A bank partnership that has recently been the target of a series of “true lender” attacks has defeated a California regulator’s motion for a preliminary injunction. The regulator sought the inunction as part of a lawsuit that seeks to hold the fintech firm Opportunity Financial LLC (“OppFi”) liable for violations of California’s usury laws. The court’s decision is a significant victory for companies that follow the bank partnership lending model to provide consumer loans.
We have previously covered the lawsuit at issue here, which OppFi brought in March 2022 against the California banking commissioner, to stop the regulator from enforcing the state’s interest rate caps on loans made in partnership with FinWise Bank (“FinWise”) (which is based in Utah). See Opportunity Fin., LLC v. Hewlett, No. 22STCV08163 (Cal. Super. Ct. Mar. 7, 2022). The commissioner has argued that OppFi—and not FinWise—is the “true lender” for purposes of assessing the validity of the loans’ interest rates. While the interest rates on the loans exceed California’s state interest rate caps, FinWise, as an out-of-state lender, is exempt from those caps. But the bank commissioner argues in its countersuit that OppFi, as the “true lender,” is violating the state’s consumer interest rate cap—and thus should pay at least $100 million in penalties. OppFi has described the commissioner’s position as an “existential threat” to its business.
The regulator’s motion for a preliminary injunction sought to immediately stop OppFi from issuing its OppLoans product in California. But the court rejected the request because the commissioner had not shown a reasonable probability of prevailing on the merits. Specifically, the court found the commissioner had “not demonstrated” that the loans were “usurious in the first place” or that the bank partnership was a “mere sham and subterfuge,” where OppFi was the “true lender.” To reach this conclusion, the court relied on OppFi’s 10-K filing, which states that OppFi’s algorithms used to determine applicants’ creditworthiness and to facilitate underwriting are “bank-approved” and “validated by bank partners” (like FinWise Bank). The court also considered the testimony of OppFi executives, which demonstrated the financial benefits that FinWise gains from its partnership with OppFi. Because FinWise is actively involved in the loan-making process and profits from the partnership, the court said, there was insufficient evidence that it was a mere “straw lender” or that the partnership was designed to “cover up a usurious transaction.”
The decision is an important development in a case that has significant implications for the “true lender” doctrine and fintech companies like OppFi that utilize a bank partnership lending model.