California court applies ‘substance on form’, allows real lender’s claim to proceed


Can courts look beyond the face of a loan transaction to identify the “true lender”? In a lawsuit brought by the California financial regulator, a California state court recently answered yes by Opportunity Fin., LLC v. Hewlett, No. 22STCV08163 (Cal. Super. Ct. September 30, 2022)concluding that a factual investigation into the “substance” of a loan transaction was necessary to determine who the “real lender” is and refusing to dismiss a lawsuit.

The lawsuit involves a lending partnership between OppFi (a fintech) and FinWise Bank (its banking partner), which has been the target of recent class action lawsuits. OppFi filed a lawsuit to prevent the California Department of Financial Protection and Innovation (DFPI) from enforcing state interest rate caps on consumer loans made in partnership with FinWise Bank. The DFPI then filed a counterclaim, taking the position that OppFi – not FinWise Bank – is the true lender for the purposes of assessing the validity of the loan interest rates. In its caveat, OppFi argued that the loans at issue are exempt from the interest rate cap under the California Constitution and statutory exemptions for loans made by state-chartered banks like FinWise Bank.

On September 30, the Hewlett the court dismissed OppFi’s objection. According to the court, California courts look at the “substance” rather than the form of a transaction “to determine its true nature,” and the complaint alleged enough facts to suggest that OppFi may be the alleged lender in substance. In coming to this conclusion, the court relied on the following allegations: (i) OppFi purchases the loans shortly after granting “by prior arrangement”; (ii) FinWise Bank funds loans “only if [they are] fully secured by OppFi”; (iii) OppFi pays “all FinWise expenses” and “a volume fee based on the principal amount of the loans”; (iv) the loans are “available only through OppFi”; and (v) OppFi performs “all marketing, underwriting and loan servicing”. “[A]At this early stage,” therefore, the court held that it “cannot find as a matter of law that FinWise is the lender of the loans at issue.”

By favoring content over form, the Hewlett split court with two federal district court decisions applying California law. See Sims vs. Opportunity Fin.LLC, 2021 WL 1391565, at *4 (ND Cal. 13 Apr 2021); Beechum vs. Navient Sols., Inc.2016 WL 5340454, at *8 (CD Cal. 20 September 2016). sims and beech ruled that courts can only look in the face of a loan transaction when assessing whether an exemption from California’s interest rate cap applies. Although sims also involved allegations that OppFi was the “true lender” on loans made by FinWise Bank, the Hewlett the court did not consider either of these decisions. Without explanation, the Hewlett the court said in a footnote that it “finds no[se] two unreported federal cases to be convincing.

The Hewlett The decision only underscores the uncertainty lenders and fintechs face in designing their lending partnerships. The OCC’s “true lender” rule would have eliminated the confusion by identifying the true lender as the bank that is “named as the lender in the loan agreement or financing the loan.” But that rule was overturned in 2021 under the Congressional Review Act, returning to the state of uncertainty that preceded the OCC rule. The Hewlett The decision illustrates how the courts continue to confuse by taking inconsistent approaches to determining who is the “true lender” of a loan.


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