In its April 2023 Opposition to the California Department of Financial Protection and Innovation (DFPI) motion for preliminary injunction, Opportunity Financial, LLC (OppFi) presents a spirited riposte, drilling down into the DFPI’s fact allegations and legal arguments and asserting “The DFPI is wrong on the law and wrong on the facts.”

OppFi filed the Opposition in response to a series of filings by the DFPI which seek to apply California usury limits, rather than Section 27(a) of the Federal Deposit Insurance Act (FDIA), to consumer loans made by out-of-state, state-chartered banks.  This increasingly complex litigation launched when OppFi sought declaratory and injunctive relief to ward off the DFPI’s threatened enforcement of the interest rate limitations under the California Financing Law (CFL) with respect to loans made by FinWise Bank through a partnership with OppFi.  In response, the DFPI filed a cross complaint alleging that the CFL’s rate limitations are controlling because OppFi, not FinWise Bank, was the “true lender,” and that, loans made through the bank partnership were, therefore, not subject to the FDIA’s preemptive effect.

The Opposition is the latest filing in the court battle between OppFi and the DFPI, in which OppFi’s ability to do business in California hangs in the balance: as stated in its Opposition,

“If OppFi is prohibited from assisting banks that charge more than 36%, it would be forced to cease all operations in California. [ ] OppFi knows this risk because it (i) currently permits California borrowers to apply for loans with interest rates at 36% or below and almost none of the applicants qualify and obtain such loans, and (ii) previously offered a credit product at less than a 36% interest rate directly but was forced to terminate the program as the losses exceeded revenue.”

As OppFi points out, to obtain a preliminary injunction, the DFPI must demonstrate: (1) a likelihood that it will prevail on the merits at trial, and (2) irreparable injury that outweighs the harm caused by the injunction.  OppFi asserts that the DFPI fails to meet either of these requirements.

In explaining why the DFPI cannot prevail on the merits, OppFi emphasizes that because it assigns its interest in loan receivables acquired from FinWise Bank to Special Purpose Entities (SPEs), OppFi does not have the “primary economic interest” (PEI) in the loans originated by FinWise Bank, contrary to the DFPI’s allegations in support of its “true lender” theory.  As OppFi succinctly states: “The SPE assignment destroys the DFPI’s PEI test”.

OppFi also explains that the PEI approach the DFPI claims should be used to determine which entity is the true lender contravenes the FDIC’s Interest Rate Authority Rule (the “Rule”):

“While the Rule does not expressly preempt all forms of the true lender doctrine, it preempts the DFPI’s version.  The Rule provides that “whether interest on a loan is permissible under section 27 . . . is determined as of the date the loan was made” and “shall not be affected by . . . the sale, assignment, or other transfer of the loan, in whole or in part.” 12 C.F.R. § 331.4(e) (emphasis added).  Here, the DFPI argues that OppFi is the “true lender” “primarily” because an affiliate purchases receivables “within three days after FinWise funds the loan.” [ ] (emphasis added).  This argument, focused on the purchase of receivables, violates the Rule in two ways.  First, it looks to events occurring after the date the loan was made.  Second, it purports to “affect []” the “permissible” interest rate by taking into account a subsequent “sale . . . of the loan, in whole or in part.” 12 C.F.R. § 331.4(e).  Neither is permissible.”

Based on several declarations it filed along with the Opposition, OppFi asserts that the facts set forth in a declaration of a DFPI employee filed to support the DFPI’s contentions are “riddled with errors and false assumptions.”  Based on the declarations it filed, OppFi points out that “the DFPI’s description of FinWise’s relationship with OppFi is simply incorrect.”  OppFi provides several examples of inaccuracies in the DFPI employee’s declaration, asserting that the declaration “misstates, misrepresents, and ignores critical aspects of the program,” uses “selective reading” of an SEC filing, and actually misquotes an SEC filing, in order to attempt to portray OppFi as the “true lender.”

OppFi further asserts that even if the “true lender” doctrine were to be allowed, FinWise should nevertheless be considered the lender, because the loans are “independently underwritten in Utah by FinWise using its own proprietary process, made in FinWise’s name, using FinWise’s own funds, and are held by FinWise throughout their life.”  OppFi also notes that FinWise bears substantial financial risk related to the loans and that “FinWise maintains control over the entire program, including the application process, underwriting, marketing, and compliance.”  In addition, OppFi cites the declarations it filed describing in detail facts demonstrating that FinWise controls all aspects of marketing, and exercises significant control over OppFi’s activities, in connection with the program and the loans made through the program.

With respect to the requirement that in order to grant the injunction, the DFPI must demonstrate that irreparable harm will result if the injunction is not granted, OppFi first points out that “the DFPI’s delay in seeking a preliminary injunction confesses a lack of irreparable harm”:

“The State of California first publicly accused OppFi of operating a “rent-a bank scheme” in August 2020. [ ] Even after it filed its Cross-Complaint seeking injunctive relief, DFPI waited another eight months to pursue a preliminary injunction.  This delay alone demonstrates that there is “no harm” in delaying relief until after trial.”

Further, OppFi notes, “if the Court ultimately concludes that the interest rate on the challenged loans is usurious, the core harm to consumers is the overpayment of interest, which may be recovered later.  This is not an irreparable harm.”  On the other hand, according to OppFi, if the injunction requested by the DFPI were to issue,

“OppFi would be forced to cease operations in California, which would have an irreparable impact on OppFi’s business as a whole.  OppFi would be forced to consider a potential reduction in staff, would suffer a loss of associated talent, its goodwill and regulation would be impacted, and, critically, OppFi would lose invaluable data regarding California borrowers, which would impact its ability to reenter the market …OppFi’s expertise is based on its real-world experience and the information it collects while operating…If compelled to terminate its operations, the information that OppFi would have otherwise obtained will be unattainable. [] This is irreparable harm.  In addition, OppFi would not be able to recover any of its lost profits, which is further irreparable harm.”

OppFi concludes its Opposition by asserting “[b]ecause the DFPI has not established a reasonable probability of success on the merits and the balance of harm favors OppFi, the Court should deny the Motion.”

In our view, the outcome of this litigation may significantly affect not only OppFi and FinWise Bank, but also numerous other banks and fintechs involved in consumer lending programs in California.  Accordingly, this case has the potential to cause material constriction in credit availability to California residents if decided in favor of the DFPI.