Innovations in financial technology have enabled nonbank firms to market, originate, and service consumer loans entirely online via web-based lending platforms. These online lenders promote themselves as a faster, disintermediated alternative to traditional lending that leverages technology to provide borrowers with convenient and near-instantaneous access to a wider variety of credit products. Yet despite its claimed advantages, the online lending industry remains perpetually entangled in litigation and controversy surrounding its prevailing business model. Most prominently, lawmakers, regulators, and courts are sharply divided as to whether online lending platforms should be able to escape otherwise applicable state usury laws by “partnering” with chartered depository institu-tions to originate high-interest loans. Experts also question the (mis)alignment of incentives between parties at each stage of the lending process, particularly given that the online lender performs a traditionally bank-like role in the transaction but typically bears no economic interest in the loans it originates. In response, this Note argues that a recent settlement between Colorado authorities and two online lenders offers a uniquely practicable template for resolving these interrelated challenges by applying pressure to the incentive mechanisms that lead online lenders to originate high-risk—and therefore high-interest—loans that state usury laws would ordinarily prohibit.
To read this Article, please click here: Port in a Storm: Colorado’s “Safe Harbor” Settlement as a Template for Online Lending Reform.