In ELIZABETH BELYEA, et al., Plaintiffs, v. GREENSKY, INC., et al., No. 3:20-CV-01693-JSC, 2023 WL 8701311, at *1 (N.D. Cal. Dec. 15, 2023), Judge Corley dismissed a CLRA claim against a loan broker.  The facts were as follows:

GreenSky is a “loan broker and sometimes-lender” that brokers loans for consumers “to pay for home improvement, home repair, and healthcare costs,” then improperly charges consumers for those loans. (Dkt. No. 95 ¶ 2.) “Merchants in GreenSky’s program”—“a group of over 17,000 contractors and other home improvement specialists” and “medical offices”—“connect their customers with GreenSky’s bank partners using GreenSky’s mobile app, which allows GreenSky to orchestrate the entire lending process, from application to funding.” (Id. ¶¶ 28-29.) GreenSky then “earns the bulk of its revenues by charging a ‘merchant fee’ on each loan, which is calculated as a percentage of the loan amount,” with an average merchant fee equaling “7% of the total loan amount.” (Id. ¶¶ 30, 43.) “GreenSky receives this compensation for the service of brokering the loans between consumer-borrowers and lenders.” (Id. ¶ 40.) However, “the nature and amount of this fee is not disclosed to the consumer at any point in the lending process.” (Id. ¶ 30.) Moreover, “[m]erchants pass on the cost of the merchant fees to consumer-borrowers through higher project costs,” so “the cost of the merchant fees is ultimately borne by consumer-borrowers.” (Id. ¶¶ 44-45.) Plaintiffs assert GreenSky also “contracts with its bank partners, via loan origination agreements to receive ‘incentive payments.’ ” (Id. ¶ 46.) These “incentive payments” are “compensation for the service of brokering the loans between consumer-borrowers and lenders” and “entail a kick-back of interest-rate spreads to GreenSky.” (Id. ¶¶ 46, 47.) Plaintiffs allege four counts: (1) Violation of the Credit Services Act of 1984, Cal. Civ. Code § 1789.10, et seq.; (2) Violation of the Consumers Legal Remedies Act (“CLRA”), Cal. Civ. Code § 1750, et seq.; (3) Unlawful, Unfair, and Fraudulent Business Practices, Cal. Bus. & Prof. Code § 17200, et seq.; and (4) Unjust Enrichment/Quasi-contract.

Judge Corley found that loan brokering fell outside the CLRA.

