On April 8, the California Department of Financial Protection and Innovation (DFPI) deposit a counterclaim against a Chicago-based FinTech company alleging that as a “true lender” of consumer installment loans, it is subject to and has also violated California Finance Laws (CFLs) by making loans in excess of the CFL rate cap of 36% and that the FinTech violated the California Consumer Financial Protection Act (CCFPL) by offering and collecting loans whose rates exceeded the rate cap. The counterclaim was filed in response to a complaint deposit by the fintech company in March to block the DFPI from applying California usury law to loans made through its partnership with a state-chartered bank located in Utah (we discussed this complaint in a previous blog post here).

The DFPI argues that the FinTech, not the bank, is the true lender based on the substance of the transaction and considering all of the circumstances where the primary determining factor is the entity that has the predominant economic interest. in the transaction. The DFPI alleges that the FinTech has the predominant economic interest because it:

• Purchases between 95 and 98% of the receivable for each loan issued;

• insulates the bank from virtually all credit risk by creating a secured secondary market in which the bank can “sell” its loans in order to recover its funds;

• Performs all the functions of a traditional lender as it alone offers the relevant installment loans via its website;

• Is responsible for all marketing in association with the relevant loans, including the use of search engine optimization, email remarketing and referrals;

• Underwrites for consumers who apply for the relevant loans on its website; and

• Undertakes loan servicing obligations, including collection of all interest and principal payments made on loans.

In addition, the DFPI is advancing a somewhat novel Unfair, Deceptive, and Abusive Act or Practice (UDAAP) claim against the FinTech under California’s recently enacted CCPL as an alternative theory of liability. Specifically, the DFPI alleges that while the FinTech is not the true lender under California law, the FinTech is nonetheless a service provider that assists a bank in offering illegal financial products designed, among other things, to evade California wear limitations.

Among other remedies, the DFPI seeks (i) an injunction permanently prohibiting the FinTech from recovering the affected loans, (ii) a declaration that the affected loans are void, (iii) an order requiring the FinTech to return to all the borrowers concerned; (iv) an order requiring the deletion of any negative credit reports relating to the affected loans, and (v) the payment by the FinTech of “penalties of $2,500 for each violation of the CFL, in the amount of at least $100 million”.

Put into practice : The DFPI complaint is part of an ongoing trend that attacks on bank partnerships have argued that the non-bank partner is the “true lender” (we have already discussed this trend in previous blog posts here). The addition of an alternative UDAAP liability theory is, among other legal challenges, likely to test the limits of federal preemptive principles that allow banks to export interest rates.