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Volume XII, Number 185


July 01, 2022

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Fintech Flips Script, Sues California Regulator Over 36% Rate Cap Law

On March 7, a Chicago-based FinTech company  filed a Complaint for Declaratory and Injunctive Relief in Los Angeles County Superior Court against the Commissioner of the California Department of Financial Protection and Innovation (DFPI), Clothilde Hewlett.

According to the filing, the complaint responds to the DFPI’s 2020 investigation and recent “threatened” enforcement action against the FinTech company alleging that the FinTech company originated loans with interest rates in excess of the limit set by the Fair Access to Credit Act (AB 539).  AB 539, which became effective January 1, 2020, amended the California Financing Law (CFL) to include an interest rate cap of 36% for covered loans between $2,500 and $10,000 made by “finance lenders” subject to the CFL.

The FinTech company argues that the CFL’s interest rate caps do not apply to its loans because:

  • The FinTech company’s loans are constitutionally and statutorily exempt from California’s maximum interest rate caps because the loans are made by its bank partner, a state-chartered bank located in Utah. The bank uses the FinTech company’s technology platform to provide its loan products to consumers.

  • The FinTech company does not make loans in California. As such, it is not a “finance lender” under the CFL with respect to its loan making activities, and, therefore, is not subject to the interest rate caps established by AB 539 for those activities.

  • Even if AB 539 could arguably apply to the FinTech company , Section 27 of the Federal Deposit Insurance Act preempts application of AB 539 to the FinTech company’s loans.

The FinTech company is seeking declaratory relief in support of its position that the interest rate caps set forth in California law do not apply to loans that are originated by bank partners and serviced through the FinTech company’s technology platform.

Putting it Into Practice:  This complaint is the latest activity in states where regulators and Attorneys General are targeting bank partnership arrangements based on the “true lender” legal theory that posits that nonbanks “rent” bank charters from banks that carry little or no economic or regulatory risk to, among other things, evade state usury laws (we previously discussed this latest trend in earlier Consumer Finance & FinTech Blog posts herehere, and here).  In fact, the Fintech company in question here was a recent target of the D.C. OAG for allegations that it provided predatory, usurious loans to D.C. borrowers while deceptively marketing its products as consumer-friendly (we previously discussed this action in an earlier Consumer Finance & FinTech Blog post here).

Copyright © 2022, Sheppard Mullin Richter & Hampton LLP.National Law Review, Volume XII, Number 70

About this Author

Moorari Shah Bankruptcy Lawyer Sheppard Mullin Law Firm

Moorari Shah is a partner in the Finance and Bankruptcy Practice Group in the firm's Los Angeles and San Francisco offices. 

Areas of Practice

Moorari combines deep in-house and law firm experience to deliver practical, business-minded legal advice. He represents banks, fintechs, mortgage companies, auto lenders, and other nonbank institutions in transactional, licensing, regulatory compliance, and government enforcement matters covering mergers and acquisitions, consumer and commercial lending, equipment finance and leasing, and supervisory examinations,...

A.J. S. Dhaliwal Bankruptcy Attorney Sheppard Mullin Washington DC

A.J. is an associate in the Finance and Bankruptcy Practice Group in the firm's Washington, D.C. office. 

A.J. has over a decade of experience helping banks, non-bank financial institutions, and other companies providing financial products and services in a wide range of matters including government enforcement actions, civil litigation, regulatory examinations, and internal investigations.

With a diversified regulatory, compliance, and enforcement background, A.J. counsels financial institutions in matters involving...