The California Department of Financial Protection and Innovation files a counterclaim alleging that OppFi is the “true lender” on loans made through a banking partnership and seeking penalties of “at least $100 million dollars’ | Ballard Spahr LLP
In response to the complaint filed by Opportunity Financial, LLC (OppFi) seeking to prevent the California Department of Financial Protection and Innovation (DFPI) from applying California usury law to loans made under OppFi’s partnership with FinWise Bank (Bank), the DFPI filed a counterclaim seeking to bar OppFi from collecting the loans and have the loans declared void.
In 2019, California enacted AB 539 which, effective January 1, 2020, limited the rate of interest that could be charged on loans less than $10,000 but greater than $2,500 by approved lenders under California Finance Act (CFL) at 36% plus federal funds. rate. OppFi’s complaint states that prior to 2019, the Bank entered into a contractual agreement with OppFi (Program) pursuant to which the Bank uses OppFi’s technology platform to provide small dollar loans to consumers through the United States (Program Loans). It alleges that in February 2022, the DFPI advised OppFi “that its program-related activities were subject to the CFL and violated AB 539 because, according to the Commissioner [of the DFPI]OppFi is the “true lender” on the program loans, and the interest rate on these loans exceeds the interest rate cap in AB 539.” OppFi has also been informed that the interest rate on the loans of the program for an amount less than $2,500 violated the CFL rate limit on these loans.
OppFi’s complaint alleges that because the Bank and not OppFi provides the program loans and the Bank is an FDIC-insured state chartered bank located in Utah, the Bank is authorized by Section 27 (a) the Federal Deposit Insurance Act to charge interest on its loans, including loans to California residents, at a rate permitted by Utah law, regardless of any California law imposing a rate limit of lower interest. Complaint seeks declaration that CFL interest rate caps do not apply to program loans and an injunction prohibiting the DFPI from applying CFL rate caps to OppFi based on its participation in the program.
In its counterclaim, the DFPI alleges that “OppFi is the true lender of [the Program Loans]on the “substance of the transaction” and the “entire circumstance
‘s”, the main factor being “which entity – bank or non-bank – has the predominant economic interest in the transaction”. The DFPI alleges that OppFi holds the predominant economic interest in the program loans because:
- OppFi buys between 95 and 98% of the receivable for each loan;
- On average, OppFi purchases receivables from the Bank within three days of the Bank funding the loan and before any initial loan payments are made to the Bank;
- OppFi insulates the Bank from “essentially” all credit risk “by creating a secured secondary market” for the program loans which OppFi accomplishes by purchasing the loans using its wholly-owned subsidiaries established solely to purchase receivables from banking partners such as the Bank;
- OppFi’s loan receivables sale agreement with the Bank provides that the Bank is only obligated to fund loans if OppFi’s buying subsidiary maintains a minimum amount of collateral, consisting of an account of cash collateral, an alternative collateral account and letters of credit in favor of the Bank;
- OppFi pays the Bank a guaranteed monthly “banking program fee” based on a percentage of the principal amount of loans made by the Bank, “not only further mitigating any actual credit risk for [the Bank] but by literally providing the banking partner with a rent based on the volume of lending for its charter; ” and
- OppFi has paid the Bank the start-up costs of the partnership and is responsible for paying the Bank’s expenses related to the partnership.
The DFPI counterclaim also alleges that in addition to holding the predominant economic interest, OppFi “performs all the functions of a traditional lender”, is responsible for all marketing in association with the Loan Program, determines underwriting criteria Program Loans with a minimum contribution from the Bank, and assumes program loan service obligations.
The DFPI claims that program loans are subject to the CFL and that OppFi violates the CFL by making loans above the CFL rate cap. As a remedy for the alleged CFL violations, the DFPI seeks (1) an injunction permanently prohibiting OppFi from collecting on the Program Loans, (2) a declaration that the Program Loans are void, (3) a order requiring OppFi to return to all borrowers on Program loans, (4) an order requiring the removal of any negative credit reports relating to Program loans, and (5) payment by OppFi of “penalties of $2,500 for each violation of the CFL, amounting to at least $100 million.”
Although OppFi holds a CFL license, the counterclaim also alleges that OppFi’s conduct is nonetheless subject to the California Consumer Financial Protection Act (CCFPL). The CCFPL provides that it does not apply to a CFL licensee “to the extent that such person or employee is acting under the authority” of a CFL license. According to the DFPI, “OppFi has affirmatively denied that it conducts any of its business under its CFL license. [and] [t]therefore, to the extent that OppFi does not offer [the Program Loans] under the authority of its CFL license, OppFi’s conduct is subject to the CCFPL.
The counterclaim alleges that OppFi violated the CCFPL through conduct that includes offering and collecting program loans at rates above the rate permitted under the CFL. The remedy sought by the DFPI for OppFi’s alleged violations of the CCFPL includes (1) reimbursement of payments, interest, and other fees received by OppFi from California borrowers on the program loans, and (2) an injunction permanently restraining OppFi to (a) “make use of automated payments and remotely created checks that rely on consumer banking data, payment systems and networks, and online banking systems to receive payments on [Program Loans]and (b) “to promote and recommend [Program Loans] as a means of “building a credit history” and purporting to provide services to help a consumer manage or settle their debts by recommending their [Program Loans] as a way to consolidate debt.
Late last year, we completed a months-long project to update and expand on a 2017 white paper on bank lending models – programs involving partnerships between banks (or associations of banks). savings) and fintech companies or other non-bank companies in interstate lending. . The new white paperwhich spans 49 single-spaced pages, is designed to serve as a comprehensive survey of laws, cases, and regulatory attitudes regarding bank lending models.