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.

Opportunity Financial, LLC (OppFi) has filed a Demurrer to the cross-complaint filed by the California Department of Financial Protection and Innovation (DFPI) in which it 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 in the transaction.”  In the cross-complaint, the DFPI identifies various characteristics of the Program to demonstrate that OppFi holds the predominant economic interest in the Program Loans.  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 (CCFPL) 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 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 claim that the Program Loans violate the CFL fails as a matter of law because the Program Loans were made by the Bank and loans made by a state-chartered bank are exempt from the CFL’s rate cap pursuant to the usury exemption for state-chartered banks in the state’s Constitution as well as the CFL’s exemption for such banks.  It also argues that the DFPI’s attempt to avoid this result by asserting that OppFi is the “true lender” on the Program Loans has no basis in California statutes or common law.  OppFi cites as dispositive two federal district court decisions in which the courts rejected the plaintiffs’ usury claims that were based on “true lender” theories, including a 2021 case involving OppFi, Sims v. Opportunity Fin., LLC.

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 asserts that “it is not unlawful to take advantage of [statutory exemptions].”  It argues that “the Program is structured in a manner to lawfully qualify for the constitutional and statutory exemptions to interest rate caps in California.  If such conduct constitutes actionable ‘evasion,’ that would render the constitutional and statutory exemptions null and void.”

In response to the complaint filed by Opportunity Financial, LLC (OppFi) seeking to block the California Department of Financial Protection and Innovation (DFPI) from applying California usury law to loans made through OppFi’s partnership with FinWise Bank (Bank), the DFPI has filed a cross-complaint seeking to enjoin OppFi from collecting on the loans and to have the loans declared void.

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.  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 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.

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 its 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 in the transaction.”  The DFPI alleges that OppFi holds the predominant economic interest in the Program Loans because:

  • OppFi purchases between 95 to 98 percent of the receivable for each loan;
  • On average, OppFi purchases the receivables from the Bank within three days after the Bank funds the loan and before any initial loan payments are made to the Bank;
  • OppFi insulates the Bank from “essentially” any credit risk “by creating a guaranteed secondary market” for the Program Loans which OppFi accomplishes by purchasing the loans using its fully-owned subsidiaries created solely to purchase receivables from bank partners such as the Bank;
  • OppFi’s Loan Receivables Sale Agreement with the Bank provides that the Bank is only obligated to fund loans if OppFi’s purchasing subsidiary maintains a minimum amount of security, consisting of a cash collateral account, an alternative collateral account, and letters of credit for the Bank’s benefit;
  • OppFi pays the Bank a guaranteed monthly “Bank Program Fee” based on a percentage of the principal amount of loans originated by the Bank, “not only further mitigating any actual credit risk for [the Bank] but literally providing the bank partner loan-volume based rent for its charter;” and
  • OppFi paid the Bank for startup costs of the partnership and is responsible for paying the Bank’s expenses related to the partnership.

The DFPI’s cross-complaint also alleges that in addition to holding the predominant economic interest, OppFi “performs all of the functions of a traditional lender,” is responsible for all marketing in association with the Program Loan, determines the underwriting criteria for the Program Loans with minimal input from the Bank, and undertakes the servicing obligations of the Program Loans.

The DFPI claims that the Program Loans are subject to the CFL and that OppFi is violating the CFL by making loans in excess of the CFL rate cap.  As remedies for the alleged CFL violations, the DFPI seeks (1) an injunction permanently barring OppFi from collecting on Program Loans, (2) a declaration that the Program Loans are void, (3) an order requiring OppFi to make restitution to all borrowers on Program Loans, (4) an order requiring the removal of any negative credit reporting relating to Program Loans, and (5) OppFi’s payment of “penalties of $2,500 for each and every violation of the CFL, in an amount of at least $100 million.”

Although OppFi holds a CFL license, the cross-complaint also alleges that OppFi’s conduct is nevertheless subject to the California Consumer Financial Protection Law (CCFPL).  The CCFPL provides that it does not apply to a CFL licensee “to the extent that person or employee is acting under the authority” of a CFL license.  According to the DFPI, “OppFi has affirmatively disclaimed that it is conducting any of its activities under its CFL license [and] [t]therefore, to the extent OppFi is not offering [the Program Loans] under the authority of its CFL license, OppFi’s conduct is subject to the CCFPL.”

