Significant "True Lender" Changes to Washington Consumer Loan Act Now Effective

Washington recently enacted significant changes to its Consumer Loan Act that may bring certain nonbank loan marketers and program managers within its scope. The Consumer Loan Act requires a license to make consumer loans of any dollar amount that bear a finance charge, including both mortgage and non-mortgage loans. In addition to requiring non-exempt lenders to obtain a license in order to make consumer loans, the Consumer Loan Act also imposes a maximum finance charge limit of 25% APR on these consumer loans. However, prior to June 6, 2024, the Consumer Loan Act did not require a license to solicit, broker, arrange, or purchase non-mortgage consumer loans.

Senate Bill 6025, titled the “Predatory Loan Prevention Act,” was signed by Governor Jay Inslee and took effect on June 6, 2024. Senate Bill 6025 amends the Consumer Loan Act to incorporate “true lender” provisions that, as a matter of law, re-characterize certain non-exempt entities as the lender of consumer loans with APR exceeding 25%. The “true lender” provisions seek to apply the Consumer Loan Act’s licensing requirement and finance charge limitations, among other compliance obligations, to certain loans originated through partnerships between exempt lenders such as banks or depository institutions and nonbank marketers, program managers, and other third parties.

The new “true lender” provisions apply to non-exempt entities if:

• The non-exempt entity acts as an agent or a service provider or in a similar capacity for an exempt lender (such as a bank) related to a consumer loan with an APR that exceeds 25%; and
• Either of these is true: (i) the non-exempt entity holds, acquires, or maintains the predominant economic interest in the loan or (ii) the totality of the circumstances indicate that the non-exempt entity is the lender and the transaction is structured to evade the requirements of the Consumer Loan Act.

If these conditions are met, then the non-exempt entity is considered to be the party that made the loan, as a matter of law, for purposes of determining whether the loan complies with the licensing and other compliance obligations contained in the Consumer Loan Act.

With Senate Bill 6025 taking effect, the Consumer Loan Act now provides that it is also a violation of the law for a person to “[e]ngage in any device, subterfuge, or pretense to evade the requirements of this chapter including, but not limited to, making, offering, or assisting a borrower to obtain a loan with a greater rate of interest, consideration, or charge than is permitted by [the Consumer Loan Act].”

Last, if a transaction violates the Consumer Loan Act’s requirement that a person hold a license to “engage in any activity subject to” the Consumer Loan Act, the amended Consumer Loan Act provides that:

• If the loan is not a residential mortgage loan, the loan is void and unenforceable.
• If the loan is a residential mortgage loan, all non-third-party fees charged in connection with the origination of the loan, other than interest, must be refunded to the borrower.

With these amendments, Washington joins Connecticut, Hawaii, Georgia, Illinois, Maine, Minnesota, Nevada, New Hampshire, and New Mexico as states that have adopted some form of a “true lender” provision that applies certain licensing and/or compliance obligations to some or all consumer loans that are marketed, arranged, or originated through partnerships or arrangements with nonbank entities.