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 end its lending partnership with Capital Community Bank (CC Bank). The order also bars LoanMart from: (1) marketing or servicing title loans of less than $10,000 with rates greater than 36 percent in California for the next twenty-one months; or (2) entering into any new lending partnership with a state-chartered bank until September 2023. LoanMart is licensed to make consumer loans under the California Financing Law.
As a Utah-chartered bank, CC Bank is entitled to apply Utah’s interest-rate laws to loans it makes to California residents even if those rates exceed California’s interest rate cap. Prior to January 1, 2020, when the California Fair Access to Credit Act (FACA) became effective, California did not cap interest rates on consumer loans of more than $2,500. The FACA capped the annual interest rate on loans of between $2,500 and $10,000 at 36% plus the federal funds rate. According to the DFPI, the loans that CC Bank originated to California borrowers had annual interest rates of over 90%.
The settlement order resulted from an extended dialogue between the DFPI and LoanMart, in which the DFPI attempted to determine whether LoanMart’s role in the lending program was “so extensive as to require compliance with California’s lending laws.” The DFPI’s language suggests that the agency was considering whether LoanMart, rather than CC Bank, was the “true lender” with respect to the loans at issue. The allocation of loan-related activities and economic risk between the marketplace platform and its bank partner are key issues in a true lender analysis. However, the DFPI consent order does not describe the details of the lending arrangement between LoanMart and CC Bank except to say that LoanMart was engaged in “marketing” and “servicing” consumer title loans that CC Bank originated.
For that reason, the LoanMart settlement does not provide useful guidance to marketplace lenders regarding the impact of specific program features on a true lender analysis. It is also difficult to draw broad conclusions on the DFPI’s enforcement stance because of factors specific to LoanMart. Unlike many marketplace lenders that position themselves as mere service providers to their bank partners, LoanMart made loans direct to consumers under a California lending license before it partnered with CC Bank and retained its license thereafter. For that reason, LoanMart was subject to the DFPI’s supervisory authority with respect to loans it made in California.1 LoanMart was also one of the largest title lenders in the State. LoanMart’s status as a supervised licensee and 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 the DFPI. LoanMart switched its California lending program from a direct lending model to the partnership model almost immediately following enactment of the FACA interest-rate caps that would otherwise have applied to its loans. The DFPI viewed LoanMart’s shift from licensed lending to a bank partnership model as a potential “direct effort to evade” interest-rate limitations.2 The DFPI’s press release regarding the LoanMart settlement goes on to state that the agency will “continue to combat any effort to evade California’s Fair Access to Credit Act”.
To sum up, the DFPI seems focused on business models, including bank partnership, that purport to exempt loans to California residents from the interest-rate restrictions of the FACA. In addition to using its supervisory authority over licensed lenders, as it has done with LoanMart, the DFPI could attempt to address business models it views as evasive using its investigatory and enforcement powers under the California Consumer Financial Protection Law (CFPL). The CFPL applies to non-licensed providers of consumer financial services and prohibits unfair, deceptive or abusive acts or practices.3 The CFPL empowers the DFPI to enforce the CFPL’s UDAAP prohibition and to subject specific providers of consumer financial services and their service providers to DFPI supervision by order or by rulemaking.4
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1 Unlicensed non-bank lenders, by contrast, are not supervised by the DFPI but are subject to its enforcement authority under the California Consumer Financial Protection Law (CFPL), which prohibits unfair, deceptive, and abusive acts and practices.
2 The California Financing Law (as amended by the Fair Access to Credit Act) does not contain a general, or “catch-all”, prohibition on evasion. It does, however, address attempts to evade statutory requirements by inflating the principal amount of the loan (to take advantage of less stringent requirements for larger loans) or by making loans to California residents from out of state.
3 Cal. Fin. Code § 90012.
4 Cal. Fin. Code § 90010.
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