The cross-complaint alleges that OppFi has violated the CCFPL by conduct that includes offering and collecting on Program Loans at rates that exceed the rate permitted under the CFL.  The relief that the DFPI seeks for OppFi’s alleged CCFPL violations includes (1) disgorgement of payments and interest and other charges received by OppFi from California borrowers on Program Loans, and (2) an injunction permanently barring OppFi from (a) “making use of automated payments and remotely created checks that rely on consumer banking data, payment systems and networks and online banking systems to receive payments on unlawful [Program Loans], and (b) “promoting and recommending unlawful [Program Loans] as a way to ‘build credit history’ and purporting to provide services to assist a consumer with debt management or debt settlement by recommending its [Program Loans] as a means of consolidating debt.”

At the end of last year, we completed a months-long project in updating and expanding a 2017 White Paper addressing bank-model lending—programs involving partnerships between banks (or savings associations) and fintech or other nonbank companies in the interstate delivery of loans. The new White Paper, which runs 49 pages single-spaced, is designed to serve as a comprehensive survey of laws, cases and regulatory attitudes addressing bank-model lending.  For more information, please contact Mindy Harris at harrism@ballardspahr.com.

 

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.”

 

Last week, California Governor Newsom signed into law AB 539, which makes significant amendments to the California Financing Law (CFL), and SB 616, which creates a new exemption from levy for deposit account funds.

The Governor signed AB 539 on October 10.  Most importantly, the CFL amendments limit the rate of interest that may be imposed on loans of $2,500 – $10,000 to 36% plus the federal funds rate (which is currently hovering around 2%) per annum. These loans previously had no express interest rate limitation (although, some high interest loans have been attacked for price unconscionability.)  The amendments are effective January 1, 2020.

The Governor signed SB 616 on October 7.  The law adds a new section to California’s Code of Civil Procedure that exempts from levy without a claim by the debtor funds in a deposit account in an amount that has been determined by the state’s Department of Social Services to be the “minimum basic standard of adequate care for a family of four for Region 1” as adjusted annually.  That amount for 2019 is $1729.  The exemption does not apply to money levied on to satisfy certain obligations such as wages owed or child or spousal support.  The new exemption is effective September 1, 2020.

 

 

On the last day of California’s 2019 legislative session, by a vote of 61 to 8, the California State Assembly overwhelmingly passed Assembly Bill 539, the Fair Access to Credit Act. Governor Newsom has until October 13th to sign or veto the bill.

As we’ve previously covered, AB 539 makes significant amendments to the California Financing Law. Most importantly, the bill limits the rate of interest that may be imposed on loans of $2,500 – $10,000 to 36% plus the federal funds rate (which is currently hovering around 2%) per annum. These loans previously had no express interest rate limitation (although, some high interest loans have been attacked for price unconscionability.

In addition to capping the rate on loans of $2,500 to $10,000, the bill also:

  • Requires creditors to furnish credit information to at least one national consumer reporting agency;
  • Imposes an obligation on creditors to offer borrowers a Department of Business Oversight approved credit education program or seminar;
  • Prohibits prepayment penalties for loans that are not secured by real property;
  • Expands existing loan term restrictions to require that loans of $3,000 to $10,000 be repayable in no more than 60 months and 15 days; and
  • Establishes a minimum 12 month loan term for loans of $2,500 to $10,000.

If the bill becomes law it will impact nearly half of the $3 billion California loans that are originated under the CFL, and California will join approximately 40 other states that have express interest rate caps for these types of loans.

AB 539 was cleared by the California Senate’s Banking Committee on June 26.  The bill would change several aspects of the California Financing Law (CFL), including by setting new interest rate caps, imposing new rules governing loan duration, and prohibiting prepayment penalties.  For example, while the CFL does not set a maximum interest rate on loans of $2,500 or more, AB 539 would cap the interest rate at 36% plus the federal funds rate on loans of $2,500 or more but less than $10,000.

