While the California Financing Law defines "finance lender", it does so in a very open-ended and nonspecific manner. Cal. Fin. Code § 22009 ("'Finance lender' includes any person who is engaged in the business of making consumer loans or making commercial loans.") The scope of the CFL is further obscured by the fact that it does not define "loan" or what it means to "make a loan".
The Commissioner of Financial Protection & Innovation is endeavoring to take advantage of the resulting ambiguities to expand the application of the CFL to so-called "true lenders". A recent ruling by California Superior Court Judge Timothy Patrick Dillon, however, has dealt a blow to the Commissioner's efforts. Opportunity Financial, LLC v. Commissioner, L.A. Super. Ct. Case No. 22STCV08163.
The case was originally brought by Opportunity Financial, LLC ("OppFi") which sought declaratory and injunctive relief with respect to the Commissioner's "true lender" doctrine under which OppFi would be subject to the interest rate caps imposed under the CFL. OppFi operates an online platform through which consumers may obtain loans from a state chartered bank. The Commissioner cross-complained asserting that OppFi was the "true lender" and the use of the bank was a ruse to avoid the rate caps. The Commissioner claimed that OppFi was the "true lender" because it had a prearrangement with the bank to purchase loan receivables (but not the loans); OppFi owned the online platform; OppFi controls the underwriting process; OppFi purchases over 90% of the receivables; and the bank does not carry the financial risk.
In denying the Commissioner's motion for a preliminary injunction, Judge Dillon found that the Commissioner had failed to sufficiently show that the partnership between OppFi and the bank was a mere sham. He found that OppFi's prearranged purchase of 90% of the receivables was consistent with the bank's right under Section 27 of the Federal Deposit Insurance Act to assign, sell or otherwise transfer its loans. He also found that the Commissioner failed to provide sufficient evidence that OppFi controlled the underwriting process. He also found that there was undisputed evidence that the bank gained financially from its relationship with OppFi and was not merely a "straw" lender. Finally, Judge Dillon found that ruling that OppFi was the "true lender" may stand as an obstacle to Congress' purposes in enacting Section 27.
While Judge Dillon's written ruling is lengthy and detailed, I do not expect that it will be the last word on the viability of the "true lender" doctrine or its application to other situations. The case itself has yet to be tried and one side or the other may appeal that decision.