May courts look beyond the face of a loan transaction to identify the “true lender”? In a lawsuit filed by California’s financial regulator, a California state court recently answered yes, finding that a fact-intensive inquiry into the “substance” of a loan transaction was necessary to determine who the “true lender” is and declining to dismiss a lawsuit. See Opportunity Fin., LLC v. Hewlett, No. 22STCV08163 (Cal. Super. Ct. Sept. 30, 2022).
The lawsuit involves a lending partnership between OppFi (a fintech) and FinWise Bank (its bank partner), which has been the target of recent class actions. OppFi filed suit to stop California’s Department of Financial Protection and Innovation (DFPI) from enforcing the state’s interest rate caps on consumer loans made in partnership with FinWise Bank. The DFPI then filed a cross-complaint, taking the position that OppFi—and not FinWise Bank—is the true lender for purposes of assessing the validity of the loans’ interest rates. In its demurrer, OppFi argued that the loans at issue are exempt from the interest rate cap under the California Constitution and statutory exemptions for loans originated by state-chartered banks like FinWise Bank.
On September 30, the Hewlett court denied OppFi’s demurrer. According to the court, California courts examine the “substance” rather than the form of a transaction “to determine its true nature,” and the complaint alleged enough facts to suggest that OppFi could be the alleged lender in substance. To reach this conclusion, the court relied on the following allegations: (i) OppFi purchases the loans shortly after origination “by prearrangement”; (ii) FinWise Bank funds the loans “only if [they are] fully secured by OppFi”; (iii) OppFi pays “all of FinWise’s expenses” and “a volume fee based on the amount of the loans’ principal”; (iv) the loans are “only available through OppFi”; and (v) OppFi performs “all marketing, underwriting, and servicing of the loans.” “[A]t this early stage,” therefore, the court held that it “cannot rule as a matter of law that FinWise is the lender of the loans at issue.”
By looking to substance over form, the Hewlett court split with two federal district court decisions applying California law. See Sims v. Opportunity Fin., LLC, 2021 WL 1391565, at *4 (N.D. Cal. Apr. 13, 2021); Beechum v. Navient Sols., Inc., 2016 WL 5340454, at *8 (C.D. Cal. Sept. 20, 2016). Sims and Beechum held that courts may look only to the face of a loan transaction when assessing whether an exemption from California’s interest rate cap applies. Although Sims also involved allegations that OppFi was the “true lender” on loans made by FinWise Bank, the Hewlett court did not engage with either decision. Without explanation, the Hewlett court stated in a footnote that it “does not find the[se] two federal unreported cases to be persuasive.”
The Hewlett decision only underscores the uncertainty that lenders and fintechs face in designing their lending partnerships. The OCC’s “true lender” rule would have eliminated confusion by identifying the true lender as the bank that is “named as the lender in the loan agreement or funds the loan.” But that rule was nullified in 2021 under the Congressional Review Act, returning to the state of uncertainty that preceded the OCC’s rule. The Hewlett decision illustrates how courts continue to create confusion by adopting inconsistent approaches to determining who is the “true lender” on a loan.