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Financial Services Law Insights and Observations

California DBO denies point-of-sale lending license application; issues related guidance

State Issues State Regulators Licensing Fintech CDBO

State Issues

On December 30, the California Department of Business Oversight (DBO) announced the denial of a Minnesota-based point-of-sale company’s application to make loans under the California Financing Law (CFL) after determining the company had already been making unregulated loans to California consumers in violation of the CFL. According to the DBO’s Statement of Issues, the fintech company offers a product that allows consumers to enter into small installment loans in order to make online purchases at participating merchants. The company contended that it purchases credit sale contracts from merchants selling goods to consumers, and argued that these types of purchases do not qualify as loans subject to the CFL. However, following a review of the company’s application and products, the DBO concluded that the company structured its merchant partners’ purported credit sales to evade otherwise applicable consumer protections. Moreover, the DBO stated in its press release that the company’s “extensive role in its merchants’ transactions and pre-existing relationship with some consumers who were parties to the purported credit sales showed that [the company] was making loans under California law.” According to the decision, “[e]xtensive third-party involvement in the underlying credit sale may cause transactions to be deemed loans, regardless of form . . . even if the underlying credit sale is bona fide” (italics in original).

The DBO also issued a separate legal opinion advising a different, unidentified lender that its deferred payment products meet the Civil Code and case law definition of “loans” and therefore require a CFL license to be offered in the state. Among other things, the DBO argued that it is unclear as to why the lender’s products—which the lender claims “are not loans but similar to a forbearance”—would be exempt from the CFL, reiterating that loans and forbearances are both subject to usury provisions. The DOB noted that point-of-sale financing transactions may meet the definition of a loan when: (i) the transactions are treated like loans by the consumer, merchant, and third-party financer, “despite contradictory language in the applicable contracts”; (ii) there is an extensive relationship between the merchant and third-party financer; (iii) disclosures are not clearly made to the consumer about the role of the third-party financer and all financing terms; and (iv) “the financing transaction is not otherwise regulated.”

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