Subprime lender OppFi sues to continue making loans in California

The fintech lender OppFi is suing California’s banking commissioner, arguing its high-cost loans should not be subject to the state’s annual interest rate cap of 36% because they’re made in partnership with a bank.

OppFi, which is not a bank, would be unable to charge triple-digit interest rates in California on its own due to the state’s rate cap. But it has been partnering on high-cost loans with Utah-based FinWise Bank, which has the ability to export Utah’s far looser interest rate rules.

Consumer advocates and state policymakers have called the arrangement a “rent-a-bank” scheme in which OppFi is using FinWise Bank’s charter to evade California’s 36% rate cap. But in a lawsuit filed this week, Chicago-based OppFi argued that it is not the actual lender on the loan — and that since it only performs certain services on behalf of FinWise Bank, the state’s rate cap does not apply.

Bloomberg

OppFi says Clothilde Hewlett, who leads the California Department of Financial Protection and Innovation, is trying to “wage a war” against similar partnerships between fintech companies and banks.

“It is clear that the Commissioner has decided unequivocally to abuse her enforcement powers against OppFi in an effort to expand unlawfully the DFPI’s regulatory reach and the scope of” the state’s rate cap, OppFi said in its lawsuit, which was filed in Los Angeles County Superior Court.

OppFi is also seeking a declaration stating that the loans, which FinWise is continuing to make using the OppFi platform, do not violate the rate cap. While the agency has not taken a formal action, OppFi said in a press release it filed the lawsuit so it "can continue to serve close to 7.2 million Californians in need of credit."

California’s rate cap, which took effect in 2020, prohibits lenders from charging annual percentage rates above 36% on installment loans between $2,500 and $10,000.

Hewlett, who declined to comment directly on the lawsuit, said in a statement that triple-digit APRs “keep struggling Californians in a cycle of poverty and were banned in the state” through the rate cap law.

“Companies that do business in California that do not adhere to the law will be investigated and could be subject to enforcement action to ensure consumer protection and compliance with state law,” the DFPI commissioner said.

OppFi and other high-cost lenders say higher interest rates are necessary to make the loans economically feasible, because they lend to borrowers with lower credit scores who often don’t qualify for bank loans. OppFi also says its website directs customers who qualify for APRs below 36% to other lenders.

A few of OppFi’s competitors had eyed switching to bank partnerships in California after the state passed its rate cap, prompting a warning from policymakers there that doing so would be an evasion of the new law.

Shortly after the law took effect, the agency reached out to OppFi to request more information on its bank partnership. Last month, a top DFPI official told OppFi that the commissioner concluded the OppFi-FinWise loans violate the state’s rate cap and “threatened immediate enforcement action” to stop the partnership, the OppFi lawsuit says.

“The Commissioner’s threatened action poses a potentially fatal threat to OppFi’s business in California,” OppFi said in the lawsuit, adding that its only business in California is providing tech services to the bank.

“OppFi is not making the loans — the bank is,” the lawsuit says.

OppFi says its role in the partnership consists of maintaining a website for consumers to access loans; preparing a marketing strategy for FinWise; customer support and loan servicing; and using its algorithms to help with underwriting. The bank underwrites, funds and approves all the loans, and the loan contracts “make clear the bank is the entity extending credit,” the lawsuit says.

But consumer advocacy groups say OppFi and other high-cost lenders are the true lenders.

“Just nominal approval of underwriting and origination of the loan isn't enough to make the bank the true lender,” said Lauren Saunders, associate director at the National Consumer Law Center.

In a letter last month, the NCLC and 14 other consumer groups asked the Federal Deposit Insurance Corp., which supervises the handful of banks involved in the partnerships, to “put an end to modern predatory rent-a-bank schemes.”

Last year, a federal judge in California dismissed a lawsuit from an OppFi customer who argued the bank was violating California’s consumer protection laws. The company also recently settled a lawsuit filed by the District of Columbia’s attorney general over alleged rate cap violations. As part of the $2 million settlement, OppFi agreed to stop offering loans with APRs above the district’s 24% APR cap, either directly or in partnership with a bank.

OppFi, which went public last year, reported $293.3 million in loan receivables in the third quarter, up from $240.3 million a year earlier.

Last week, the company said its former CEO Neville Crawley had resigned after less than two months at the helm. Crawley had joined OppFi last July as its president.

The board appointed Todd Schwartz, the company’s founder and executive chairman, as its new CEO.