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.

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Photo of Andrew Soukup Andrew Soukup

Andrew Soukup is a co-chair of the firm’s Class Action Litigation Practice Group. Andrew specializes in representing heavily regulated businesses in class actions, multidistrict litigation, and other high-stakes disputes.

Praised for achieving “big wins in his class action practice,” Andrew has

Andrew Soukup is a co-chair of the firm’s Class Action Litigation Practice Group. Andrew specializes in representing heavily regulated businesses in class actions, multidistrict litigation, and other high-stakes disputes.

Praised for achieving “big wins in his class action practice,” Andrew has defeated a variety of advertising, consumer protection, privacy, and product defect and safety claims ranging in exposure from millions to billions of dollars. Based on his “proven record,” Andrew has been recognized as an “attorney you want on your side in a bet-the-company case.”

Andrew’s clients include those in the consumer products, life sciences, financial services, technology, automotive, and media and communications industries. He has helped his clients prevail in litigation in federal and state courts across the country against putative class representatives, government agencies, state attorneys general, and commercial entities.

With a long history of representing companies subject to extensive federal regulation and oversight, Andrew provides a unique ability to help courts understand the complex environment that governs clients’ businesses. Clients turn to Andrew because of his successful outcomes at all stages of litigation, his responsiveness and attention to their matters, his understanding of their businesses, and his creative strategies.

Andrew’s recent successes include:

  • Leading the successful defense of several of the world’s leading companies and brands from claims that they engaged in deceptive marketing or sold defective products, including claims brought under state consumer protection and unfair deceptive acts or practices statutes.
  • Defeating claims against one of the nation’s leading consumer products companies in industry-wide, multidistrict class-action litigation challenging the company’s marketing and advertising of over-the-counter medicine containing allegedly ineffective ingredients, which earned Andrew recognition by American Lawyer as a “Litigator of the Week.”
  • Delivering wins in multiple nationwide class actions on behalf of leading financial institutions related to fees, disclosures, and other banking practices, including the successful defense of numerous financial institutions accused of violating the Paycheck Protection Program’s implementing laws, which contributed to Covington’s recognition as a “Class Action Group of the Year.”
  • Helping several of the world’s largest seafood companies defeat ESG-related claims accusing them of misrepresenting their practices.

Andrew has also obtained favorable outcomes for numerous clients in commercial and indemnification disputes raising contract, fraud, and other business tort claims. He helps companies navigate contractual and indemnification disputes with their business partners. And he advises companies on their arbitration agreements, and has helped numerous clients avoid multi-district and class-action litigation by successfully enforcing their arbitration agreements.

Watch: Andrew provides insights on class action litigation, as part of our Navigating Class Actions video series.

 
Photo of Ashley Simonsen Ashley Simonsen

Ashley Simonsen is a litigator whose practice focuses on defending complex class actions and mass torts in state and federal courts across the country.

Ashley represents clients in the technology, consumer brands, financial services, and sports industries through all stages of litigation, including trial…

Ashley Simonsen is a litigator whose practice focuses on defending complex class actions and mass torts in state and federal courts across the country.

Ashley represents clients in the technology, consumer brands, financial services, and sports industries through all stages of litigation, including trial, with a strong track record of success on early dispositive motions. Her practice encompasses advertising, antitrust, product defect, and consumer protection matters. Ashley regularly advises companies on arbitration clauses in consumer agreements and related issues, including mass arbitration risks and issues arising under McGill v. Citibank, N.A. And she is one of the nation’s leading experts on “true lender” issues and the related “valid when made” doctrine.

Ashley has been recognized three times by Law360 as an “MVP” (in Class ActionsTechnology, and Banking) and as a “Rising Star” (in Banking). Her successful representation of Meta earned her a 2021 “Top Verdict” recognition from the Daily Journal. She has also been included in the Daily Journal’s list of the “Top 100 Lawyers” and “Top Women Lawyers” in California, named a “Lawyer on the Fast Track” and “Women Leader in Tech Law” by The Recorder, and recognized twice as a Leader of Influence: Litigators & Trial Lawyers by the Los Angeles Business Journal. Before practicing law, Ashley was an associate at Lehman Brothers in New York where she advised banks on balance sheet management and interest rate hedging strategies.

Photo of Matthew Verdin Matthew Verdin

Matthew Verdin focuses on defending clients in the technology and financial services sectors. He has a strong record of delivering wins on behalf of clients in class actions and complex litigation, particularly in privacy and consumer protection lawsuits. Matthew is particularly successful in…

Matthew Verdin focuses on defending clients in the technology and financial services sectors. He has a strong record of delivering wins on behalf of clients in class actions and complex litigation, particularly in privacy and consumer protection lawsuits. Matthew is particularly successful in securing dismissals at the pleadings stage. For example, he won dismissal at the pleadings stage of over a dozen wiretapping class actions involving the alleged use of website analytics tools to collect data about users’ website visits. He also advises companies on managing litigation risk under federal and state wiretapping laws.

Matthew is also dedicated to pro bono legal services. Recently, he helped a domestic violence survivor win a case in the California Court of Appeal. Matthew’s oral argument led to the court ordering renewal of his client’s restraining order just one day later.