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 terminate its loan partnership with Capital Community Bank (CC Bank). The order also prohibits LoanMart from: (1) marketing or servicing title loans under $10,000 with rates greater than 36% in California for the next twenty-one months; or (2) enter into a new lending partnership with a state-chartered bank through September 2023. LoanMart is authorized to make consumer loans under California finance law.
As a Utah chartered bank, CC Bank is permitted to apply Utah interest rate laws to loans it makes to California residents, even if those rates exceed the interest rate cap. California interest. Prior to January 1, 2020, when the California Fair Access to Credit Act (FACA) took effect, California did not cap interest rates on consumer loans over $2,500. The FACA capped the annual interest rate on loans between $2,500 and $10,000 at 36% plus the federal funds rate. According to the DFPI, loans made by CC Bank to California borrowers had annual interest rates above 90%.
The settlement order was the result of an extended dialogue between the DFPI and LoanMart, in which the DFPI attempted to determine whether LoanMart’s role in the loan program was “so extensive as to require compliance with California loan laws “. The language of the DFPI suggests that the agency was considering whether LoanMart, rather than CC Bank, was the “true lender” in respect of the loans at issue. The distribution of lending activities and economic risk between the market 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 to say that LoanMart was engaged in the “marketing” and “service” of consumer securities loans. that CC Bank had created.
For this reason, the LoanMart Rules do not provide useful guidance to market lenders regarding the impact of specific program features on a true lender analysis. It is also difficult to draw general conclusions about the execution position of the DFPI due to factors specific to LoanMart. Unlike many market lenders who position themselves as mere service providers for their banking partners, LoanMart provided direct-to-consumer loans under a California lending license before partnering with CC Bank and retained his license thereafter. For this reason, LoanMart was subject to the DFPI’s supervisory authority with respect to the loans it made in California.1 LoanMart was also one of the largest state securities lenders. LoanMart’s status as a supervised licensee and its high profile 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 transitioned its California lending program from a direct lending model to a partnership model almost immediately after the 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 partnership banking model as a “potential direct effort to circumvent” interest rate limitations.2 The DFPI press release regarding LoanMart’s settlement goes on to state that the agency “will continue to fight any efforts to evade California’s Fair Access to Credit Act.”
In summary, the DFPI appears focused on business models, including partnership banking, that purport to exempt loans to California residents from FACA interest rate restrictions. In addition to using its oversight authority over approved lenders, as it did with LoanMart, the DFPI could attempt to tackle business models it considers evasive by using its investigative and enforcement powers. performance under the California Consumer Financial Protection Act (CFPL). The CFPL applies to unlicensed consumer financial service providers 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 consumer financial service providers and their service providers to DFPI oversight by order or regulation.4
1 Unlicensed non-bank lenders, on the other hand, are not supervised by the DFPI but are subject to its enforcement authority under the California Consumer Financial Protection Act (CFPL), which prohibits unfair acts and practices , misleading and abusive.
2 The California Finance Act (as amended by the Fair Access to Credit Act) does not contain a blanket or “catch-all” prohibition on evasion. However, it does address attempts to evade legal requirements by inflating the loan principal amount (to take advantage of less stringent requirements for larger loans) or by granting loans to California residents from out of state.
3 Cal. Fin. Code § 90012.
4 Cal. Fin. Code § 90010.