Last month the FDIC released guidelines stipulating that online lenders funded by banks may receive increased regulatory attention. If enacted, such regulation may reduce the advantage startups have over traditional banks from a compliance perspective.
The lender-bank partnerships are sometimes known as “rent-a-charter,” since the lender pays the bank to take on its status as a national financial institution not subject to state usury laws that cap interest rates. The bank reviews the credit policies submitted by its online partner, then uses its capital to fund each loan until an investor ultimately takes it over. The whole process typically takes a day or two. Some experts argue rent-a-charter arrangements reduce risk. Taxpayers aren’t in danger of being on the hook if a loan fails, while borrowers are given wider access to credit even if banks don’t want to take risks.