On April 8, the California Department of Financial Protection and Innovation (DFPI) filed a cross-complaint against a Chicago-based FinTech company alleging that as the “true lender” of consumer installment loans, it is subject to and also violated the Californian Financing Laws (CFL) by making loans in excess of the CFL 36% rate cap and that the FinTech violated the California Consumer Financial Protection Law (CCFPL) by offering and collecting on loans with rates exceeding the rate cap. The cross-complaint was filed in response to a complaint filed by the Fintech company in March to prevent the DFPI from applying California usury law to loans made through its partnership with a state-chartered bank located in Utah (we discussed this complaint in a previous blog post here).
The DFPI argues that the FinTech, and not the bank, is the true lender based on the substance of the transaction and in consideration of the totality of the circumstances where the primary determining factor is which entity has the predominant economic interest in the transaction. The DFPI alleges that the FinTech hold the predominant economic interest because it:
- Purchases between 95 to 98 percent of the receivable for each loan originated;
- Insulates the bank from essentially any credit risk by creating a guaranteed secondary market that the bank can “sell” its loans in order to recoup its funds;
- Performs all the functions of a traditional lender because it alone offers the relevant installment loans through its website;
- Is responsible for all marketing in association with the relevant loans, including the use of search engine optimization, email remarketing, and referrals;
- Performs underwriting for consumer who apply for the relevant loans on its website; and
- Undertakes the servicing obligations of the loans, including collecting all interest and principal payments made on the loans.
In addition, the DFPI is advancing a somewhat novel unfair, deceptive, and abusive act or practice (UDAAP) claim against the FinTech under California’s recently enacted CCPL as an alternative theory of liability. Specifically, the DFPI alleges that even if the FinTech is not the true lender under California law, the FinTech is nonetheless a service provider that is assisting a bank to offer unlawful financial products designed, among other things, to evade California’s usury limitations.
Among other relief, the DFPI seeks (i) an injunction permanently barring the FinTech from collecting on the relevant loans, (ii) a declaration that the relevant loans are void, (iii) an order requiring the FinTech to make restitution to all impacted borrowers; (iv) an order requiring the removal of any negative credit reporting relating to the relevant loans, and (v) the FinTech’s payment of “penalties of $2,500 for each and every violation of the CFL, in an amount of at least $100 million.”
Putting It Into Practice: The DFPI’s complaint is part of a continuing trend whereby attacks on bank partnerships have argued that the nonbank partner is the “true lender” (we have previously discussed this trend in prior blog posts here). The addition of an alternative UDAAP theory of liability is, among other legal challenges, likely to test the limits of federal preemption principles that allow banks to export interest rates.