Connecticut Department of Banking Issues Guidance on Small Loan Rules

The Connecticut Department of Banking has issued new industry guidance regarding the Small Loan Lending and Related Activities Act.

These changes in the regulation are set to come into effect on Oct. 1, the regulator said in the document released Monday (Sept. 11).

One of the key changes brought about by the new regulation is an increase in the dollar limit of small loans subject to regulatory requirements. Previously, the limit stood at $15,000, but it has now been raised to $50,000, according to the guidance.

In another change, to accurately reflect the total cost of credit for borrowers, the calculation of the Annual Percentage Rate (APR) for small loans will now be based on the Military Lending Act (MLA), replacing the federal Truth-in-Lending Act (TILA). The MLA includes more fees in its calculation of the APR, including those for credit insurance and credit-related ancillary products, the guidance said.

In addition, to calculate APR, the definition of “finance charges” now includes ancillary products, memberships or services sold in connection with a small loan, as well as amounts offered or agreed to by borrowers in furtherance of obtaining credit or as compensation for the use of money, per the guidance. Additionally, any fees charged, agreed to, or paid by borrowers in connection with a small loan are considered finance charges.

The new regulation also requires licensure of “true lenders” that partner with banks to offer small-dollar loans, according to the guidance. This licensure requirement applies to lenders who hold the predominant economic interest in a small loan and those who market, broker, arrange or facilitate the loan while holding the right to purchase the loans. The “true lender” regulation aims to prevent non-banks from avoiding the APR restrictions defined in the Act through partnerships with banks.

In the past, advocacy groups have asked U.S. regulators to look more into banks partnering with FinTechs to charge predatory interest rates that would otherwise be illegal in the lenders’ home states.

For example, in February 2022, a coalition of such groups said that the Federal Deposit Insurance Corp. (FDIC) and other agencies should crack down on banks doing “high-cost predatory lending” in their work with FinTech firms.