CA DFPI Issues Consent Order Regarding Crypto-Backed Lending

A crypto asset product and service company recently agreed to a consent order with the California Department of Financial Protection and Innovation (DFPI) to resolve allegations that the company, without holding a California Financing Law (CFL) License, offered consumer and commercial loans under a crypto-backed lending program, and, among other things, did not evaluate the borrowers’ ability to repay.  The order alleges that, from 2018 through 2022, the company made 5,456 loans to California residents in violation of California laws, specifically the CFL and the California Consumer Financial Protection Law.

The order alleges that the loans required crypto assets as collateral, and the loan agreement allowed the company to dispose of the crypto at any time and for any reason without borrower consent while the loan was outstanding.  Prior to making these loans, the company allegedly did not underwrite, generally (e.g., evaluate a borrower’s credit history, debt, and expenses), and, instead, overcollateralized the loans.  The company neither admits nor denies the findings.

The order requires that: (i) all loans be transferred to the related CFL-licensed company entity; (ii) all future California loans must go through this same licensed company entity; and (iii) the company must pay a $500,000 penalty.

The DFPI previously took enforcement action, in coordination with other states, against this company in 2022 for violations of state securities laws related to its crypto interest-earning program.