May courts look beyond the face of a loan transaction to identify the “true lender”?  In a lawsuit filed by California’s financial regulator, a California state court recently answered yes, finding that a fact-intensive inquiry into the “substance” of a loan transaction was necessary to determine who the “true lender” is and declining to dismiss a lawsuit. See Opportunity Fin., LLC v. Hewlett, No. 22STCV08163 (Cal. Super. Ct. Sept. 30, 2022).

The lawsuit involves a lending partnership between OppFi (a fintech) and FinWise Bank (its bank partner), which has been the target of recent class actions.  OppFi filed suit to stop California’s Department of Financial Protection and Innovation (DFPI) from enforcing the state’s interest rate caps on consumer loans made in partnership with FinWise Bank.  The DFPI then filed a cross-complaint, taking the position that OppFi—and not FinWise Bank—is the true lender for purposes of assessing the validity of the loans’ interest rates.  In its demurrer, OppFi argued that the loans at issue are exempt from the interest rate cap under the California Constitution and statutory exemptions for loans originated by state-chartered banks like FinWise Bank.

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

By looking to substance over form, the Hewlett court split with two federal district court decisions applying California law.  See Sims v. Opportunity Fin., LLC, 2021 WL 1391565, at *4 (N.D. Cal. Apr. 13, 2021); Beechum v. Navient Sols., Inc., 2016 WL 5340454, at *8 (C.D. Cal. Sept. 20, 2016)Sims and Beechum held that courts may look only to 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 court did not engage with either decision.  Without explanation, the Hewlett court stated in a footnote that it “does not find the[se] two federal unreported cases to be persuasive.”

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

Photo of Andrew Soukup Andrew Soukup

Andrew Soukup has a wide-ranging complex litigation practice representing highly regulated businesses in class actions and other high-stakes disputes. He has built a successful record of defending clients from consumer protection claims asserted in class-action lawsuits and other multistate proceedings, many of which…

Andrew Soukup has a wide-ranging complex litigation practice representing highly regulated businesses in class actions and other high-stakes disputes. He has built a successful record of defending clients from consumer protection claims asserted in class-action lawsuits and other multistate proceedings, many of which were defeated through dispositive pre-trial motions.
Andrew is co-chair of the firm’s Class Action Litigation practice group.

Andrew has helped his clients achieve successful outcomes at all stages of litigation, including through trial and appeal. He has helped his clients prevail in litigation against putative class representatives, government agencies, and commercial entities. Representative victories include:

  • Delivered wins in multiple nationwide class actions on behalf of large financial companies related to fees, disclosures, and other banking practices, including the successful defense of numerous lenders accused of violating the Paycheck Protection Program’s implementing laws, which contributed to Covington’s recent recognition as a “Class Action Group Of The Year.”
  • Successfully defending several of the nation’s leading financial institutions in a wide variety of litigation and arbitration proceedings involving alleged violations of RICO, FCRA, TILA, TCPA, FCBA, ECOA, EFTA, FACTA, and state consumer protection and unfair and deceptive acts or practices statutes, as well as claims involving breach of contract, fraud, unjust enrichment, and other torts.
  • Successfully defended several of the nation’s leading companies and brands from claims that they deceptively marketed their products, including claims brought under state consumer protection and unfair deceptive acts or practices statutes.
  • Obtained favorable outcomes for numerous clients in commercial disputes raising contract, fraud, and other business tort claims.

Because many of Andrew’s clients are subject to extensive federal regulation and oversight, Andrew has significant experience successfully invoking federal preemption to defeat litigation.

Andrew also advises clients on their arbitration agreements. He has successfully helped numerous clients avoid multi-district class-action litigation by successfully enforcing the institutions’ arbitration agreements.

Clients praise Andrew for his personal attention to their matters, his responsiveness, and his creative strategies. Based on his “big wins in his class action practice,” Law360 named Mr. Soukup a “Class Action Rising Star.

Prior to practicing law, Andrew worked as a journalist.

Photo of Ashley Simonsen Ashley Simonsen

Ashley Simonsen is a litigator whose practice focuses on defending complex class actions in state and federal courts across the country, with substantive experience in the three hotbeds of class action litigation: New York, San Francisco, and Los Angeles.

Ashley represents clients in…

Ashley Simonsen is a litigator whose practice focuses on defending complex class actions in state and federal courts across the country, with substantive experience in the three hotbeds of class action litigation: New York, San Francisco, and Los Angeles.

Ashley represents clients in the technology, consumer brands, financial services, and sports industries through all stages of litigation, including trial, with a strong track record of success on early dispositive motions. Her practice encompasses advertising, antitrust, product defect, and consumer protection matters. Ashley regularly advises companies on arbitration clauses in consumer agreements and related issues, including mass arbitration risks and issues arising under McGill v. Citibank, N.A. And she is one of the nation’s leading experts on “true lender” issues and the related “valid when made” doctrine.

Photo of Matthew Verdin Matthew Verdin

Matthew Verdin specializes in defending class actions and complex commercial disputes. He has significant experience representing clients in the financial services and technology industries, achieving favorable outcomes in litigation involving consumer protection, trademark, and privacy claims.