California Department of Financial Protection and Innovation Responds to OppFi’s Attempt to Block ‘True Lender’ Challenge to Loans Made Through Partnership Banking | Ballard Spahr LLP


The California Department of Financial Protection and Innovation (DFPI) has filed its opposition to Opportunity Financial, LLC (OppFi) Demurrer to the counterclaim of the DFPI. In the DemurrerOppFi is asking the California District Court to dismiss the DFPI’s attempt to apply California usury law to loans made under OppFi’s partnership with FinWise Bank (Bank) alleging that OppFi is the ” true lender” of the loans.

In 2019, California enacted AB 539 which, effective January 1, 2020, limited the rate of interest that could be charged on loans less than $10,000 but greater than $2,500 by approved lenders under California Finance Act (CFL) at 36% plus federal funds. assess. In March 2022, Opfi filed a complaint in California state court seeking to block the DFPI’s attempt to apply the CFL rate cap to loans made under its partnership with the Bank. OppFi’s complaint states that prior to 2019, the Bank entered into a contractual agreement with OppFi (Program) pursuant to which the Bank uses OppFi’s technology platform to provide small dollar loans to consumers through 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 by approved lenders under the LCF.

OppFi’s complaint alleges that because the Bank and not OppFi provides the program loans and the Bank is an FDIC-insured state chartered bank located in Utah, the Bank is authorized by Section 27 (a) the Federal Deposit Insurance Act to charge interest on its loans, including loans to California residents, at a rate permitted by Utah law, regardless of any California law imposing a rate limit of lower interest. Complaint seeks declaration that CFL interest rate caps do not apply to program loans and an injunction prohibiting the DFPI from applying CFL rate caps to OppFi based on its participation in the program.

In response to OppFi’s lawsuit seeking to prevent the DFPI from applying California usury law to loans made through the partnership, the DFPI filed a counterclaim seeking to enjoin OppFi from collecting the loans and have the loans declared void. In the counterclaim, the DFPI alleges that “OppFi is the true lender of [the Program Loans]on the basis of the “substance of the transaction” and the “totality of the circumstances”, the main factor being “which entity – bank or non-bank – has the predominant economic interest”. The DFPI claims that the program’s loans are therefore subject to the CFL and that OppFi violates the CFL and California’s Consumer Financial Protection Act by providing loans at interest rates that exceed the CFL rate cap.

The DFPI also alleged additional violations of the CFL by OppFi, including the CFL’s “anti-avoidance” provisions. One such provision is Section 22326 which applies to “any person who, by means, subterfuge, or pretense, incurs or receives interest, consideration, or charges greater than those permitted by this Division for all ready…”. The other provision is article 22324 which prohibits “the contract[ing] for or “negotiate[ing] in that state for a loan to be made out of state for the purpose of evading or avoiding California loan law.

In its Demurrer to Counterclaim, OppFi argues that the DFPI’s “true lender” challenge against the program’s loans has no basis in California statutes or the 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 consideration of substance rather than form in the assessment of property claims. usury and does not allow usury laws to be circumvented by disguise or subterfuge”. .” It also cites cases from other courts, including the decision of a California federal district court in Call for fundswho used a “true lender” analysis to support usury challenges.

OppFi also argues in the Demurrer that the DFPI’s other CFL claims fail in law. Regarding the DFPI’s CFL claims based on its “anti-avoidance” provisions, OppFi asserted that “it is not illegal to take advantage of [statutory exemptions].” The DFPI argues in its opposition that because true lender analysis should apply, OppFi’s argument “is both incorrect and subject to inappropriate factual questions to oppose.”

The following consumer advocacy groups have requested permission to file an amicus brief opposing OppFi’s opposition: 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 federal district court in Texas in which the named plaintiff alleges that OppFi engaged in a “rent-a-bank” scheme to deliberately evade state law, including in Texas where the named plaintiff took out her loan. OppFi has filed a motion to compel arbitration which the plaintiff opposes.

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