United States: Fintech lawsuit highlights true lender risk for banking partnership lending model
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After the shutdowns sustain federal regulators’ “good when done” rules, a new trial serves as a reminder that state regulators and class action plaintiffs’ attorneys can continue to challenge the banking partnership lending model under the “true lender” doctrine.
In early March, fintech OppFi filed a lawsuit to block California’s banking commissioner from enforcing state interest rate caps on loans made in partnership with FinWise Bank. See Opportunity Fin., LLC v. Hewlett, No. 22STCV08163 (Cal. Super. Ct. Mar. 7, 2022). According to complaint, the state regulator has threatened to enforce the law on the grounds that OppFi – not FinWise Bank – is the supposed “true lender” for the purposes of assessing the validity of loan interest rates. Interest rates on loans, if made by OppFi, would exceed California interest rate caps, including under California law Fair Access to Credit Act (also known as AB 539), which came into effect in January 2020.
OppFi is asking for a statement that California’s interest rate caps do not apply to loans made in partnership with FinWise Bank “because OppFi doesn’t make the loans, it’s the bank.” OppFi alleges that FinWise Bank is the lender because it is the entity that “provided the credit, entered into contracts with the borrowers for repayment and remains the legal owner of the loans”. OppFi argues that this has two main implications. First, loans made by state-chartered banks like FinWise Bank are legally exempt from California’s interest rate caps. Based on a favorable situation decision that Covington obtained for Navient Solutions, a California federal judge recently dismissed claims against OppFi on that same basis, as OppFi claims.
Sims vs. Opportunity Fin., LLC2021 WL 1391565, at *4 (ND Cal. 13 Apr 2021). Second, Section 27 of the Federal Deposit Insurance Act allows FinWise Bank to make loans at the interest rate permitted in its home state of Utah (where there is no rate cap). interest), and is ahead of contrary California laws.
According to OppFi, California’s banking commissioner is trying to “wage war” on fintechs partnering with banks. OppFi said in a Press release that the company sued “so it can continue to serve nearly 7.2 million Californians in need of credit.” The commissioner, who declined to comment directly on the trial, said in a statement“Companies doing business in California that fail to comply with the law will be investigated and may be subject to enforcement action to ensure consumer protection and compliance with US law. State.”
The state regulator’s challenge is part of an ongoing trend (as noted here), where attacks on banking partnerships began to drop mad arguments in favor of arguments that the non-bank partner is the “true lender”.
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