In response to the complaint filed by Opportunity Financial, LLC (OppFi) seeking to block the California Department of Financial Protection and Innovation (DFPI) from applying California usury law to loans made through OppFi’s partnership with FinWise Bank (Bank), the DFPI has filed a cross-complaint seeking to enjoin OppFi from collecting on the loans and to have the loans declared void.

In 2019, California enacted AB 539 which, effective January 1, 2020, limited the interest rate that can be charged on loans less than $10,000 but more than $2,500 by lenders licensed under the California Financing Law (CFL) to 36% plus the federal funds rate.  OppFi’s complaint recites that prior to 2019, the Bank entered into a contractual arrangement with OppFi  (Program) pursuant to which the Bank uses OppFi’s technology platform to make small-dollar loans to consumers throughout the United States (Program Loans).  It alleges that in February 2022, the DFPI informed 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 Program Loans, and the interest rate on those loans exceeds the interest rate cap in AB 539.”  OppFi was also informed that the interest rate on Program Loans in amounts less than $2500 violated the CFL rate limit on such loans.

OppFi’s complaint alleges that because the Bank and not OppFi is making the Program Loans and the Bank is a state-chartered FDIC-insured 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 allowed by Utah law regardless of any California law imposing a lower interest rate limit.  The complaint seeks a declaration that the CFL interest rate caps do not apply to Program Loans and an injunction prohibiting the DFPI from enforcing the CFL rate caps against OppFi based on its participation in the Program.

In its cross-complaint, the DFPI alleges that “OppFi is the true lender of [the Program Loans]” based on the “substance of the transaction” and the “totality of the circumstance’s,” with the primary 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 purchases between 95 to 98 percent of the receivable for each loan;
• On average, OppFi purchases the receivables from the Bank within three days after the Bank funds the loan and before any initial loan payments are made to the Bank;
• OppFi insulates the Bank from “essentially” any credit risk “by creating a guaranteed secondary market” for the Program Loans which OppFi accomplishes by purchasing the loans using its fully-owned subsidiaries created solely to purchase receivables from bank 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 purchasing subsidiary maintains a minimum amount of security, consisting of a cash collateral account, an alternative collateral account, and letters of credit for the Bank’s benefit;
• OppFi pays the Bank a guaranteed monthly “Bank Program Fee” based on a percentage of the principal amount of loans originated by the Bank, “not only further mitigating any actual credit risk for [the Bank] but literally providing the bank partner loan-volume based rent for its charter;” and
• OppFi paid the Bank for startup costs of the partnership and is responsible for paying the Bank’s expenses related to the partnership.

The DFPI’s cross-complaint also alleges that in addition to holding the predominant economic interest, OppFi “performs all of the functions of a traditional lender,” is responsible for all marketing in association with the Program Loan, determines the underwriting criteria for the Program Loans with minimal input from the Bank, and undertakes the servicing obligations of the Program Loans.

The DFPI claims that the Program Loans are subject to the CFL and that OppFi is violating the CFL by making loans in excess of the CFL rate cap.  As remedies for the alleged CFL violations, the DFPI seeks (1) an injunction permanently barring OppFi from collecting on Program Loans, (2) a declaration that the Program Loans are void, (3) an order requiring OppFi to make restitution to all borrowers on Program Loans, (4) an order requiring the removal of any negative credit reporting relating to Program Loans, and (5) OppFi’s payment of “penalties of $2,500 for each and every violation of the CFL, in an amount of at least $100 million.”

Although OppFi holds a CFL license, the cross-complaint also alleges that OppFi’s conduct is nevertheless subject to the California Consumer Financial Protection Law (CCFPL).  The CCFPL provides that it does not apply to a CFL licensee “to the extent that person or employee is acting under the authority” of a CFL license.  According to the DFPI, “OppFi has affirmatively disclaimed that it is conducting any of its activities under its CFL license [and] [t]therefore, to the extent OppFi is not offering [the Program Loans] under the authority of its CFL license, OppFi’s conduct is subject to the CCFPL.”

The cross-complaint alleges that OppFi has violated the CCFPL by conduct that includes offering and collecting on Program Loans at rates that exceed the rate permitted under the CFL.  The relief that the DFPI seeks for OppFi’s alleged CCFPL violations includes (1) disgorgement of payments and interest and other charges received by OppFi from California borrowers on Program Loans, and (2) an injunction permanently barring OppFi from (a) “making 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 unlawful [Program Loans], and (b) “promoting and recommending unlawful [Program Loans] as a way to ‘build credit history’ and purporting to provide services to assist a consumer with debt management or debt settlement by recommending its [Program Loans] as a means of consolidating debt.”

At the end of last year, we completed a months-long project in updating and expanding a 2017 White Paper addressing bank-model lending—programs involving partnerships between banks (or savings associations) and fintech or other nonbank companies in the interstate delivery of loans. The new White Paper, which runs 49 pages single-spaced, is designed to serve as a comprehensive survey of laws, cases and regulatory attitudes addressing bank-model lending.  

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