Last week, the California Department of Financial Protection and Innovation (DFPI) announcement that it had entered into a consent order with Wheels Financial Group, LLC d / b / a LoanMart, a California-based company that markets and manages auto title loans. LoanMart has been investigated launched in September 2020, in which the DFPI (then still known as Department of Business Oversight) investigated whether LoanMart, through its partnership with a Utah bank, escaped the interest rate cap of the Fair Access to Credit Act (FACA). Effective January 1, 2020, the FACA limited the interest rate that can be charged on loans from $ 2,500 to $ 10,000 by lenders approved under the California Financing Law (CFL) to 36% plus the rate. federal funds. LoanMart holds a CFL license.
The consent order recites that on November 17, 2020 (date of termination), LoanMart ceased marketing loans granted by the bank to California borrowers in an amount less than $ 10,000. He also specifies that when LoanMart informed the DFPI of this development, the parties “entered into discussions to resolve the investigation without the need for a hearing or other litigation”. The Consent Order includes the statement that LoanMart, in entering into the Consent Order, “neither admits nor denies having violated any California law or regulation.” It provides that, “in the absence of any change in law or regulation or any court ruling”, LoanMart will not market consumer vehicle-guaranteed installment loans intended primarily for personal, family or household use. with loan amounts of 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 submitted) and will not serve any submitted loans issued after the date of cessation 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’s investigation is an FDIC-insured and 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” on auto title loans marketed and managed by LoanMart and, therefore, whether the authority the bank’s federal charge of interest as permitted by Utah law should not be taken into account and the FACA rate cap should apply to these loans.
When the investigation was initiated, we indicated that it seemed likely that LoanMart was being targeted because it was licensed as a lender under the CFL. We noted, however, that the DFPI’s investigation into LoanMart also raised the specter of DFPI’s scrutiny of the “real lender” of other bank / non-bank partnerships where the non-bank entity was not. licensed as a lender or broker, especially when the rates charged exceed those licensed under the FACA. Under AB-1864, which entered into force on January 1, 2021, it appears that non-bank entities that market and manage loans in partnership with banks would be considered “covered persons” subject to government oversight. DFPI.