Marketed as consumer protection, the California Department of Financial Protection and Innovation (DFPI), California advocacy groups, and Governor Newsom have tried to prevent Californians from accessing credit by targeting financial technology (fintech) companies like Opportunity Financial (OppFi). But lenders like OppFi are not the problem; it is the effort to impose price controls that hurts consumers.
OppFi offers small loans through their lending program, OppLoans. They partner with a bank located in Utah, called FinWise Bank, that underwrites and issues these loans while OppFi services them. State-chartered banks are subject to usury laws in the state in which they are chartered, not the borrower’s state. Because FinWise is in Utah, they are not subject to the 36 percent interest rate cap imposed in California.
DFPI accused OppFi of being the “true lender” of the loans rather than that lender being FinWise. DFPI believed OppFi was operating out of a bank in another state in name only, in order to issue loans at high interest rates, a scheme known as “rent-a-bank.”
The judge ruled that FinWise was the “true lender” of the loans and noted there was no actual evidence of the contrary provided by the DFPI. The outcome raises the question of whether or not interest rate caps are consumer protection.
Consumer access to loans is critical. According to a report by the FINRA Investor Education Foundation, 22 percent of survey respondents said they could not come up with $2,000, which was down from 25 percent in 2012, just after the financial crisis. For that same category, respondents were asked how they would attempt to come up with $2,000 and 27 percent said they would put it on a credit card while 28 percent would take out a loan.
Consumers demand access to credit, especially when wallets are tightening. But interest rate caps prevent many consumers from accessing this needed resource, without accounting for the detrimental effects of restricting access in the name of consumer protection.
The research speaks for itself. A study conducted in 2023 following the implementation of an interest rate cap in Illinois found that when the rates were capped at 36 percent, loans to subprime borrowers, those with credit scores between 580 and 619, decreased 38 percent in the first six months. Because interest rates represent the level of risk the lender is taking, the riskier borrower will have higher interest rates. When lenders are prevented from setting interest rates that represent risk levels, credit access is restricted.
Restricting credit access for people who are already hurting financially can push them into alternative loans such as through black market-like schemes. Advocates of interest rate caps believe it helps prevent marginalized borrowers from entering into high-cost loan agreements they deem exploitative. However, interest rate caps restricting credit access can often force consumers to do just this, which is not consumer protection.
In 2019, Governor Newsom signed the bill capping interest rates at 36 percent. He praised its passage, citing industries “must be held to account.” But these rates do not help borrowers access credit. If credit becomes restricted, consumers are unable to take out loans. But companies like OppFi allow consumers to build credit while paying down their loans, reporting on time payments to the credit bureaus.
California groups along with the DFPI and Governor Newsom have been critical of fintech companies and have attempted to tamp down access to credit on the basis of consumer protection. Consumer protection expands access to financial resources; it does not restrict it. Research has proven these policies are ineffective, harming the consumers they claim to protect.
Leah Locke is a Policy Analyst with the American Consumer Institute, a nonprofit education and research organization. Follow Leah on X @leahmlocke