As mentioned in my post last week, the Department of Business Oversight issued a press release shortly after Christmas announcing that it had issued a "legal opinion" concerning whether a point-of-sale product constitute loans for purposes of the California Financing Law. I placed quotation marks around "legal opinion" because the California Financing Law does not authorize the Department to issue legal opinions as such. Rather, the Commissioner is authorized to make "specific rulings". Cal. Fin. Code § 22150.
The Department redacts the background information from its "legal opinion" pursuant to the requestor's confidentiality request. However, the Department's discussion of the issues provides some clues as to the nature of the arrangement at issue. The requestor enters into contracts with merchants selling goods to customers who at checkout are presented with a deferred payment option. The Department concluded that this arrangement involved loans. The Department identified five factors relevant to its analysis: (1) the intent of the parties; (2) the relationship between the merchant and the requestor; (3) the timing of the requestor's assumption of the contract; (4) who provides the contract and makes the credit evaluation; and (5) the existence of another regulatory scheme. Based on these factors, the Department concluded that the requestor's arrangements constitute loans for purposes of the California Financing Law.
Remarkably, the California Financing Law does not define the term "loan". The Department therefore looks to the definition of the term in the California Civil Code: "A loan of money is a contract by which one delivers a sum of money to another, and the latter agrees to return at a future time a sum equivalent to that which he borrowed. Cal. Civ. Code § 1912. The Department, however, does not cite any authority for why this definition should govern the California Financing Law that is codified in the California Financial Code.
Much more problematical is the Department's application of Section 1912 to the requestor's arrangement:
"Under this definition, [the requestor's] products are loans because they consist of a contract (the Terms of Service entered into between the customer and [the requestor]) by which [the requestor] delivers a sum of money to another here, to the merchant on behalf of the customer), and the customer agrees to pay the sum of money back at a future time."
However, the plain language of Section 1912 requires delivery of money to another and "the latter" agreeing to return it. As described by the Department, the requestor delivers money to the merchant, but the customer (not the merchant) returns the money.