Sector developments and company hires

Federal preemption challenges continue
Two US courts have heard actions that are of significance to marketplace lenders and their funding sources so far this month, Chapman and Cutler reports. In Maryland, a state regulatory action purporting to require licensing of a sponsor bank and its fintech service providers has been removed to federal court. Conversely, a California federal court has dismissed an action challenging a marketplace lending programme.

In the first case, Salazar versus Fortiva Financial, the Maryland Office of the Commissioner of Financial Regulation alleged that a Missouri state chartered bank and its fintech partners engaged in a bank partnership programme violating various Maryland licensing and credit-related statutes. “Depending on the outcome of this matter, it could significantly change how banks and their fintech partners approach such Maryland requirements,” Chapman and Cutler notes.

In the charge letter, the Commissioner alleged the bank made unsecured consumer loans without complying with the regulatory provisions found in the Maryland Consumer Loan Law. The Commissioner also alleged the bank violated the installment loan licensing requirements by making unsecured consumer loans pursuant to Maryland’s credit grantor closed end credit provisions without a license or an exemption.

As for the bank’s fintech partners, the Commissioner alleged they failed to obtain a license under the Maryland Credit Services Businesses Act, which is required to solicit or arrange unsecured consumer loans for others such as banks. As such, the state alleges that both the non-bank service provider and the out-of-state bank are subject to licensing and credit requirements. 

The defendants have removed the matter to federal court on the grounds that the federal court has federal question jurisdiction over the Commissioner’s claims against the bank and federal law preempts the Commissioner’s claims.

Meanwhile, the second case – Sims versus Opportunity Financial - challenged the validity of loans and business practices associated with a bank partnership programme between FinWise Bank and its non‑bank service provider Opportunity Financial. Originally filed in state court, the defendants removed the action to federal court and filed a motion to dismiss.

The plaintiff - a California consumer - alleged that the defendants operated a “rent-a-bank” scheme to issue high-cost loans, although the bank was listed as the lender on the loan. The plaintiff claimed the bank was lender in name only, with the service provider marketing the loan, purchasing the loan and then servicing and collecting the loan, which the plaintiff alleged was to evade California interest rate restrictions.

The defendants challenged all claims based on the doctrine of federal preemption and alternatively that if preemption failed, the action failed to state a cognisable claim under state law. The court found that all of the plaintiff’s claims failed on the merits and, as a result, did not need to address or resolve the issue of federal preemption.

SME SRT notes upgraded
Scope has affirmed the class A notes and upgraded by a notch classes B to D issued by Santander’s York 2019-1 CLO, in light of positive portfolio performance. As of the 15 March 2021 calculation date, the outstanding nominal balance of the synthetic securitisation was £1.54bn from £3.08m at closing, referencing 1,749 obligations granted to 881 SMEs, self-employed and mid-size corporate borrowers.

After the 20 June 2020 payment date, the transaction breached a subordination event (only 10% of the pool can have a one-year probability of default of greater than 5%). As a result, all classes now amortise on a sequential basis.

Nevertheless, the classes benefit from significant credit enhancement build-up due to the fast repayment of the reference obligation portfolio. As of 15 March 2021, credit enhancement on classes A, B, C and D has respectively increased to 39.5%, 27.5%, 23.2% and 15.1% from the closing levels of 23%, 14.5%, 11.5% and 7.5%.

Scope notes that York’s portfolio performance has been positive due to a combination of UK government financial support and the significant amount of payment holidays offered by Santander.

Since the closing date, only one reference obligation has been subject to a transaction credit event, which occurred in early February 2021 and was reported to the protection seller on 31 March 2021. York’s pool weighted average one-year probability of default deteriorated to 7.8% in March 2021 from 1.8% at closing. Further, debtors flagged as being under close monitoring and on the serious watch list respectively account for around 28% and 6% of the portfolio, as of 15 March 2021.