On October 9, a Florida senator unveiled SB 146, a proposal aimed at amending the Florida Consumer Finance Act (CFA). The purpose of this amendment is to prevent the circumvention of the CFA’s legal safeguards. The proposed legislation is a novel approach in that it views all payments associated with a loan, including those classified as “voluntary”, as interest. What’s more, SB 146 brings in two tests for true lender purposes – the predominant economic interest test and the totality of the circumstances test.
SB 146 appears to follow a trend seen in other states of addressing “true lender” issues. This type of regulatory imbalances often happen when there’s a grey area between two potential “true” lenders, one being the nominal lender (the name on the loan document), and the other being the entity which holds the “predominant economic interest” in the loan. Minnesota, for instance, recently passed similar legislation to mitigate such issues.
- The predominant economic interest test is designed to ascertain whether the bank or the non-bank partner is the true lender. Under this test if the bank (or other nominal lender) holds less than the dominant economic interest, it will be seen as the “true” lender.
- The totality of the circumstances test, on the other hand, regards the entire context of the transaction. Here, the court looks beyond the contractual agreement to the realities of the business arrangement to determine the true lender.
The question of who is the “true” lender in a lending partnership has been gaining increased attention, both legally and from the public. Clearer rules in this area could potentially offer more protection to consumers from predatory lending practices and high interest rates.
As banking, financing and lending practices continue to evolve, such measures will become increasingly essential to safe and fair dealings. This bill confirms Florida’s determination to protect its consumers, and offers a model for other states to follow.