A recent court ruling suggests that FinTech lenders may need to follow state usury laws, depending on their business model. On August 12, 2015, the U.S. Court of Appeals for the Second Circuit confirmed that LendingClub cannot bypass state usury laws. For example, LendingClub Corp., and other peer-to-peer lending services have been making a loan to a borrower in, say, New York—where interest rates are capped at 16 percent for most loans—by originating it in Utah, which has no usury limits. Barring an appeal to the U.S. Supreme Court, the ruling, if adopted in other Circuits, could mean that FinTech lenders may have existing loans that may be deemed in violation of state laws. That poses a risk to loans already sold into securities that are helping to finance the industry’s growth, and may present obstacles to future originations of the highest-yielding credits.
The case is titled Madden v. Midland Funding LLC, 2d Cir., No. 14-cv-02131, (petition for rehearing denied, 8/12/15).