California courts, interpreting Fairbanks, have also held loans fall outside the purview of the CLRA. See Alborzian v. JPMorgan Chase Bank, N.A., 235 Cal. App. 4th 29, 40 (2015) (“A mortgage loan is not a ‘good’ because it is not a ‘tangible chattel;’ it is not a ‘service’ because it is not ‘work, labor, or services … furnished in connection with the sale or repair of goods.’ ”). Further, a lender’s provision of “ancillary services,” such as advice about the terms of a loan or insurance, does not “convert a non-‘service’ into a ‘service.’ ” Id.
Plaintiffs “take no issue with GreenSky’s role in homeowners repaying their loan” (Dkt. No. 209 at 15), but assert GreenSky also acts as a loan broker. Plaintiffs argue this brokerage activity—GreenSky’s work setting up the loan application process (Dkt. No. 95 ¶¶ 31-32), running homeowners’ credit and helping to obtain the bank’s approval for the homeowner (id. ¶ 34), selecting among lenders to fund the loan (id.), and helping pay contractors using the loan (id. ¶ 35)—qualifies its activities as a “service” under the CLRA.  However, California caselaw compels the conclusion even these loan brokerage activities are not a “service” as defined by the CLRA. In Fairbanks, the California Supreme Court explained:  “[A]ncillary services are provided by the sellers of virtually all intangible goods—investment securities, bank deposit accounts and loans, and so forth. The sellers of virtually all these intangible items assist prospective customers in selecting products that suit their needs, and they often provide additional customer services related to the maintenance, value, use, redemption, resale, or repayment of the intangible item. Using the existence of these ancillary services to bring intangible goods within the coverage of the Consumers Legal Remedies Act would defeat the apparent legislative intent in limiting the definition of “goods” to include only “tangible chattels.” (Civ. Code, § 1761, subd. (a).) We conclude, accordingly, that the ancillary services that insurers provide to actual and prospective purchasers of life insurance do not bring the policies within the coverage of the Consumers Legal Remedies Act.”  Fairbanks, 46 Cal. 4th at 65 (emphasis added). Similar to the insurance providers in Fairbanks, GreenSky aids “prospective customers in selecting” a loan, and then “provide[s] additional customer services related to the maintenance, value, [and] use” of that loan. Id.  Plaintiffs attempt to distinguish GreenSky’s activity from the activity of the insurance salespeople in Fairbanks because GreenSky “is paid separately for the loan-servicing,” so the loan-servicing is a separate transaction and not “ancillary” to the loan. (Dkt. No. 16.) But, even if GreenSky’s “merchant fee” is charged on top of the loan fees, and therefore “separate,” that fee is still “ancillary” to the loan because it would not be charged in absence of the loan, and the fee is payment for services related to the loan. See Palestini v. Homecomings Fin., LLC, No. 10-CV-1049-MMA, 2010 WL 3339459, at *12 (S.D. Cal. Aug. 23, 2010) (dismissing CLRA claim based on services related to a mortgage loan because “[w]ithout their mortgage loan, Plaintiffs would never have been charged for these services; they are, by definition, ancillary to the mortgage loan”); Meyer v. Cap. All. Grp., No. 15-CV-2405-WVG, 2017 WL 5138316, at *7 (S.D. Cal. Nov. 6, 2017) (“It would seem wildly incongruous that the CLRA would apply to advertising or marketing of loans but not apply to the loans themselves. Indeed, bootstrapping the CLRA into this case in this manner would, as the Supreme Court of California explained, ‘defeat the apparent legislative intent in limiting the definition of” goods and services.”) (citing Fairbanks, 46 Cal. 4th at 65.) Plaintiffs further argued Greensky differs from the insurance providers in Fairbanks, because Greensky finds customers and then selects a bank to service the loan, rather than providing in-house services alongside provision of insurance or a loan. However, this behavior is not unlike the insurance salespeople in Fairbanks, who may choose among the various insurance options and “help[ ] consumers select policies that meet their needs.” Fairbanks, 46 Cal. 4th at 65. Moreover, while the insurance salespeople may have worked for the insurance company, while Greensky is a separate company from the banks, does not make Greensky’s services any less “ancillary.” In Meyer, like in this case, the defendants did not themselves provide the loans, but instead were “loan advertisers.” Meyer, 2017 WL 5138316, at *6. Plaintiffs’ attempt to distinguish Meyer on the grounds the Meyer defendants only engaged in “marketing and advertising” for loan companies, whereas Greensky not only connects customers to banks, but also plays a more active role in the loan application process is unpersuasive. Plaintiffs fail to explain why such a distinction matters—after all, the Meyer defendants’ active “telemarketing efforts” is likely equally if not more labor-intensive than Greensky’s use of technology to find and set up loan applications for customers. Moreover, the Meyer court concluded “the CLRA simply does not apply to loan products.” Id. at *5. All Greensky’s activities are in effect “loan products”; Plaintiffs agree without the loan, Greensky would be providing no “service.” See Suski v. Marden-Kane, Inc., No. 21-CV-04539-SK, 2022 WL 3974259, at *8 (N.D. Cal. Aug. 31, 2022), appeal dismissed sub nom. Suski v. Coinbase, Inc., No. 22-16506, 2023 WL 6532382 (9th Cir. June 30, 2023), and appeal dismissed, No. 22-16508, 2023 WL 6532674 (9th Cir. June 30, 2023) (concluding Coinbase, which facilitates trading in cryptocurrency, did not fall under the CLRA because the “service” was “ancillary” to the sale of cryptocurrency, which is “an intangible good outside the purview of the CLRA” because “[t]he case law is clear, … if the Coinbase’s alleged services were offered by an entity which sold cryptocurrency, such services would be considered ancillary and would not be covered by the CLRA. The Court finds that Coinbase offering the same services for others selling cryptocurrency does not meaningfully distinguish the services.); Ancillary, Black’s Law Dictionary (11th ed. 2019) (defining “ancillary” as “[s]upplmentary” or “subordinate”).
*4 At oral argument, Plaintiffs urged the Court to follow Sonoda v. Amerisave Mortgage Corp., No. C-11-1803 EMC, 2011 WL 2690451 (N.D. Cal. July 8, 2011). In Sonoda, the district court held the CLRA did not apply to the conduct of the defendant Amerisave, because any services the defendant offered were “ancillary to the loan itself and therefore do not bring this case within the coverage of the CLRA.” Id. at *5. In what Plaintiffs acknowledge was “dicta,” the district court stated:  To be sure, if Amerisave was not loaning money but instead acted only as a broker for other third-party lenders, then arguably what Amerisave was selling was its work or labor in finding a loan for Plaintiffs (rather than negotiating terms of it own loans). Such brokerage services might well qualify as “services” under the CLRA. See [Cal. Civ. Code] § 1761(b) (defining services as “work, labor, and services for other than a commercial or business use, including services furnished in connection with the sale or repair of goods”). Id. at *4. However, later on, the district court explained “[i]n determining what is ancillary for purposes of the instant case, the Court finds it appropriate to look at what was intended to be sold or what was sold as required by the language of the statute.” Id. (citing Cal. Civ. Code § 1770). Since “what was ultimately being sold by Amerisave was a mortgage loan (an intangible good),” the district court held “the services directly related to the sale of the loan (e.g., representations about and negotiations over the terms of the loan)—especially those which serve as a necessary predicate to the transaction—are ancillary.” Id. Here, what was ultimately being sold was a loan, and Defendants’ actions were all “predicate” to that loan transaction. Greensky provides no standalone services unrelated to procuring and servicing the loan and would receive no payment if the loan did not exist. So, Sonada does not persuade the Court Defendants’ conduct falls within the CLRA. Accordingly, Plaintiffs’ CLRA claims are dismissed. In holding the CLRA does not apply to Greensky, the Court accepts Plaintiffs’ characterization of Greensky’s conduct. Since granting leave to amend would therefore be futile, see Novak v. United States, 795 F.3d 1012, 1020 (9th Cir. 2015), Plaintiffs’ CLRA claims are dismissed without leave to amend.

