On March 7, a Chicago-based FinTech company filed a Complaint for declaratory and injunctive relief in Los Angeles County Superior Court against California Department of Financial Protection and Innovation (DFPI) Commissioner Clothilde Hewlett.
According to the filing, the complaint responds to the DFPI’s 2020 investigation and recent “threatened” enforcement action against the FinTech company alleging that the FinTech company issued loans with interest rates above the limit set by the Fair Access to Credit Act (AB 539). AB 539, which became effective January 1, 2020, amended the California Finance Act (CFL) to include an interest rate cap of 36% for covered loans between $2,500 and $10,000 made by “financial lenders” subject to the CFL.
The FinTech company argues that CFL interest rate caps do not apply to its loans because:
- The fintech company’s loans are constitutionally and statutorily exempt from California’s maximum interest rate caps because the loans are made through its banking partner, a state-chartered bank located in Utah. The bank uses the FinTech company’s technology platform to deliver its consumer lending products.
- The FinTech company does not make loans in California. As such, it is not a “financial lender” within the meaning of the CFL with respect to its lending activities and, therefore, is not subject to the interest rate caps established by AB 539 for these activities.
- Although AB 539 could arguably apply to the FinTech Company, Section 27 of the Federal Deposit Insurance Act prevents AB 539 from applying to loans from the FinTech Company.
The FinTech company seeks declaratory judgment in support of its position that interest rate caps set forth in California law do not apply to loans issued by banking partners and serviced through the FinTech’s technology platform. fintech company.
Put into practice : This complaint is the latest activity in states where regulators and attorneys general are targeting bank partnership agreements based on the “true lender” legal theory which posits that non-banks “rent” bank charters from banks that do not carry little or no economic or regulatory risk to, among other things, evade state usury laws (we’ve already discussed this latest trend in previous Consumer Finance & FinTech blog posts here, hereand here). In fact, the fintech company in question here was a recent target of the DC OAG for allegations that it provided predatory and usurious loans to DC borrowers while deceptively marketing its products as consumer-friendly (we have already discussed this action in a previous Consumer Finance & FinTech blog post here).