Opportunity Financial, LLC (OppFi) has filed a Complaint for Declaratory and Injunctive Relief in a California state court against the California Department of Financial Protection and Innovation (DFPI), seeking to block the DFPI from applying California usury law to loans made through OppFi’s partnership with Fin Wise Bank (Bank), a state-chartered FDIC-insured bank located in Utah.

In 2019, California enacted AB 539 which, effective January 1, 2020, limited the interest rate that can 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.  The 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 as soon as AB 539 was signed into law, the DFPI “began touting AB 539 as a weapon to use against nondepositories that contract with state and federally-chartered banks.”

According to the complaint, in 2020 and 2021, OppFi provided documents to the DFPI in response to the DFPI’s request for information relating to its partnership with the Bank.  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.

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 in connection with 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 made through OppFi’s online platform for their entire lifecycle;
    • Reviews and approves all marketing materials; and
    • Enters into contracts with borrowers for Program Loans which are only between the borrower and the Bank, define the Bank as the lender on Program Loans, and make clear that the Bank is the entity extending credit.
  • “Consistent with its role [as a provider of technology-based services],” OppFi provides the following services to the Bank:
    • Maintains a website for receiving consumer inquiries about loan products;
    • Prepares a marketing strategy and marketing materials which the Bank reviews and approves;
    • Processes applications for Program Loans by applying the Bank’s underwriting model to the information it collects from consumers’ loan applications, using an algorithm approved by the Bank to approve or reject applications; and
    • Services Program Loans for the Bank.

According to the complaint, in addition to servicing fees paid by the Bank, OppFi receives the right to purchase a percentage of the beneficial interest in Program Loans.  The Bank, in addition to retaining ownership of Program Loans, retains title to Program Loans and a beneficial interest in a portion of the principal and interest on Program Loans.

The 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 interest rate caps in the CFL 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.

The complaint references the California Attorney General’s failed attempt to invalidate the FDIC’s Madden-fix rule which is codified at 12 C.F.R. Section 160.110(d).  A California federal district court judge recently rejected the California AG’s challenge (in which other states joined) to the FDIC’s rule and, in a separate lawsuit, also rejected a challenge by the California AG and other state AGs to the OCC’s Madden-fix rule codified at 12 C.F.R. Section 7.4001(e).  The rules provide that a loan made by a national bank, federal savings association, or federally-insured state-chartered bank that is permissible under applicable federal law (Section 85 of the National Bank Act (NBA) or Section 27 of the Federal Deposit Insurance Act (FDIA)) is not affected by the sale, assignment, or other transfer of the loan.

While the two decisions do represent a very positive development, the 60-day time period for the AGs to appeal the decisions to the Ninth Circuit has not yet expired.  Most significantly, as clearly illustrated by the DFPI’s assertion that OppFi is the “true lender” on the Program Loans, the decisions have not removed the uncertainty that continues to exist for participants in bank-model programs as a result of “true lender” threats.  (The OCC’s attempt to provide a clear bright line test for determining when a bank is the “true lender” in a bank-model program through a regulation was overturned by Congress under the Congressional Review Act.)  In addition to “true lender” threats, non-bank participants in bank-model programs will continue to face state licensing threats.  Given such continuing threats, non-bank participants would be well-advised to revisit their vulnerability to “true lender” challenges and their compliance with state licensing laws.

The DFPI is not alone in asserting a “true lender” claim.  Other state authorities that have launched or threatened “true lender” attacks against bank-model programs include authorities in D.C., Maryland, New York, North Carolina, Ohio, Pennsylvania, West Virginia, and Colorado.  While non-bank participants have been the focus of these state 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 abuses of the OCC’s Madden-fix rule in which he stated that “[t]he OCC is committed to strong supervision that expands financial inclusion and ensures banks are not used as a vehicle for “rent-a-charter” arrangements.”