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California Alleges FinTech is “True Lender” Seeks Penalty

  • Written by Moorari Shah

The California Department of Financial Protection and Innovation (DFPI) filed a cross-complaint against a Chicago-based FinTech company alleging that as the “true lender” of consumer installment loans, it is subject to and also violated the Californian Financing Laws (CFL) by making loans in excess of the CFL 36% rate cap and that the FinTech violated the California Consumer Financial Protection Law (CCFPL) by offering and collecting on loans with rates exceeding the rate cap.  The cross-complaint was filed in response to a complaint filed by the Fintech company in March to prevent the DFPI from applying California usury law to loans made through its partnership with a state-chartered bank located in Utah (we discussed this complaint in a previous blog post here).

The DFPI argues that the FinTech, and not the bank, is the true lender based on the substance of the transaction and in consideration of the totality of the circumstances where the primary determining factor is which entity has the predominant economic interest in the transaction.  The DFPI alleges that the FinTech hold the predominant economic interest because it:

  • Purchases between 95 to 98 percent of the receivable for each loan originated;

  • Insulates the bank from essentially any credit risk by creating a guaranteed secondary market that the bank can “sell” its loans in order to recoup its funds;

  • Performs all the functions of a traditional lender because it alone offers the relevant installment loans through its website;

  • Is responsible for all marketing in association with the relevant loans, including the use of search engine optimization, email remarketing, and referrals;

  • Performs underwriting for consumer who apply for the relevant loans on its website; and

  • Undertakes the servicing obligations of the loans, including collecting all interest and principal payments made on the loans.

In addition, the DFPI is advancing a somewhat novel unfair, deceptive, and abusive act or practice (UDAAP) claim against the FinTech under California’s recently enacted CCPL as an alternative theory of liability. To read more click here.