California DFPI announces consent order with auto title loan servicer that was subject of “true Lender” investigation

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Last week, the California Department of Financial Protection and Innovation (DFPI) announced that it had entered into a consent order with Wheels Financial Group, LLC d/b/a LoanMart, a California-based company that markets and services automobile title loans.  LoanMart was the subject of an investigation launched in September 2020 in which the DFPI (then still named the Department of Business Oversight) was investigating whether LoanMart, through its partnership with a Utah bank, was evading the interest rate cap in the Fair Access to Credit Act (FACA).  Effective January 1, 2020, the FACA limited the interest rate that could be charged on loans of $2,500 to $10,000 by lenders licensed under the California Financing Law (CFL) to 36% plus the federal funds rate.  LoanMart holds a CFL license.

The consent order recites that on November 17, 2020 (Cessation Date), LoanMart stopped marketing loans made by the bank to California borrowers in an amount less than $10,000.  It also recites that when LoanMart notified the DFPI of this development, the parties “engaged in discussions to resolve the inquiry without the necessity of a hearing or other litigation.”  The consent order includes the statement that LoanMart, by entering into the consent order, “neither admits nor denies that it has violated any California law or regulation.”  It provides that, “absent any change in law or regulation or any court ruling,” LoanMart will not market vehicle-secured installment consumer loans intended primary for personal, family, or household purposes with loan amounts less than $10,000 to California consumers at an interest rate greater than 36 percent plus the federal funds rate in a program involving a state-chartered bank (Subject Loans) and will not service any Subject Loans originated after the Cessation Date for a period of 21 months from the effective date of the consent order.

Because LoanMart’s bank partner in the program that was the target of the DFPI’s investigation is a state-chartered FDIC-insured bank located in Utah, it 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 DFPI’s focus in the investigation appeared to be whether LoanMart, rather than the bank, should be considered the “true lender” on the auto title loans marketed and serviced by LoanMart, and as a result, whether the bank’s federal authority to charge interest as allowed by Utah law should be disregarded and the FACA rate cap should apply to such loans.

When the investigation was launched, we commented that it seemed likely that LoanMart was targeted because it was licensed as a lender under the CFL.  We noted, however, that the DFPI’s investigation of LoanMart also raised the specter of “true lender” scrutiny by the DFPI of other bank/nonbank partnerships where the nonbank entity was not licensed as a lender or broker, especially where the rates charged exceed those permitted under the FACA.  Under AB-1864, which became effective on January 1, 2021, it appears nonbank entities that market and service loans in partnerships with banks would be considered “covered persons” subject to the DFPI’s oversight.

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