Focus on Fintech: Auto Lender LoanMart Agrees to Terminate Bank Partnership Lending Program After California’s DFPI Issues “True Lender” Request | Eversheds Sutherland (USA) LLP
On December 14, 2021, Wheels Financial, LLC (d/b/a LoanMart) entered into a Consent Order with the California Department of Financial Products and Innovation (DFPI) in which the Company agreed to extend its lending partnership with Capital Community Bank (CC- Bank). The order also prohibits LoanMart from: (1) marketing or servicing title loans of less than $10,000 with interest rates greater than 36 percent in California for the next twenty-one months; or (2) enter into a new lending partnership with a state-licensed bank by September 2023. LoanMart is licensed under the California Finance Act to provide consumer credit.
As a licensed bank in Utah, CC Bank is authorized to apply the interest rate laws of Utah to loans it makes to California residents, even if those interest rates exceed the California interest rate cap. Prior to January 1, 2020, when the California Fair Access to Credit Act (FACA) went into effect, California did not cap interest rates on consumer loans greater than $2,500. FACA capped the annual interest rate on loans between $2,500 and $10,000 at 36% plus the federal funds rate. According to DFPI, the loans CC Bank made to California borrowers had annual interest rates in excess of 90%.
The settlement order resulted from an extensive dialogue between the DFPI and LoanMart, in which the DFPI sought to determine whether LoanMart’s role in the lending program was “sufficient to require compliance with California lending laws.” DFPI’s language suggests the agency is considering whether LoanMart, rather than CC Bank, is the “true lender” with respect to the loans in question. The sharing of credit-related activities and economic risk between the marketplace platform and its banking partner are key issues in a true lender analysis. However, the DFPI Consent Order does not describe the details of the loan agreement between LoanMart and CC Bank, except that LoanMart was involved in the “marketing” and “facilitation” of consumer loans originated by CC Bank.
For this reason, the LoanMart Marketplace lender comparison does not provide useful guidance as to the impact of specific program features on a true lender analysis. It is also difficult to draw general conclusions about DFPI’s enforcement stance due to factors specific to LoanMart. Unlike many marketplace lenders that position themselves as mere service providers to their banking partners, LoanMart extended direct-to-consumer lending under a California lending license before partnering with CC Bank and retained its license thereafter. As a result, LoanMart was subject to the regulator of the DFPI with respect to loans originated in California.1 LoanMart was also one of the largest title lenders in the state. LoanMart’s status as a regulated licensee and its high visibility may have been factors in the DFPI’s decision to target the company.
Additionally, the timing of LoanMart’s partnership with CC Bank influenced DFPI. LoanMart transitioned its California lending program from a direct lending model to the partnership model almost immediately after the FACA interest rate caps that would otherwise apply to its loans went into effect. The DFPI viewed LoanMart’s move from licensed lending to a banking partnership model as a potential “direct attempt to circumvent interest rate caps.”2 The DFPI press release regarding the LoanMart settlement further states that the agency “will continue to fight any efforts to circumvent California’s Fair Access to Credit Act.”
In summary, the DFPI appears to be focused on business models, including banking partnerships, that purport to exempt loans to California residents from FACA’s interest rate limits. In addition to using its supervisory powers over licensed lenders, as is the case with LoanMart, the DFPI could seek to combat business models it sees as evasive by using its investigative and enforcement powers under the California Consumer Financial Protection Act (CFPL). The CFPL applies to unlicensed providers of consumer financial services and prohibits any unfair, deceptive or abusive act or practice.3 The CFPL authorizes the DFPI to enforce the CFPL’s UDAAP prohibition and to subject certain consumer financial services providers and their service providers to DFPI oversight by order or rulemaking.4
1 In contrast, unlicensed non-bank lenders are not regulated by the DFPI but are subject to its enforcement powers under the California Consumer Financial Protection Law (CFPL), which prohibits unfair, fraudulent and abusive acts and practices.
2 The California Funding Act (as amended by the Fair Access to Credit Act) does not contain a general or “general” prohibition on tax evasion. However, it addresses attempts to circumvent legal requirements by inflating the principal amount of the loan (to take advantage of less stringent requirements for larger loans) or by lending to California residents from abroad.
3 cal. fin. Code § 90012.
4 cal fin. Code § 90010.