California’s DFPI announces a consent warrant with an auto title loan company that has been the subject of a “real lender” investigation | Ballard Spahr LLP
Last week the California Department of Financial Protection and Innovation (DFPI) announced that it has entered into a consent form with Wheels Financial Group, LLC d / b / a LoanMart, a California-based company that markets and services auto title loans. CreditMart was the subject of an investigation started in September 2020, in which the DFPI (then still Department of Business Oversight) examined whether LoanMart was circumventing the interest rate limit of the Fair Access to Credit Act (FACA) through its partnership with a bank in Utah. Effective January 1, 2020, the FACA capped the interest rate that could be charged by lenders licensed under the California Financing Law (CFL) to 36% plus the federal funds rate on loans from $ 2,500 to $ 10,000. LoanMart has a CFL license.
The declaration of consent advises that on November 17, 2020 (the discontinuation date), LoanMart stopped marketing loans from the bank to California borrowers for less than $ 10,000. It also states that when LoanMart notified DFPI of this development, the parties “had discussions to resolve the investigation without the need for a hearing or other legal dispute”. The consent request includes a statement that by entering into the consent request, LoanMart “does not admit or deny that it has violated any California law or regulation.” It provides that LoanMart will not, “without change in law or regulation or court rulings,” provide consumer vehicle-secured consumer loans for personal, family, or household purposes with loan amounts less than $ 10,000 to California consumers at an interest rate greater than that than 36 percent plus the Federal Funds Rate in a program in which a federally recognized bank participates (subject loan) and will not service subject loans granted after the termination date for a period of 21 months from the effective date of the consent order.
Because LoanMart’s banking partner in the program that was the target of the DFPI investigation is a federally-accredited FDIC-insured bank based in Utah, it is entitled to interest on its loans under Section 27 (a) of the Federal Deposit Insurance Act to calculate. including loans to California residents at an interest rate permitted under Utah law, regardless of any California law that requires a lower interest rate limit. The focus of the DFPI investigation appeared to be on whether LoanMart, rather than the bank, should be viewed as the “true lender” for the auto title loans marketed and serviced by LoanMart, and whether the federal agency should therefore charge the bank interest that is permitted under Utah law should not be taken into account and the FACA’s interest rate cap should apply to such loans.
When the investigation opened, we determined that LoanMart was likely being targeted as it was approved as a lender under the CFL. However, we found that DFPI’s investigation of LoanMart also raised the specter of “true lender” scrutiny by DFPI of other bank / non-bank partnerships where the non-bank entity was not licensed as a lender or broker, in particular if the calculated rates exceed these, approved by FACA. According to AB-1864, which went into effect January 1, 2021, it appears that non-bank companies that market and service loans in partnership with banks are considered “Covered Persons” subject to the supervision of the DFPI.