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Financial Services Law Insights and Observations

California DBO investigates auto title lender over out-of-state bank partnership

State Issues California CDBO State Regulators Auto Finance True Lender

State Issues

On September 3, the California Department of Business Oversight (CDBO) announced a formal investigation into a California auto title lender to determine whether the lender is evading state interest rate caps through a recent partnership with a Utah-based bank. The California Fair Access to Credit Act—enacted in 2019—caps annual simple interest rates on loans between $2,500 and $10,000 made by state-licensed lenders at around 36 percent (covered by InfoBytes here). The CDBO asserts that prior to the new interest rate caps taking effect, the auto title lender frequently made loans carrying interest rates in excess of 100 percent. Rather than reducing its interest rates to comply with the new law, the lender “stopped making state-licensed auto title loans in California,” and instead used “its existing lending operations and personnel” to market and service auto title loans purportedly made by the Utah-based bank. These loans, the CDBO claims, still carry interest rates greater than 90 percent, but because the Utah-based bank is not regulated or supervised by the CDBO it is not subject to the interest rate caps when lending in California. According to the CDBO, its investigation is intended to find out whether the auto title lender’s “role in the arrangement is so extensive as to require compliance with California’s lending laws” and if the arrangement is a “direct effort to evade the Fair Access to Credit Act,” which CDBO contends would be illegal.