Changes Coming To Connecticut—Consumer Lenders, Take Note

The Connecticut legislature passed Senate Bill 1033 on June 6, 2023. If signed into law by Connecticut's governor, Senate Bill 1033 will make significant changes to the Connecticut Small Loan Act, including expanding the types of consumer credit that are subject to the Small Loan Act, narrowing an existing exemption from the Small Loan Act, and enacting a new "anti-evasion" provision to capture certain persons acting as agents or service providers to banks and other exempt lenders.

The Small Loan Act requires a license to perform a wide variety of activities with respect to "small loans," which are non-mortgage consumer loans of $15,000 or less with APR exceeding 12%. The Small Loan Act generally requires a license to make, broker, service, and purchase small loans, as well as to provide lead generation or referral services, unless the person engaging in licensable activity is exempt. Senate Bill 1033 would amend the definition of a "small loan" to increase the dollar amount threshold for coverage under the Small Loan Act from $15,000 to $50,000. In addition, Senate Bill 1033 would provide that a "small loan" includes any 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" that is in an amount of $50,000 or less and bears an APR exceeding 12%.

The bill also would expand the types of fees and charges that are considered part of the APR when determining whether a consumer loan has an APR exceeding 12%. The current Small Loan Act provides that the APR is calculated in accordance with the federal Truth In Lending Act and Regulation Z. Senate Bill 1033 would amend the Small Loan Act to provide that the APR is calculated in accordance with the Military Lending Act and consist of a broad variety of fees and charges, including (i) any charge that must be calculated as part of the "military APR" under the Military Lending Act; (ii) fees for any ancillary product, membership, or service sold in connection with or concurrent with a small loan; (iii) any amount offered or agreed to by a borrower in furtherance of obtaining credit or as compensation for the use of money, and (iv) any fee, voluntary or otherwise, that is charged, agreed to, or paid by a borrower in connection with or concurrent with a small loan. This expanded definition of APR may be a response to a Connecticut Department of Banking enforcement action against a consumer loan platform that operated under a model where the platform was compensated through voluntary "tips" from borrowers.

The bill also would amend the Small Loan Act to incorporate a new "anti-evasion" provision that would apply the licensing requirement to persons that act as an agent, service provider, or in another capacity for an exempt lender (such as a bank) if any of the following apply:

• The person holds, acquires or maintains, directly or indirectly, the "predominant economic interest" in a small loan
• The 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

The totality of the circumstances indicate that the person is the lender and that the transaction is structured to evade the Small Loan Act

The language of this amendment mirrors the "anti-evasion" provisions enacted in other states in recent years, including Illinois and New Mexico. While the bill does not define the circumstances under which a person will be deemed to have the "predominant economic interest" in a loan, it does provide that the following non-exhaustive circumstances would weigh in favor of deeming a person to be the lender under a "totality of circumstances" analysis:

• The person indemnifies, insures, or protects an exempt lender for any costs or risks related to a small loan
• The person predominantly designs, controls, or operates a small loan program
• The person purports to act as an agent, service provider or in another capacity for an exempt lender in Connecticut while acting directly as a lender in another state

Finally, the bill would amend the Small Loan Act to narrow an existing exemption for servicers of bank-originated consumer loans. The Small Loan Act currently exempts any person whose activities are limited to servicing a small loan on behalf of an exempt person, if the small loan is owned by the exempt person and the servicer's arrangement includes providing accounting, record-keeping, and data processing services, in addition to payment collection. The bill would amend the Small Loan Act to limit eligibility for this exemption to persons that are not subject to the new "anti-evasion" provision as agents or service providers to exempt lenders.

Senate Bill 1033 has been sent to Governor Ned Lamont for his signature. If the bill is approved, it will take effect on October 1, 2023. Companies engaging in consumer loan activity in Connecticut that are not already licensed should review Senate Bill 1033 and determine whether to apply for a Small Loan Company license if the bill is enacted.