On December 23, 2024, the California Department of Financial Protection and Innovation (DFPI) announced a consent order with a lender to resolve its investigation into the company’s crypto-backed lending program, which the DFPI alleged violated multiple provisions of the California Financing Law. As part of the settlement, the lender has agreed to issue $162,800 in borrower refunds and pay $137,500 in penalties, while also implementing stricter underwriting standards, enhanced risk disclosures, and additional consumer protections.
The lender provides financial services related to crypto assets, including offering loans backed by cryptocurrency collateral. Between November 2019 and November 2022, the company issued 342 loans to 151 California residents, allowing borrowers to pledge crypto assets in exchange for fiat or crypto loans.
The DFPI found that the lender violated the California Financing Law in several ways including:
- Failing to adequately assess borrowers’ ability to repay loans;
- Misrepresenting annual percentage rates (APRs), leading to understated costs for consumers;
- Charging undisclosed administrative fees to borrowers; and
- Failing to maintain the required minimum net worth of $25,000 between October 2022 and April 2023.
Under the consent order, the lender must:
- Issue refunds to eligible California borrowers and notify them via email about their refund amount and instructions for claiming it;
- Send notices to California borrowers with active loans, providing information on how to close their loans; and
- Comply with enhanced consumer protections, including improved underwriting and risk disclosure practices.
Putting it Into Practice: The DFPI’s action underscores increased regulatory scrutiny of crypto-backed lending programs and reinforces the expectation that crypto lenders must adhere to traditional consumer protection laws. For crypto lenders and financial institutions offering similar products, ensuring full compliance with lending regulations—including proper loan disclosures, accurate APR calculations, and borrower ability-to-repay assessments—will be critical to avoiding regulatory action. Market participants should take note of this case as a signal that state regulators are actively enforcing lending laws in the crypto space.