Earlier this month, in Fama v. Opportunity Financial LLC, a Magistrate Judge of the federal district court for the Western District of Washington held that the arbitration provision in OppFi’s installment loan agreement is enforceable and rejected the plaintiff’s contentions that the provision is substantively and procedurally unconscionable. This is the third federal district court decision—out of four putative class actions filed to date against OppFi by the same plaintiff’s counsel stating the same claims—to compel arbitration of the named plaintiff’s individual claims.

The complaint in Fama alleged that OppFi is the “true lender” with respect to a loan the plaintiff obtained from FinWise Bank, because OppFi supposedly “holds the predominant economic interest” in the plaintiff’s loan. Therefore, according to the complaint, OppFi is subject to interest rate caps under Washington law, which the interest rate on the plaintiff’s loan exceeded, rendering the loan agreement “void and unenforceable.” The complaint asserted claims for damages under Washington’s usury law and the federal Racketeer Influenced and Corrupt Organizations (“RICO”) Act, and also sought declaratory and injunctive relief.

The court held that under the Federal Arbitration Act (FAA) and Washington law, the arbitration provision was not unconscionable. As to procedural unconscionability, the court explained:

The key inquiry in analyzing procedural unconscionability is “whether [the claimant] lacked meaningful choice.”…Plaintiff does not contend she could not read the Note due to the font size or due to any technical glitches. Plaintiff testified she read portions of the Note on her telephone but chose not to read beyond the payment schedule. Although Plaintiff states she would not have understood the importance or applicability of the Arbitration Clause even if she had read it, this does not make the Note procedurally unconscionable. The key inquiry is if Plaintiff lacked a meaningful choice and there is no evidence that she did. There was no demand that Plaintiff sign the Note immediately or that she could not have contacted counsel or OppFi if she had any questions or concerns about the terms of the Note. Plaintiff completed the loan application remotely using her telephone and in fact, signed seven materially identical notes in a similar manner over a three-year period – all of which indicates Plaintiff had reasonable opportunities to consider the terms of the Note and the Arbitration Clause.

The court also emphasized that the plaintiff had an unconditional right to “opt out” of the arbitration provision within 60 days after signing the Note, but failed to do so. “Courts in this State,” the court observed, “routinely find opt out provisions sufficient to defeat a claim of procedural unconscionability.”

The court then determined that the arbitration clause was not substantively unconscionable, dismissing a litany of plaintiff’s arguments. Among other things, the plaintiff argued that the arbitration provision should not be enforced because it contained a “preclusion provision” limiting the effect of any arbitration award to the specific parties to that arbitration. However, the court found that “‘[i]t is settled that the parties to an arbitration may choose to limit the arbitration award’s preclusive effect’” and that “the preclusive effect agreement is consistent with the public policy embodied in the FAA.”

The plaintiff also argued that the Utah choice of law provision in the installment loan agreement was substantively unconscionable because it forced the arbitrator to apply Utah law. The court rejected that argument on the ground that the choice of law provision was not contained in the arbitration clause itself but rather in another part of the loan agreement. Therefore, under the U.S. Supreme Court’s doctrine of severability, under which attacks on the agreement as a whole rather than the arbitration clause specifically must be decided by the arbitrator and not a court, the plaintiff’s substantive unconscionability argument was for the arbitrator to determine. We note that under Utah Code § 70C-3-104, a creditor may contract with the debtor of a closed-end consumer contract for a waiver by the debtor of the right to initiate or participate in a class action related to the closed-end consumer contract, even if the class action waiver is not contained in an arbitration clause. We were instrumental in getting this statute enacted years before the U.S. Supreme Court in AT&T Mobility LLC v. Concepcion upheld the validity of class action waivers in consumer arbitration agreements.

The Fama court also disagreed with the ruling of the California federal district court in Carpenter v. Opportunity Financial LLC, which, as we discussed in our earlier blog, denied OppFi’s motion to compel arbitration. The Fama court found “the decisions in this District and elsewhere” to be “more persuasive.” This earlier blog also addresses two other putative class actions, Michael v. Opportunity Financial, LLC and Johnson v. Opportunity Financial, LLC, in which OppFi prevailed and arbitration has been compelled.

According to PACER, all parties in the Fama case consented to proceed before the Magistrate Judge. The Magistrate Judge issued an Order, not a Report and Recommendation that would require district court approval. Accordingly, under Federal Rule of Civil Procedure 73(c), any appeal can be directed to the court of appeals. However, the Magistrate’s Order stayed the case pending the completion of arbitration, rather than dismissing it. Therefore, as things now stand, there is no immediate right to appeal the Magistrate’s Order pursuant to FAA Sections 16(b)(1) and (b)(2).

OppFi also is engaged in a different “true lender” battle on another front. In March 2022, OppFi filed a declaratory judgment action to prevent the California Department of Financial Protection and Innovation (DFPI) from enforcing California interest rate limitations with respect to loans made by FinWise Bank through a partnership with OppFi. (Unlike the putative class actions described above, OppFi’s litigation with the DFPI is not subject to arbitration as it does not involve a claim by a borrower.) The DFPI has asked the court for a preliminary injunction ordering OppFi to stop facilitating the loans; OppFi has filed an Opposition asserting the DFPI is “wrong on the law and wrong on the facts”. In supplemental briefs filed in July and August 2023, the parties proffered opposing arguments as to whether or not DFPI has the authority to pursue an enforcement position that OppFi asserts is in fact an impermissible “underground regulation”. The court has taken the matter under submission as of August 4, 2023.

As pointed out in our earlier blogs, the outcome of the litigation discussed above has the potential to significantly affect not only the litigants, but also numerous other banks and fintechs involved in consumer lending programs. We will continue to monitor developments in Fama and the other OppFi cases given the importance of the “true lender” issue presented in those cases.