In a lengthy (65-page) order, the California Superior Court in Los Angeles has issued an extremely important decision upholding the legitimacy of bank-model online lending by denying a motion for preliminary injunction filed by the California Department of Financial Protection and Innovation (DFPI) that sought to force fintech Opportunity Financial LLC (OppFi) to stop facilitating loans to California borrowers from its partner FinWise Bank at interest rates above the interest rate cap (generally 36% plus the Federal Funds Rate) imposed by the California Financing Law (CFL). As indicated in our earlier blog regarding the DFPI’s motion, FinWise Bank, a state-chartered FDIC-insured bank located in Utah, is empowered under Section 27 of the Federal Deposit Insurance Act to charge interest on loans made by it to California residents at the rate permitted by Utah law, notwithstanding the lower interest rate cap under California law.

In denying the DFPI’s motion, the Court laid the groundwork for its analysis with a thorough discussion of California usury law, the CFL as it relates to the litigation underlying the motion, federal preemption of state law, the nature of the loans facilitated by OppFi, and the legal standard when a public agency moves for an injunction.

The Court then proceeded with an analysis leading to a conclusion that the DFPI has not shown a reasonable probability of prevailing on the merits in the litigation at hand. The Court explains that valid-when-made concepts under California’s usury law and Constitution, and “obstacle preemption”, serve as bases for its denial of the DFPI’s motion as follows:

“To summarize, on the present record and for purposes of this motion, according to the FDIC and federal cases cited above, to the extent “FinWise-originated” OppLoans had permissible interest rates at the time the loans were made, the fact that the bank sold, assigned, or otherwise transferred the loans to OppFi should not make the loans usurious. On this motion, this principle is consistent with California’s usury law and Constitution.

Indeed, as stated above, “‘obstacle preemption arises when “‘under the circumstances of [a] particular case, [the challenged state law] stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress.’” … “(“federal law may nonetheless pre-empt state law to the extent it actually conflicts with federal law. Such a conflict . . . [can also occur] . . . because the state law stands `as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress’” (citations removed)].)

Here, on this motion and the present record, if the court were to interpret the CFL to mean that FinWise was not a “true lender” for exemption purposes because the bank decided to assign, sell, or otherwise transfer OppLoans to OppFi (whether within days of originating the loan or months, or whether in whole or in part), that ruling may stand as an obstacle to the full purposes and objectives of Congress given how courts have interpreted Section 27 and the FDIC’s Interest Provision to allow banks such as FinWise to do so.

Accordingly, on the present record, the court finds that the Commissioner has not established a reasonable probability of prevailing on the merits.”

We will study the Superior Court’s order in the coming days and present our further detailed discussion and remarks on this order and what it portends. For a summary of and links to earlier discussions of the parties’ filings and arguments, see our earlier blog.

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