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Small Business Borrower Sues Kabbage

A small business (SMB) in Massachusetts borrowing funds via marketplace lender Kabbage has sued the platform, igniting new debate in the conversation over the definition of a “true lender,” according to reports in the National Law Review on Tuesday (Oct. 31).

On Oct. 12 of this year, a small business owner sued Kabbage, Inc. and Celtic Bank in a federal court in Massachusetts. The lawsuit argues that the defendants are attempting to “evade Massachusetts’ usury law,” the publication explained.

Usury laws regulate how much interest can be charged on a loan. The rise of marketplace lenders has led to disagreement over who is the “true lender” — the marketplace or the bank that provides the actual funding via the marketplace. State and federal regulators, including the Consumer Financial Protection Bureau (CFPB) are working to hold marketplace lending platforms accountable to usury law compliance, the publication noted, under the argument that the platforms are the true lenders.

Kabbage works with Celtic Bank, chartered by the state of Utah, to provide SMB borrowers with loans via its platform.

The small business that sued the parties is reportedly arguing that Celtic let Kabbage “rent” that bank charter to originate loans with excessive interest rates, despite Kabbage being the “true lender,” because Kabbage, not Celtic, bears the risk of loss. The plaintiffs are using state usury and consumer protection statutes, the publication said, as well as the federal RICO statute and Lanham Act.

The plaintiff is suing Kabbage and Celtic to voice the loan agreements, which include arbitration and choice-of-law provisions, reports said. Defendants have reportedly not yet responded to the lawsuit.

“The Kabbage case exemplifies the litigation risk inherent in using bank partnerships to originate high-interest loans,” said the National Law Review, “a practice that has become more common as FinTech and traditional banking entities collaborate.”

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