Opportunity Financial, LLC (OppFi) has filed a lawsuit Complaint for declaratory judgment and injunctive relief in California state court against the California Department of Financial Protection and Innovation (DFPI) seeking to prevent the DFPI from applying California’s usury law to loans made through OppFi’s partnership with Fin Wise Bank (bank), a state-licensed bank FDIC-insured bank, located in Utah.
In 2019, California enacted AB 539, effective January 1, 2020, increasing the interest rate that may be charged on loans from $2,500 to $10,000 by lenders licensed under the California Finance Act (CFL) to 36% plus the Federal Funds Rate Limited. The complaint notes that prior to 2019, the bank entered into a contractual agreement with OppFi (Program) whereby the bank would use OppFi’s technology platform to provide consumer loans in the United States (Program loans). It is alleged that as soon as AB 539 was enacted, the DFPI “began touting AB 539 as a weapon against non-custodians contracting with state and federal banks.”
According to the complaint, OppFi submitted documents to the DFPI in 2020 and 2021 in response to the DFPI’s request for information regarding its partnership with the bank. In February 2022, the DFPI told OppFi “that its program-related activities are subject to the CFL and violate AB 539 because, according to the commissioner [of the DFPI]OppFi is the “true lender” for program loans, and the interest rate on those loans exceeds the interest rate limit in AB 539.” OppFi was also informed that the interest rate on program loans for amounts less than $2500 exceeds the CFL interest rate limit on such loans hurt.
The complaint describes the role and responsibilities of FinWise and OppFi in the program as follows:
- “Consistent with its role as lender,” the Bank performs the following functions related to its relationship with OppFi:
- Approves all underwriting criteria applied to program loans;
- Uses only bank funds to make program loans;
- Retains ownership of all loans issued through OppFi’s online platform for their entire life cycle;
- Reviews and approves all marketing materials; and
- Enters into agreements with borrowers for program loans that are only between the borrower and the bank, defines the bank as the lender for program loans and clarifies that the bank is the lending authority.
- “In keeping with his role [as a provider of technology-based services]OppFi offers the following services to the bank:
- Maintains a website for receiving consumer inquiries about credit products;
- Prepares a marketing strategy and marketing materials that the bank reviews and approves;
- Processes program loan applications by applying the Bank’s underwriting model to the 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 processing fees paid by the bank, OppFi gets the right to earn a percentage of the economic interest in program loans. In addition to retaining title to the Program Loans, the Bank retains title to the Program Loans and an beneficial interest in a portion of the principal and interest on the Program Loans.
The complaint alleges that because the bank and not OppFi originates the program loans, and the bank is a state-chartered FDIC-insured bank based in Utah, the bank is entitled to interest under Section 27(a) of the Federal Deposit Insurance Act to be levied on its loans, including loans to California residents, at an interest rate permitted by Utah law, regardless of whether California law requires a lower interest rate limit. The complaint seeks a statement that the interest rate caps in the CFL do not apply to program loans and an injunction barring the DFPI from enforcing the CFL interest rate caps against OppFi because of its participation in the program.
The complaint relates to the California Attorney General’s failed attempt to invalidate the FDICs Driving me crazy-Fix rule codified in 12 CFR Section 160.110(d). A California federal district judge recently dismissed California AG’s (which other states have joined) challenge to the FDIC rule and, in a separate lawsuit, also a California AG and other state AG’s challenge to the OCCs Driving me crazy-Fix rule codified in 12 CFR Section 7.4001(e). The rules provide that a right under applicable federal law (Section 85 National Bank Act (NBG) or Section 27 Federal Deposit Insurance Act (FDIA)) shall not be affected by the sale, assignment or other transfer of the loan.
While the two decisions represent a very positive development, the 60-day deadline for AGs to appeal the decisions to the Ninth Circuit has not expired. Most importantly, as the DFPI’s assertion that OppFi is the “true lender” of the program loans makes clear, the decisions have not removed the uncertainty that persists for participants in banking model programs due to “true lender” threats. (The OCC’s attempt to provide, through regulation, a clear, unambiguous test of when a bank is the “true lender” in a banking model program was overturned by Congress under the Congressional Review Act.) In addition to threats from “true lenders,” non-bank participants in banking model programs will continue to face government licensing threats. In the face of such ongoing threats, non-bank participants would be well advised to reconsider their vulnerability to “true lender” challenges and their compliance with state licensing laws.
The DFPI isn’t the only one to claim a “genuine lender.” Other state agencies that have launched or threatened “real lender” attacks against bank model programs include agencies in DC, Maryland, New York, North Carolina, Ohio, Pennsylvania, West Virginia and Colorado. While non-bank participants have been the focus of these government attacks, bank participants could also face increased scrutiny from their regulators. Within hours of the release of the two California decisions, the Acting Comptroller of the Currency issued a warning about the abuse of the OCCs Driving me crazy-fix rule, noting that “[t]The OCC advocates strict oversight that expands financial inclusion and ensures banks are not used as vehicles for rent-a-charter arrangements.”