In the wake of rulings upholding federal regulators’ “valid when made” rules, a new lawsuit serves as a reminder that state regulators and class-action plaintiffs’ lawyers may continue to challenge the bank partnership lending model under the “true lender” doctrine.

In early March, the fintech OppFi filed suit to stop California’s banking commissioner from enforcing the state’s interest rate caps on loans made in partnership with FinWise Bank.  See Opportunity Fin., LLC v. Hewlett, No. 22STCV08163 (Cal. Super. Ct. Mar. 7, 2022).  According to the complaint, the state regulator threatened enforcement on the grounds that OppFi—and not FinWise Bank—is the supposed “true lender” for purposes of assessing the validity of the loans’ interest rates.  The interest rates on the loans, if made by OppFi, would exceed California’s interest rate caps, including under California’s Fair Access to Credit Act (also known as AB 539), which took effect in January 2020.

OppFi is seeking a declaration that California’s interest rate caps do not apply to the loans made in partnership with FinWise Bank “because OppFi is not making the loans—the Bank is.”  OppFi alleges that FinWise Bank is the lender because it is the entity that “extended credit, entered into contracts with the borrowers for repayment, and remains the title owner of the loans.”  OppFi argues that this has two primary implications.  First, loans made by state-chartered banks like FinWise Bank are statutorily exempt from California’s interest rate caps.  Relying on a favorable decision that Covington obtained for Navient Solutions, a California federal judge recently dismissed claims against OppFi on this same basis, as OppFi alleges.  Sims v. Opportunity Fin., LLC, 2021 WL 1391565, at *4 (N.D. Cal. Apr. 13, 2021).  Second, section 27 of the Federal Deposit Insurance Act permits FinWise Bank to make loans at the rate of interest allowed in its home state of Utah (where there is no interest rate cap), and preempts California’s contrary laws.

According to OppFi, the California banking commissioner is attempting to “wage a war” against fintechs that partner with banks.  OppFi said in a press release that the company filed suit “so it can continue to serve close to 7.2 million Californians in need of credit.”  The commissioner, who declined to comment directly on the lawsuit, said in a statement, “Companies doing business in California that do not comply with the law will be investigated and may be subject to enforcement action to ensure consumer protection and compliance with state law.”

The state regulator’s challenge is part of a continuing trend (as reported here), whereby attacks on bank partnerships have started to abandon Madden arguments in favor of arguments that the nonbank partner is the “true lender.”