Fintech lender Opportunity Financial (“OppFi”) and the Department of Financial Protection and Innovation (“DFPI”), California’s financial-services regulator, filed dueling claims as they battle over state efforts to enjoin the company’s branded loans, which exceed California’s 36% interest-rate cap. This is the latest effort by fintech lenders to cement the True Lender Rule against state opposition.
As we previously reported, in October 2020, the Office of Comptroller of Currency (“OCC”) promulgated the True Lender Rule which provided, in relevant part, that if the national bank was named as the original lender in the loan agreement, it would be considered the entity that actually “made” the loan and thus the “true lender.” National and state-chartered banks can export the interest-rate cap of its home state, and the non-bank partner would not be considered the true lender. The Rule took effect December 29, 2021 and was immediately criticized by state regulators who believed that the rule diminished the jurisdiction of state usury regulations. On June 30, 2021, Congress repealed the True Lender Rule under the Congressional Review Act. Still, Acting Comptroller of Currency Michael J. Hsu hinted that the OCC may be looking into how it can differentiate between harmful rent-a-charter arrangements and healthy partnerships that expand access to credit.
Prior to its repeal, the True Lender Rule helped clarify the regulatory scheme applicable to loans funded by banks and later sold to non-bank entities, which ultimately allow non-bank entities like OppFi to charge higher interest rates on loans. Despite its repeal, fintech lenders, like OppFi still rely on the preemption principles underlying the Rule in issuing loan products through bank partnerships which often have higher interest rates
On March 10, 2022, OppFi proactively filed a complaint against the DFPI after the DFPI had threatened to sue the company for making consumer loans with interest rates exceeding 36%, the limit set by recent California law. OppFi’s branded OppLoans can carry interest rates of up to 160%.
In response, on April 12, 2022, DFPI filed a cross-complaint against OppFi alleging that the lender charged California borrowers usurious interest rates.
Both arguments center on who is the “true lender” of the loans. OppFi argues that its loans are exempt from California’s interest-rate caps because they were originated by its bank partner, FinWise Bank of Utah. FinWise is a Utah state-chartered bank that may, under Section 27 of the Federal Deposit Insurance Act, lend nationally at whatever rates are permitted in Utah. Since Utah has no interest-rate cap and FinWise is the lender identified in the loan documents, OppFi contends that the loans’ interest rates are lawful. Conversely, the DFPI argues that OppFi is the “true lender” of these loans because, under a predominant economic interest test set forth in CFPB v. CashCall, OppFi has the predominant economic interest in the loans because it purchases 95-98% of the receivable for each loan originated by FinWise. The DFPI further argues that the loans perpetuate harmful “rent-a-bank” schemes where so-called predatory lenders use banks as fronts to avoid state interest-rate caps to make higher-cost loans.
In 2021, the District of Columbia’s Attorney General similarly sued OppFi because its loans exceeded D.C.’s 24% usury limit. On April 20, 2022, without admitting liability, OppFi entered into a consent judgment and order with the DC Attorney General, which includes an agreement to pay $1.5 million in restitution to D.C. borrowers and forgive an additional $640,000 in past due interest.
At the core of this debate are bank-lending partnerships. Lending partnerships are commonly used by non-bank fintech lenders to leverage national or state-chartered banks’ licenses and more advantageous regulatory schemes, including federal preemption rights. As applied to the lending and credit market, a national or state-chartered bank may make or fund a loan and then sell all or part of that loan to the non-bank fintech entity, or vice versa. The non-bank entity relies on the bank’s federal preemption rights in purchasing the loans on the secondary market. Those rights allow the bank to charge higher interest rates on products across state lines as long as the bank is the entity underwriting and funding the loan.
Although the OCC’s original True Lender Rule is no longer in effect, we can expect that fintechs like OppFi will continue to utilize bank-lending partnerships in reliance on the practical effects of the True Lender Rule. Until federal and state interests are more closely aligned in promoting such partnerships, we expect continued friction between state regulators and fintech lenders who are marketing to consumers seeking credit. Consumer lenders that cater to higher-risk borrowers are pressured to keep interest rates low, which is particularly challenging as interest rates rise to combat inflation. Coupled with tightening underwriting guidelines, this impacts which consumers can obtain credit.
The lawsuit is Opportunity Financial LLC v. Hewlett, case number 22STCV08163, in Los Angeles County Superior Court.
For more on our coverage about bank partnerships and the True Lender Rule, see here.