The California Department of Financial Protection and Innovation (DFPI) has filed its opposition to Opportunity Financial, LLC’s (OppFi) Demurrer to the DFPI’s cross-complaint.  In the Demurrer, OppFi asks the California trial court to reject the DFPI’s attempt to apply California usury law to loans made through OppFi’s partnership with FinWise Bank (Bank) by alleging that OppFi is the “true lender” on the loans.

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.  In March 2022, OppFi filed a complaint in a California state court seeking to block the DFPI’s attempt to apply the CFL rate cap to loans made through its partnership with the Bank.  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 because it was the “true lender” on the Program Loans, it could not charge interest rates on the Program Loans that were higher than the rates permitted to be charged by lenders licensed under the CFL.

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 response to the complaint filed by OppFi seeking to block the DFPI from applying California usury law to loans made through the partnership, the DFPI filed a cross-complaint seeking to enjoin OppFi from collecting on the loans and to have the loans declared void.  In the 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 circumstances,” with the primary factor being “which entity—bank or non-bank—has the predominant economic interest.”  The DFPI claims that the Program Loans are therefore subject to the CFL and that OppFi is violating the CFL and the California Consumer Financial Protection Law by making loans at interest rates that exceed the CFL rate cap.

The DFPI also alleged additional CFL violations by OppFi, including the CFL’s “anti-evasion” provisions.  One of such provisions is Section 22326 which applies to “any person, who by any device, subterfuge, or pretense charges, contracts for, or receives greater interest, consideration, or charges than is authorized by this division for any loan….”  The other provision is Section 22324 which prohibits “contract[ing] for or “negotiat[ing] in this state for a loan to be made outside of the state for purpose of evading or avoiding” California lending law.

In its Demurrer to the cross-complaint, OppFi argues that the DFPI’s  “true lender” challenge to the Program Loans has no basis in California statutes or common law.  In its opposition, the DFPI cites various authorities in support of its assertion that for more than a century, “California law has recognized the principle of looking at substance over form in evaluating usury claims and does not permit evasion of usury laws through disguise or subterfuge.” It also cites cases from other courts, including a California federal district court’s decision in CashCall, that have used a “true lender” analysis to uphold usury challenges.

OppFi also argues in the Demurrer that the DFPI’s other CFL claims fail as a matter of law.  With respect to the DFPI’s CFL claims based on its “anti-evasion” provisions, OppFi asserted that “it is not unlawful to take advantage of [statutory exemptions].”  The DFPI asserts in its opposition that, because a true lender analysis should apply, OppFi’s argument “is both incorrect and subject to factual issues inappropriate for demurrer.”

The following consumer advocacy groups have sought leave to file an amicus brief in opposition to OppFi’s Demurrer: Center for Responsible Lending, California Reinvestment Coalition, Consumer Federation of California, National Consumer Law Center, Public Law Center, and UC Berkeley Center for Consumer Law & Economic Justice.

OppFi is also a defendant in a class action lawsuit filed in a Texas federal district court in which the named plaintiff alleges that OppFi engaged in a “rent-a-bank” scheme to purposefully evade state law, including in Texas where the named plaintiff entered into her loan.  OppFi has filed a motion to compel arbitration which is opposed by the plaintiff.