[co-author: Skylar Stoudt*]

On October 30, the Superior Court of California County of Los Angeles denied the DFPI’s motion for a preliminary injunction to force a Chicago-based fintech company to stop facilitating loans to California borrowers from its bank partner at interest rates above California’s interest rate cap (generally 36% for loans less than $10,000) (we previously discussed this case here and here).

The case involves the fintech’s partnership with an out-of-state bank based in Utah. The fintech company offers loans through an online platform in California, however, the loans originate from the bank in Utah. The DFPI alleges that the fintech company partnered with the out-of-state bank to evade California interest rate caps. The fintech company charges interest rates between 59% and 160%, exceeding California’s rate cap in many instances.

The DFPI contends that the fintech company, and not the bank, is the “true lender” (we have previously discussed the true lender issue in prior blog posts here). The DFPI sought a preliminary injunction to stop the company’s lending activities in California.

The court’s ruling was in favor of the fintech company, asserting that the DFPI had “not sufficiently shown that the partnership was a mere sham and subterfuge to cover up a usurious transaction.” The court concluded that the DFPI had not shown a reasonable probability of prevailing on the merits, explaining that valid-when-made concepts under California’s usury law and Constitution, and “obstacle preemption” that protects the activities of chartered banks, serve as bases for its denial of the DFPI’s motion.

The court’s decision pertained only to the preliminary injunction, and the case will proceed to the next phases, where both parties will present their evidence and arguments.

*Skylar Stoudt is a law clerk in the firm’s Washington, D.C. office.

Putting It Into Practice: By denying this motion, this ruling potentially becomes an important decision ensuring the viability of bank-fintech partnerships, and in particular to online lending programs. This ruling is the latest activity in a continuing trend targeting bank partnership arrangements based on the “true lender” legal theory that posits that nonbanks “rent” bank charters from banks that carry little or no economic or regulatory risk to, among other things, evade state usury laws (we previously discussed this latest trend in earlier posts here, here, and here). As this case progresses through the court, it should be on the watch list of both banks and fintechs, as a negative outcome could lead to a proliferation of these kinds of enforcement cases in other jurisdictions.