California denies license to point-of-sale lender

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A California regulator on Monday denied a lending license to the point-of-sale financier Sezzle in a detailed written decision that could have broader consequences for upstart consumer lenders.

The Department of Business Oversight said that the Minneapolis-based fintech company had violated California law as it has already been writing loans in the state without clearance. While Sezzle’s products are advertised as no-interest installment loans, consumers can be charged fees on purchases if they fall behind on payments and potentially pay annual percentage rates that exceed 600%, the decision said.

“Sezzle’s financing product may be worse for consumers than comparable, regulated options,” according to the 10-page decision issued by Commissioner of Business Oversight Manuel P. Alvarez.

A spokeswoman for Sezzle did not respond to a request for comment on the denial of its application. The company has 15 working days to appeal the decision, said Mark Leyes, a spokesman for the business oversight department.

The decision on Sezzle’s application could guide fintechs and others seeking to make loans to consumers at the time of purchase in the vast California market.

Sezzle, started in 2016, was one of a booming number of lenders looking to get in on the business of financing customer purchases at certain merchants. The financing is often paid back in installments without interest or fees as long as the customer pays on time. Sezzle collects fees from participating merchants, who are not allowed under their agreement to charge a higher credit price. This means merchants will make less on a Sezzle-financed transaction than if the customer paid with cash, Alvarez wrote in his decision.

Sezzle had argued that it had not been offering loans in California but rather purchasing “credit sale contracts” from the merchants as state law permits third parties to do in some cases, according to the decision.

But Alvarez ruled that Sezzle was using this classification to avoid consumer protections that are applied to traditional loans.

“Extensive third-party involvement in the underlying credit sale may cause transactions to be deemed loans, regardless of the form,” the decision said. Because of the way Sezzle markets its financing products directly to consumers, typically younger ones, via a “virtual mall” of participating merchants, these transactions should be considered loans, the decision said.

“There is no existing contract for Sezzle to purchase, and there is no manifested intent from merchants to make sales on credit to consumers,” Alvarez said in the decision.

State law prohibits the department from issuing a penalty through an administrative action like a decision on a license application; it could only do so through a civil suit, Leyes said. It is unclear whether the department would file a civil case against Sezzle for issuing what the agency deems are loans in the state without a license. Leyes declined to comment on future plans.

Before being appointed to run the department in March, Alvarez had been general counsel at another digital point-of-sale lender, Affirm, and now finds himself in the middle of the legal debate over which products should be subject to the state’s regulations.

According to the Sezzle decision, products may be considered loans when they are treated as such, despite what contract language says, and when the transaction is not otherwise regulated. Point-of-sale financing will also be considered loans when the relationship between the merchant and financier is considered “extensive” or is not disclosed to the customer.

The agency highlighted a separate legal opinion it gave to an unnamed point-of-sale lender on Dec. 20, advising that the company’s products would also be considered loans under state law and that a license was needed to offer them in California. The lender had asked the department if its products would be considered loans under the state’s definition and subject to state oversight.

“While the [requestor’s] deferred payment products are not presented to customers at checkout as loans, both [the requestor] and the customers treat them like loans,” Alvarez wrote in the Dec. 20 letter. “Whether they are aware of such at the time of check-out or not, customers who elect to pay with a [requestor] product must apply for funds to pay for the goods they are purchasing from merchants.”

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