Kabbage Lawsuit Ignites Debate Over ‘True Lenders,’ Fintech-Bank Partnerships

The lawsuit of a small business in Massachusetts against alternative lender Kabbage is raising questions about the role of partner banks in marketplace lending, namely, whether it’s the bank or the fintech that can be called the “true lender.”

The suit filed earlier this month alleges that Kabbage, together with its partner Celtic Bank (chartered in Utah) are “attempting to evade Massachusetts’ usury law” by allowing Kabbage to “rent” the bank’s charter to issue loans with higher interest rates.

Kabbage is the “true lender,” the suit argues because it holds the risk for the issued loan, not Celtic Bank.

A state’s usury law regulates the amount of interest that a bank or financial institution can charge on a loan. It is unclear where marketplace lenders fall, though regulators like the Consumer Financial Protection Bureau have launched probes and other efforts in the argument that such lenders would need to comply with those laws.

Read more at PYMNTs and National Law Review.

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