On December 14, the California Department of Financial Protection and Innovation (DFPI) announced that it entered into a consent order with an LA-based auto title lender to resolve allegations that the company violated California’s the Fair Access to Credit Act’s (FACA), which prohibits making loans of $2,500 to $10,000 with interest rates greater than 36 percent. The focus of the consent order was the auto title lender’s partnership with a Utah state-chartered bank to provide the bank with marketing and servicing services in connection with auto title loans offered to California consumers. The company offered these services at the same time that FACA amended the California Financing Law to prohibit licensed lenders from making loans with principal amounts of $2,500 to less than $10,000 with interest rates greater than 36 percent, plus the federal funds rate. The company was served a subpoena seeking documents and information last year to assess whether the company was evading California’s newly enacted interest rate caps through a partnership with the out-of-state bank. After the investigation, the company ceased marketing auto loans of less than $10,000 to California borrowers.
Pursuant to the consent order, the company will not market auto loans with loan amounts less than $10,000 to California consumers at an interest rate greater than 36 percent plus the federal funds rate in a program involving a state-chartered bank and will not service any such loans for a period of 21 months from the effective date of the consent order.
Putting it Into Practice: While the most direct impact of the order effectively ends the bank partnership arrangement between the company and the out-of-state bank for a period of 21 months, the broader takeaway from this recent consent order may be for lenders and servicers to closely and continuously monitor state and federal regulatory signals related to “true lender,” which are likely to receive continued focus as bank partnerships continue to thrive in the vast FinTech ecosystem (we discussed bank partnership arrangements based on the true lender legal theory in previous Consumer Finance & FinTech Blog posts here and here).