Marketplace lender Opportunity Financial, LLC (“OppFi”) has gone on the offensive against the California Department of Financial Protection and Innovation (“DFPI”) to protect its bank partnership program against challenge on a “true lender” theory. On March 7, 2022, OppFi filed suit against the DFPI to ask the state court to declare that FinWise Bank, a Utah-chartered bank, is the true lender of loans facilitated through OppFi’s online platform and funded by the bank.
The suit arises in response to the DFPI’s threat of an enforcement action against OppFi on the basis that OppFi is the true lender of program loans instead of OppFi’s partnering bank. A successful true lender challenge by the DFPI would recharacterize OppFi loans from bank-made loans into loans made by OppFi as a nonbank finance company, such that the loans would lose the benefits of any statutory licensing exemption for banks under state laws and interest rate exportation authority available to bank-originated loans under the Federal Deposit Insurance Act. As a result, recharacterized OppFi loans would be subject to California law, including applicable licensing and usury limits. In California, unsecured consumer loans are regulated under the California Financing Law (“CFL”), which requires a license to make such loans and limits the interest on consumer loans of at least $2,500 but less than $10,000 to 36% simple interest plus the federal funds rate, which has hovered around 0% since the beginning of the COVID-19 pandemic and has not risen above 1.5% since January 2020 (with lower-tiered maximums applicable to smaller loans).
Prior to the 2019 amendments to the CFL enacted with the Fair Access to Credit Act (AB 539), there was no maximum interest rate for loans made by CFL licensees if the loan amount was $2,500 or more. The DFPI has expressed concerns about CFL licensees moving to a bank partner model to avoid the interest rates limits on loans of less than $10,000 since those amendments were passed. In September 2020, the DFPI issued a notice stating that it was investigating whether a company was evading California’s interest rate laws through a partnership with a bank. In December 2021, the DFPI entered into a consent order with the company, which prohibited that company from marketing or servicing certain loans of less than $10,000 with rates greater than 36% in California for the next 21 months but otherwise did not impose any penalties.
OppFi’s suit seeks (i) a declaratory statement that its activities are lawful under California law and (ii) an injunction restraining the DFPI from taking further action against OppFi on the bases described above. In its complaint, OppFi notes that the DFPI’s reading of the law is inconsistent with the legislative history of the Fair Access to Credit Act as well as recent court interpretations, including one that reviewed the legality of the OppFi program and dismissed claims alleging that the loans exceeded CFL interest rate caps. See Sims v. Opportunity Fin., LLC, 2021 WL 1391565 (N.D. Cal. Apr. 13, 2021). The Sims court relied on a “named lender” standard to hold that FinWise Bank made the loans originated under OppFi’s program, so the loans were exempt from the cited provisions of the CFL pursuant to the law’s express exemption for any person doing business under a law of any state relating to banks. The court dismissed the plaintiff’s related usury claim because it was contingent on the program loans being subject to California law in the first place and dismissed the remaining claims alleging unlawful or unfair practices under various state and federal laws as legally unsupported or insufficiently pleaded.
OppFi’s action is the latest activity on the true lender front at the federal and state level. For example, in 2021, the OCC’s “True Lender Rule” was rescinded under the Congressional Review Act. The OCC’s rule had adopted a “named lender” standard to identify the true lender of a loan, which would have limited risk for bank partnership programs involving a federally chartered bank so long as the bank was the named lender on loan documents or funded the loan. Some states have tried to regulate bank partnership programs through administrative enforcement, litigation and legislation. In 2021, Illinois and Maine codified into their laws licensing and/or usury anti-evasion standards grounded in true lender concepts to target bank partnerships, and New Mexico enacted a similar law on March 1, 2022. The Illinois and New Mexico laws are specifically targeted at bank partner programs with loan rates in excess of 36% APR.
While OppFi’s suit remains at an early stage, a favorable result would benefit many fintechs by providing additional clarity with respect to bank partner programs in California.