On March 7, 2022, Opportunity Finance (OppFi), a nonbank consumer lender, filed suit in Los Angeles Superior Court against the California Department of Financial Protection and Innovation (DFPI) seeking declaratory and injunctive relief against what it calls an “unlawful threatened enforcement of [California’s] Fair Access to Credit Act.” OppFi partners with FinWise Bank to offer unsecured consumer loans in California. Because it is chartered in Utah, FinWise is entitled to interest-rate preemption under the Federal Deposit Insurance Act (FDIA). This means that FinWise can make loans under Utah’s Consumer Credit Code, which permits consumer lenders to contract for “any interest rate”, in lieu of California’s Consumer Financing Law, which limits interest to 36% annually. OppFi positions itself as a technology provider to the bank offering underwriting (based on bank-approved criteria), marketing, and other services.
OppFi’s suit against the DFPI highlights the ongoing power struggle between state and federal regulators for authority over non-bank consumer lenders. Much of the controversy has been focused on bank partnerships like OppFi’s and three separate, but related, federal rulemakings that address the scope of banks’ interest-rate preemption rights. These rulemakings, and the states’ opposition to them, have important implications for OppFi and other consumer lenders that use bank partnerships to operate across state lines without submitting to state licensure requirements and usury limits.
- Federal “True Lender” and “Valid-When-Made” Rules
In 2020, the Office of the Comptroller of the Currency (OCC) issued two rules intended to protect national banks’ ability to make and securitize consumer loans without regard to state consumer financial protection laws. The “true lender” rule attempted to clarify that a national bank has “true lender” status, and preemption privileges, with respect to any loan that it either funds or originates pursuant to a loan agreement naming the bank as the lender. As we reported previously, Congress repealed the OCC’s true lender rule in July 2021. The OCC’s “valid when made” rule was intended to ensure that national banks could transfer consumer loans they originated to non-banks at the contracted interest rate, regardless of the interest-rate laws of the borrower’s home state.1
Although the FDIC did not issue a true lender rule, it did issue an equivalent to the OCC’s valid-when-made rule for state-chartered, FDIC-insured banks. In August 2020, several states, including California, filed suit in the District Court for the Northern District of California challenging the validity of the OCC’s and FDIC’s valid-when-made rules on the grounds that, by failing to adequately consider the rules’ effect on the states’ ability to protect their residents from predatory loans, the OCC and FDIC had violated the Administrative Procedure Act. The district court granted summary judgment in favor of both agencies, a point OppFi would later raise in its complaint against the DFPI.
- OppFi’s Suit against the DFPI
OppFi’s California suit seeks: (1) a declaration that California’s interest-rate caps do not apply to its loan program with FinWise and (2) an injunction prohibiting the DFPI from enforcing the State’s 36% rate cap with respect to program loans. The complaint indicates that, during the course of an extended dialogue with the DFPI, OppFi provided the agency with information regarding its partnership with FinWise. According to the complaint, the DFPI notified OppFi in February 2022 that the program loans violated California’s Consumer Financing Law because OppFi, not FinWise, was the true lender with respect to the loans, which carried interest rates above the statutory maximum.
A true lender analysis is based on the specific facts and circumstances of the loan program in question. Because the California DFPI has not initiated an enforcement action against OppFi, we have only OppFi’s description of how its California loan program works. In its complaint, OppFi describes its role in the lending program as that of a technology provider that managed the program website, accepted applications, performed underwriting based on criteria established by FinWise, provided customer service, and serviced the loans. This is not an unusual description of services for a fintech operating under the bank model.
Perhaps more significant than OppFi’s operational responsibilities is the degree of economic interest FinWise maintained in the program loans. California, has, like many states, adopted the “predominant economic interest” test in true lender cases.2 In other words, the court will want to know whether FinWise put its own money at risk in making program loans.
Although some details of the OppFi loan program are not fully developed in the complaint, it is clear that the program was structured with the predominant economic interest test in mind. The complaint states that FinWise retained ownership of the loans and gave OppFi the option to purchase up to a specified percentage. It is not clear from the complaint, however, what percentage of receivables OppFi was entitled to purchase from FinWise or what percentage it actually did purchase. The complaint also states that FinWise advanced its own money to fund the loans.
The facts surrounding OppFi’s purchase of receivables and FinWise’s overall loan-related risk would be important to any decision on the merits in the California case. Both factors were mentioned in a 2021 true lender challenge by the attorney general for the District of Columbia that resulted in OppFi’s agreeing to pay restitution and penalties and waive interest charges related to program loans. The DC complaint described FinWise’s economic interest in the loans as “minimal” and alleged that OppFi had the “predominant economic interest” in the loans, bore the risk of non-payment, purchased “nearly all of the receivables”, and further reduced FinWise’s risk of loss with two cash collateral accounts and a letter of credit. Whether similar issues come into play in the California case remains to be seen.
- Broader Implications for the Bank Partnership Model
If OppFi is successful in obtaining the declaratory and injunctive relief it seeks, bank partnerships could have a blueprint for operating in the all-important California market. Any well-reasoned decision on the merits, whether or not favorable to OppFi, is likely to provide some guidance to industry in structuring such partnerships in the state and influence financial regulators in other states. Of particular interest will be the court’s analysis of whether FinWise undertook meaningful economic risk with respect to the program loans.
In a broader sense, OppFi’s suit against the DFPI highlights the constant risk of true lender challenges to the bank partnership model. That uncertainty is not likely to be addressed by federal rulemaking in the near term. Because the OCC’s true lender rule was rescinded under the Congressional Review Act, the OCC is barred from proposing a “similar” rule in the future absent a new congressional mandate. The FDIC appears unlikely to issue its own true lender rule. Given the lack of federal guardrails, the importance of the California market, and the DFPI’s recent focus on the bank models, we expect a substantive decision in the OppFi case to have a significant impact on the national consumer lending market.
1 The rule was intended to eliminate uncertainty arising from the Seceond Circuit Court of Appeals’ 2019 decision in Madden v. Midland Funding, LLC , which cast doubt on whether a non-bank purchaser could charge interest above the applicable state usury rate on a bank-originated loan.
2 See Consumer Fin. Prot. Bureau v. CashCall, Inc., 2016 US Dist. LEXIS 130584.