Opportunity Financial, LLC (OppFi) has filed a Complaint for declaratory and injunctive relief in California state court against the California Department of Financial Protection and Innovation (DFPI), seeking to block the DFPI from applying California usury law to loans made under the partnership of ‘OppFi with Fin Wise Bank (Bank), an FDIC-insured state chartered bank located in Utah.
In 2019, California enacted AB 539 which, effective January 1, 2020, limited the interest rate that could be charged on loans from $2,500 to $10,000 by licensed lenders under the law. California Finance Facility (CFL) at 36% plus the federal funds rate. The complaint states that prior to 2019, the Bank entered into a contractual agreement with OppFi (program) under which the Bank uses OppFi’s technology platform to provide low-value loans to consumers across the United States ( program loans). He alleges that as soon as AB 539 was enacted, the DFPI “began to portray AB 539 as a weapon to be used against noncustodians contracting with federally and state chartered banks.”
According to the complaint, in 2020 and 2021, OppFi provided documents to the DFPI in response to the DFPI’s request for information relating to its partnership with the Bank. In February 2022, the DFPI notified 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.
The complaint describes the role and responsibilities of FinWise and OppFi in the program as follows:
- “Consistent with its role as a lender”, the Bank performs the following functions in its relationship with OppFi:
- Approves all underwriting criteria applied to program loans;
- Uses only Bank funds to provide program loans;
- Retains ownership of all loans made through OppFi’s online platform throughout their life cycle;
- Review and approve all marketing materials; and
- Contracts with borrowers for program loans that are between the borrower and the Bank only, defines the Bank as the program loan lender, and clarifies that the Bank is the entity granting the credit.
- “In line with its role [as a provider of technology-based services]“, OppFi provides the following services to the Bank:
- Maintains a website to receive consumer inquiries on loan products;
- Prepares a marketing strategy and marketing materials for the Bank to review and approve;
- Processes applications for program loans by applying the Bank’s underwriting model to information it collects from consumer loan applications, using a Bank-approved algorithm to approve or reject applications; and
- Service program loans for the Bank.
According to the complaint, in addition to the management fees paid by the Bank, OppFi receives the right to purchase a percentage of the beneficial interest in the program loans. The Bank, in addition to retaining ownership of the Program Loans, retains title to the Program Loans and a beneficial interest in a portion of the principal and interest on the Program Loans.
The 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) of 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 lower interest rate limit. 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 .
The complaint refers to the California Attorney General’s failed attempt to invalidate the crazy– fixed rule which is codified at 12 CFR Section 160.110(d). A California federal district court judge recently dismissed California AG’s challenge (in which other states joined) to the FDIC rule and, in a separate lawsuit, also dismissed a challenge from California AG and other state AGs at the OCC crazy-fixed rule codified at 12 CFR Section 7.4001(e). The rules provide that a loan made by a national bank, federal savings association or federally insured state chartered bank that is authorized under applicable federal law (section 85 of the National Bank Act (LNB) or Section 27 of the Federal Deposit Insurance Act (FDIA)) is not affected by the sale, assignment or other transfer of the Loan.
While both rulings represent a very positive development, the 60-day window for GMs to appeal rulings to the Ninth Circuit has not yet expired. More importantly, as clearly illustrated by the DFPI’s assertion that OppFi is the “true lender” on the program loans, the rulings have not removed the uncertainty that continues to exist for participants in the credit programs. banking model due to threats from the “real lender”. . (The OCC’s attempt to provide a plain and simple test for determining when a bank is the “true lender” in a banking model program through settlement was overthrown by Congress under the Congressional Review Act.) In addition to threats from the “true lender,” nonbank participants in banking model programs will continue to face state licensing threats. Given these persistent threats, non-bank participants would be well advised to review their vulnerability to challenges from “real lenders” and their compliance with state licensing laws.
The DFPI is not alone in asserting a “genuine lender” claim. Other state authorities that have launched or threatened “true lender” attacks on model banking programs include authorities in DC, Maryland, New York, North Carolina, Ohio, Pennsylvania, West Virginia and Colorado. While non-bank participants have been at the center of these state attacks, bank participants could also come under increased scrutiny from their regulators. A few hours after the publication of the two California decisions, the acting comptroller of the currency issued a warning on the abuses of the OCC crazy-fixed rule in which it stated that “[t]The OCC is committed to implementing strong supervision that expands financial inclusion and ensures that banks are not used as a vehicle for “charter lease” deals.[View source.]