Dive Brief:

• Loan servicer OppFi agreed to pay $1.5 million in restitution to more than 4,000 Washington, D.C., residents as part of a settlement announced Tuesday after D.C.’s attorney general sued the company, claiming it charged interest at an annual percentage rate (APR) well above the District’s 24% cap.
• The lender also agreed to waive more than $640,000 in interest owed by those borrowers, and to pay a further $250,000 to the District. OppFi agreed to stop offering loans with APRs above 24% to D.C. residents, either directly or in partnership with a bank.
• OppFi is resolving the matter "to avoid the expense of protracted litigation," the company said in a statement, according to American Banker. It denies D.C. Attorney General Karl Racine’s charge that it engaged in deceptive or unfair practices.

Dive Insight:

Racine alleges OppFi provided D.C. residents with loans that carried APRs of 160% between 2018 and May 2020.

"So-called financial services companies that operate in the District of Columbia — either brick-and-mortar or via the internet — cannot lawfully charge DC consumers above that 24% rate," Racine said in a press release Tuesday. "Companies that do, are violating DC law and will be held accountable." 

Tuesday’s settlement marks the latest fallout in the debate over which party is the "true lender" when a fintech like OppFi partners with a bank to lend to consumers. Some state attorneys general have argued fintechs use partner banks based in states with lax restrictions on interest rates to skirt caps in more stringent states.

OppFi’s partner banks — FinWise Bank, First Electronic Bank and Capital Community Bank — are all chartered in Utah, where the law does not specify an interest rate ceiling.

Colorado’s attorney general in August 2020 settled with online lenders Avant and Marlette Funding — as well as their partner banks, New Jersey-based Cross River Bank and Utah-based WebBank — after the state sued all four companies in 2017, asserting Avant and Marlette were charging interest and fees above the state’s 36% limit. Although WebBank and Cross River could export the interest rate caps of their home states, Colorado argued Avant and Marlette were the true lenders because they held the predominant economic interest.

Two months later, the Office of the Comptroller of the Currency (OCC) sought to clarify the "true lender" concept, ruling that a bank is the true lender on loans made in partnership with fintechs if, as of the origination date, it funds the loan or is named the lender in the loan agreement. Further, if one bank is named the lender in the loan agreement and another bank funds the loan, the former is the true lender, the OCC said.

The Senate and House this year voted to rescind the OCC rule under a Congressional Review Act (CRA) resolution — a move President Joe Biden codified in June.

Eight attorneys general, including Racine, sued the Federal Deposit Insurance Corp. (FDIC) in August 2020 in a strike against that regulator’s "valid-when-made" rule, which also governs the reach of state interest rate caps.

Tuesday’s settlement is not OppFi’s first dust-up with regulators this year. The Consumer Financial Protection Bureau (CFPB) in August opted not to take enforcement action against the fintech following a probe into whether the company’s practices violated the Military Lending Act, which caps at 36% the interest rate lenders can charge military borrowers on consumer loans.

OppFi — formerly OppLoans — rebranded this year ahead of a merger with special-purpose acquisition company FG New America Acquisition Corp.

"OppLoans will continue to champion the need for banks to better serve the millions of everyday consumers who struggle to qualify for credit cards and other forms of credit," an OppFi spokesperson told American Banker.