The California case could deal a blow to high-interest online lenders

Aug 31 (Reuters) – A California judge is preparing to decide whether an online lender offering small loans at more than 150% interest is violating state law, which would deal a blow to finance companies that critics say have exceeded interest rate caps to take advantage. Financial hardship. borrowers.

The California Department of Financial Protection and Innovation (DFPI) is seeking a ruling preventing Chicago-based Opportunity Financial (OppFi) from making loans at an interest rate higher than California’s maximum of 36%.

Los Angeles Superior Court Judge Timothy Dillon is expected to issue his ruling any day. If California wins, it could encourage other states to take action against lenders who make high-interest loans to low-income borrowers using what critics call “rent-a-bank” partnerships, legal experts say.

Critics say the partnerships allow some fintech lenders, which offer quick loans online, to get around the interest rate caps most states impose on nonbanks by partnering with banks in states like Utah, where there is no interest rate cap.

Lenders themselves say the partnerships help small state banks compete and fill the void for borrowers with low credit scores who need emergency funds for unexpected expenses like car repairs and medical care.

According to a 2022 Federal Reserve study, 37% of U.S. adults don’t have the cash to cover an unexpected $400 expense.

OppFi spokesperson (OPFI.N) It did not respond to a request for comment, and a DFPI spokesperson declined to comment.

California’s battle with OppFi could serve as an example for other states, said Lauren Saunders, associate director at the National Consumer Law Center.

“The more they succeed, the more you will see other countries joining in and going after the rapacious lenders,” she said.

Many nonbank lenders have already exited California, said Saunders, whose group tracks high-interest lenders.

“the real lender”

A handful of state regulators have reached settlements with fintech companies like EasyPay Finance and Elevate Credit that capped the interest rates they charged or barred them from lending in the state.

In California, I took OppFi An unusual move He filed a preemptive lawsuit to try to prevent the state from taking the necessary action.

Federal law allows state-chartered banks to lend across state lines at the legal interest rate in their home state.

But state lawmakers decide how much interest nonbank lenders can charge. California set annual interest rates on loans between $2,500 and $10,000 at 36% in 2020.

OppFi makes the loans through Utah-based FinWise BankFollow Favorite. OppFi stressed in court that the bank is the lender, because it oversees the marketing and origination of the loans, initially funds the loans, keeps 5% of each loan on its books and answers to regulators.

California urged Dillon to realize that OppFi decides who to lend to and makes a deal with the bank to buy the loans.

“People are always trying to find loopholes and technicalities to evade the laws, to maximize their profits,” Allard Chu, a state prosecutor, said at a hearing in the case in July.

The state asked Dillon to prohibit OppFi from collecting or making new loans at more than 36% interest while the case proceeds.

OppFi said that would effectively take it out of the California market and jeopardize its partnership with FinWise, since 36% is not a viable rate for making such risky loans.

OppFi argued that there is no law or government regulation specifying when a banking partner should be considered a “true lender” and that DFPI is trying to establish one in court.

If the judge agrees, the matter could be derailed.

In this case, experts believe, the state may try to regulate or legitimize the issue.

One option is to follow Colorado, which recently passed legislation invoking the long-dormant right in federal law to choose not to import other states’ interest rates.

“It’s very vague, but it’s a strong right,” said Saunders.

Some in the lending industry have questioned whether Colorado law would apply to banking partnerships, since that would depend on whether the loan was made in the home state of the borrower or in the state of the lender.

“This is really the million dollar question,” said Ron Vaskey, an attorney at Ballard Spar who advises fintech firms.

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