California DFPI Announces Consent Order With Auto Title Lending Service Investigated As ‘Real Lender’ | Ballard Spahr LLP
Last week, the California Department of Financial Protection and Innovation (DFPI) announcement that she had entered into a consent order with Wheels Financial Group, LLC d/b/a LoanMart, a California company that markets and services automobile title loans. LoanMart has been investigated launched in September 2020 in which the DFPI (then still called the Department of Business Oversight) was investigating whether LoanMart, through its partnership with a Utah bank, circumvented the Fair Access to Credit interest rate cap Act (FACA). Effective January 1, 2020, the FACA limited the interest rate that may be charged on loans of $2,500 to $10,000 by approved lenders under the California Finance Act (CFL) to 36% plus the federal funds rate. LoanMart holds a CFL license.
Consent Order recites that on November 17, 2020 (termination date), LoanMart ceased marketing loans made by the bank to California borrowers under $10,000. It also clarifies that when LoanMart informed the DFPI of this development, the parties “engaged in discussions to resolve the investigation without the need for a hearing or further litigation.” The Consent Order includes the statement that LoanMart, in entering into the Consent Order, “does not admit or deny that it has violated any California law or regulation.” It provides that, “absent any change in law or regulation or any court order”, LoanMart will not market vehicle-secured consumer installment loans intended primarily for personal, family or domestic with loan amounts less than $10,000 to California consumers at an interest rate greater than 36% plus the federal funds rate in a program involving a state chartered bank (loans subject) and will not service any loans subject issued after the termination date for a period of 21 months from the effective date of the consent order.
Since LoanMart’s partner bank in the program that was the target of the DFPI investigation is an FDIC-insured state chartered bank located in Utah, it is authorized by Section 27(a) of the Federal Deposit Insurance Act to charge interest on its loans, including loans to California residents, at a rate permitted by Utah law, regardless of any California law imposing a lower interest rate limit. The DFPI’s focus in the investigation appeared to be whether LoanMart, rather than the bank, should be considered the “true lender” for auto title loans marketed and serviced by LoanMart and, therefore, whether the authority Federal bank to charge interest as permitted by Utah law should be disregarded and the FACA rate cap should apply to these loans.
When the investigation was launched, we noted that it seemed likely that LoanMart was being targeted because it was licensed as a CFL lender. We noted, however, that the DFPI’s investigation of LoanMart also raised the specter of DFPI scrutiny of the “true lender” of other bank/non-bank partnerships in which the non-bank entity was not not licensed as a lender or broker, particularly where rates charged exceed those authorized by the FACA. Under AB-1864, which came into effect on January 1, 2021, it appears that non-bank entities that market and service loans in partnership with banks would be considered “covered persons” subject to oversight by the DFPI.