OppFi, a lender, had a group lawsuit filed against it in federal court in Texas. The judge ruled against the plaintiffs and claimed that OppFi’s high-interest rates on loans issued in conjunction with the state-chartered bank violated state usury law. To get around state rules, the plaintiff alleged that OppFi was the true lender in the partnership. Having determined that the arbitration language in the plaintiff’s disclosure statement was enforceable, the court ordered that the lawsuit be withdrawn with prejudice. This resulted in the court mandating the plaintiff’s allegations against OppFi to be arbitrated. Let us learn more about how Fintech prevails in Texas’s ‘True Lender’ challenge.
What Do You Need to Know About the True Lender Legal Challenges?
The district court tossed the case and ordered the plaintiff’s claims against OppFi to be arbitrated. The court found that the arbitration agreement did not preempt the plaintiff’s RICO claims and that the objection to the choice of law section did not invalidate the arbitration clause. The arbitrator’s focus was based on the merits of the plaintiff’s claims, including any applicable choice of law rules.
The OppFi v. California DFPI case illustrates the benefit of well-drafted arbitration agreements in fending off class action claims. The Texas judgment does not remove the potential of “true lender” objections by authorities to bank lending partnerships. The DFPI has stated its intention to enforce California bank rate caps over OppFi in relation to loans generated by OppFi’s bank partner, prompting OppFi to file a declaratory judgment complaint.
- The DFPI filed a counterclaim, arguing that OppFi, and not its bank partner, was the “actual lender” under the terms of the loans at issue because of “the substance of the transaction” and “the totality of the circumstances.” After that, OppFi filed a pass against the DFPI, arguing that:
- The DFPI’s use of the “true lender doctrine” to bring OppFi to California bank rate caps amounted to the adoption.
The execution of an “underground regulation,” which is prohibited by California’s APA to strike OppFi’s cross-complaint, has been filed by the DFPI.
Why Was OppFi Sued & What Happened to the Lawsuit?
Kristen Michael has sued OppFi in a class action complaint, claiming the fintech lender charged interest rates in excess of what is permitted by Texas law. Ms. Michael asserts that OppFi engages in a “rent-a-bank” scheme by listing a Utah-chartered bank as the lending institution in loan contracts in places like Texas, where such high APR is prohibited. OppFi, on the other hand, will buy 95% of the bank’s financing and service it going forward. According to Ms. Michael, OppFi’s SEC filings confirm her suspicions that the company is the “actual lender” on these allegedly bogus loans.
Ms. Michael sued OppFi for declaratory relief, claiming that the company broke Texas usury statutes, unjust enrichment laws, and RICO crimes post investigation. She asked for the court to rule that OppFi is the genuine financial institution on the loans, that Texas law applies to the loans, and that the arbitration clauses, class waivers, and jury waivers in the loan contracts are null and void and hence unenforceable, as well as for further damages. Loans provided through OppFi’s cooperation with FinWise Bank have also been challenged in California, where the state’s Department of Financial Protection and Innovation has attempted to apply usury laws from that state. The DFPI has stated that OppFi is the “true lender” for loans. The court hearing the lawsuit is the U.S. District Court for the Western District of Texas.
What Was the Outcome of the ‘True Lender’ Investigation in the Texas Court?
A federal court in Texas dismissed a class action lawsuit on a prominent fintech business because the company did not break Texas usury laws by imposing interest rates higher than the maximum limit under Texas law. The lawsuit claimed that the corporation had engaged in a “rent-a-bank” strategy in order to circumvent local regulations. The complaint was recommended to be dismissed without prejudice, however, because the court upheld the contractual terms in the plaintiff’s note. The court also mandated the arbitration of the claimants’ allegations.
Also Read: A brief overview on the claims
The plaintiff asserted that the arbitrator was bound to adopt “the governing law of Utah” per the note’s choice of law provision and that the agreements were enforced “exactly as drafted” per the arbitration clause. The plaintiff contended that these clauses precluded her RICO claims because they required the arbitrator to interpret the loan arrangement as “legal under Utah law.” On the other hand, the court rejected and pointed out that the mandatory binding arbitration was explicitly excluded from the selection of law provision and that the agreement compelled the arbitrator to “follow substantive law compatible with the FAA.”
In light of this ruling, it’s clear that arbitration clauses are a valuable tool for preventing class action lawsuits. OppFi is still in dispute with the California DFPI over “true lender” legal challenges. This further demonstrates the limitations of such clauses in resolving challenges raised by regulatory authorities. Fintech companies should be aware of the potential legal risks of forming agreements with state-chartered banks and get legal assistance to ensure they comply with all relevant state laws and regulations.
Closure
The Texas federal judge has thrown out a class action lawsuit over OppFi that claimed the firm broke state usury law by charging excessive interest on loans issued through its relationship with the state-chartered bank. In its recommendation to dismiss the case with prejudice, the court upheld the enforceability of the arbitration language in the plaintiff’s Notice and Disclosure Statement. It mandated arbitration of the plaintiff’s allegations against OppFi. Although carefully crafted arbitration arrangements can mitigate the potential of “true lender” objections by regulators to financial intermediation partnerships, the ongoing case in California between OppFi and the state’s DFPI shows that this threat cannot be eliminated.
Global trade leaders is an extensive repository of the world’s most efficient FinTech and trade finance companies. Learn more about global trade finance leaders at https://globaltradeleaders.com/.
