CA Court Sides with Fintech and Rejects DFPI’s “True Lender” Theory

The Los Angeles County Superior Court recently issued a final statement of decision granting summary judgment in favor of a fintech company.  The court rejected the California Department of Financial Protection and Innovation’s (DFPI) allegations that the fintech company, rather than its bank partner, was the “true lender” of consumer loans originated through the parties’ lending program. 

The underlying litigation, which began in 2022, centered on whether the fintech company violated the 36% interest rate cap on certain consumer loans under the California Fair Access to Credit Act.  DFPI challenged the fintech company’s partnership with a state-chartered bank in Utah (where it was alleged there is no state interest cap on the loans at issue) and claimed that the fintech company was engaged in a scheme to “rent” the Utah bank’s charter to originate loans at rates considered usurious in California.  Based on the allegations, DFPI sought restitution for roughly 38,000 California borrowers and at least $100 million in penalties against the fintech company.

Ultimately, the court agreed with the fintech company’s arguments and held that the record did not support that the Utah bank was a “dummy lender,” and that the arrangement existed to evade California interest rate caps.  The fintech company succeeded in doing so by establishing for the court that under the program, the Utah bank (1) controlled the application and underwriting process; (2) funded the loans with its own money; (3) retained title and ownership; (4) bore risk of loss; (5) controlled marketing; and (6) maintained legal and regulatory compliance.  Thus, the court concluded that the fintech company demonstrated that there was no issue of fact as to its legitimate relationship with the Utah bank and that the fintech company met its burden that precluded a “reasonable trier of fact from determining it was more likely than not” that the fintech company was the true lender for the loans.

The court was unpersuaded by DFPI’s counterarguments in opposition, which were addressed and rejected accordingly:

• Receivable Sales and Pre-Arranged Transfers: The court held that this did not undermine the Utah bank’s lender status and it reinforced that a loan not usurious at inception does not become usurious by subsequent events.

• Title and Control: The court found that hypothetical control over the loans by the fintech company through certain provisions and potential “Collateral Agent Calls” in the parties’ receivables sale agreement was insufficient to create a triable issue, considering the Utah bank retained title and ownership of the loans at all relevant times.

• Underwriting and Operations: The court determined that these facts did not override the bank’s final approval authority, independent underwriting, and overall supervision of the program with the fintech company.

Because of its ruling on the threshold lender identity issue, the court declined to reach the fintech company’s alternative arguments that: (1) DFPI’s enforcement position constituted an unlawful underground regulation under the California Administrative Procedures Act; and (2) the California Financing Law’s bank exemption independently barred DFPI’s claims because the loans were originated by a state-chartered bank. 

As a result, the court’s decision leaves unresolved certain questions regarding the scope of DFPI’s regulatory authority but it is a significant victory for bank-fintech company partnerships and is expected to have nationwide influence on challenges to similar arrangements by state regulators.

DFPI has 60 days to file an appeal.