In the Banking Committee, the bill was amended to require finance lenders to report a borrower’s payment performance to at least one nationwide consumer reporting agency and offer the borrower at no cost an approved credit education program or seminar before disbursing loan proceeds.

The bill cleared the California Assembly in May 2019 and now moves to the Senate Judiciary Committee, which observers also expect it to clear.  The Judiciary Committee hearing is scheduled for tomorrow, July 9.

 

 

The California Senate’s Banking and Financial Institutions Committee will hold a hearing on AB 539 on June 26, 2019.  The hearing was previously scheduled for today.

AB 539 was cleared by the California Assembly on May 23.  The bill would change several aspects of the California Financing Law (CFL), including by setting new interest rate caps, imposing new rules governing loan duration, and prohibiting prepayment penalties.  For example, while the CFL does not set a maximum interest rate on loans of $2,500 or more, AB 539 would cap the interest rate at 36% plus the federal funds rate on loans of $2,500 or more but less than $10,000.

Observers believe that the June 26 hearing will play a key role in determining the bill’s future.

 

 

 

Last week, by a vote of 60 to 4 (with 16 not voting), the California Assembly cleared AB 539, which would change several aspects of the California Financing Law (CFL), including by setting new interest rate caps, imposing new rules governing loan duration, and prohibiting prepayment penalties.  For example, while the CFL does not set a maximum interest rate on loans of $2,500 or more, AB 539 would cap the interest rate at 36% plus the federal funds rate on loans of $2,500 or more but less than $10,000.  (See our prior blog post for other limitations that would be imposed by AB 539.  However, the provisions regarding unconscionability were deleted from the version of the bill passed by the Assembly.)

The bill now moves to the California Senate, where an early June hearing is expected.

A bill introduced last week in the California State Assembly could change the consumer lending landscape in California considerably. The bill, AB 539, would change several aspects of the California Financing Law (CFL), including setting new interest rate caps, imposing new rules governing loan duration, and prohibiting prepayment penalties. Additionally, AB 539 would change the CFL to make clear that a loan’s rate cannot be used as the sole factor in determining whether a loan is unconscionable. According to the bill’s authors, these changes are necessary because of the “looming threat of a potential ballot initiative,” and due to the uncertainty caused by the California Supreme Court’s recent De La Torre decision which opened the door for borrowers to claim that high-rate consumer loans are unconscionable.

AB 539 would make these changes to the CFL:

  • At present, the CFL does not set a maximum interest rate on loans of $2,500 or more. AB 539 would cap the interest rate at 36% plus the federal funds rate (2.4% as of today) on loans of $2,500 or more but less than $10,000.
  • The CFL provides certain factors to determine whether a loan is of a “bona fide principal amount” or if there has been some artifice to evade regulation under the CFL. AB 539 would apply these factors to loans of $2,500 or more but less than $10,000.
  • At present, the CFL prohibits loans of at least $3,000 but less than $5,000 from having a term greater than 60 months and 15 days. AB 539 would increase this upper limit from $5,000 to $10,000.
  • At least for loans in excess of $2,500 up to $10,000, AB 539 would prohibit CFL licensees from issuing a loan with a term of less than 12 months.
  • AB 539 would add a section to the CFL providing that no licensee may impose a prepayment penalty for any loan not secured by real property.

California’s unconscionability doctrine is incorporated into the CFL. Although it was once widely thought that loans with no interest rate cap under the CFL could not be unconscionable, in De La Torre the California Supreme Court held that consumers could use California’s Unfair Competition Law to claim that high-rate loans were unconscionable and therefore violated the CFL. AB 539 expressly provides that a CFL-regulated loan cannot be found unconscionable based on the interest rate alone. In our view, this provision is theoretically unnecessary. In De La Torre, the California Supreme Court held that courts must consider all the circumstances of the loan before declaring that a loan’s rate is unconscionable. Specifically, courts must consider “the bargaining process and prevailing market conditions,” which is “highly dependent on context” and “flexible” according to the Court. In other words, courts properly following De La Torre could not solely consider a loan’s rate to determine unconscionability in any event. That said, the bill would be helpful in that it would foreclose unconscionability arguments based on the rate alone.