/App/NELIS/REL/82nd2023/Bill/10146/Text}