Judge Corley allowed the Plaintiff leave to amend the Plaintiff’s claim under the UCL.

“[A]ccept[ing] the factual allegations of the complaint as true and constru[ing] them in the light most favorable to the plaintiff[s],” Interpipe Contracting, Inc. v. Becerra, 898 F.3d 879, 886–87 (9th Cir. 2018), Plaintiffs adequately plead GreenSky is a “finance lender” under California law. California Financial Code § 22001(a) provides the California Financing Law “shall be liberally construed and applied” to “protect borrowers against unfair practices by some lenders.” Cal. Fin. Code § 22001(a). A “finance lender” includes those “engaged in the business of making consumer loans.” Cal. Fin. Code § 22009. While GreenSky itself may not be funding Plaintiffs’ loans, GreenSky’s business is certainly premised on “making consumer loans”—indeed, it is because GreenSky’s business is intimately connected with making loans that Plaintiffs cannot state a claim under the CLRA.  Defendants argue “GreenSky is not in the business of ‘making consumer loans’ or ‘lending money’ ” because “GreenSky simply supplies the technology that allows merchants to present their customers with bank financing, and then, if the loan closes, a GreenSky affiliate services the loan.” (Dkt. No. 206 at 20-21.) They complain while “Plaintiffs acknowledge that ‘finance lender’ is defined as a person ‘engaged in the business of making consumer loans,” Plaintiffs “conspicuously ignore the rest of the definition, which specifies that ‘making consumer loans’ connotes ‘lending money’ and ‘taking … security for a loan.” (Dkt. No. 210 at 17 (citing Cal. Fin. Code § 22009).) Defendants’ selective, out-of-context quoting of § 22009 is not well-received. As quoted above, § 22009 specifies “the business of making consumer loans or commercial loans may include lending money” and “taking … security for a loan.” Cal. Fin. Code § 22009 (emphasis added). Nowhere does § 22009 indicate “the business of making consumer loans” only includes those two activities. Rather, those two activities are examples of what “the business of making consumer loans… may include.” Id. (emphasis added). Plaintiffs sufficiently plead “the business of making consumer loans” may also include GreenSky’s conduct. So, Plaintiffs plausibly allege GreenSky is a “finance lender” for purposes of the California Financing Law.

B. California Financing Law § 22309

Plaintiffs allege GreenSky’s conduct is “unlawful” because it violates nine California Financing Law provisions. (Dkt. No. 95 ¶ 146.) Defendants challenge the factual support for two of those provisions: California Financial Code § 22309, which provides, with certain exceptions, “no charges on loans … shall be paid, deducted, or received in advance,” and California Financial Code § 22320.5, which regulates delinquency fees for defaults on loans. Plaintiffs submit they will not pursue relief based on Code § 22320.5. (Dkt. No. 209 at 10.) So, any claim based on that provision is dismissed with prejudice.  However, Plaintiffs insist they plausibly plead a claim under California Financial Code § 22309. That Section provides “no charges on loans made pursuant to this division shall be paid, deducted, or received in advance, or compounded.” Plaintiffs assert GreenSky charges a “merchant fee” on each loan, which “GreenSky receives … for the service of brokering the loans between consumer-borrowers and lenders.” (Dkt. No. 95 ¶¶ 30, 40.) They allege further this “merchant fee” is “a predetermined percentage of every loan” and is determined “at the point of origination.” (Id. ¶¶ 39, 41.) So, Plaintiffs argue, the Court can “reasonably infer that GreenSky receives its merchant fees ‘in advance.’ ”
Whether these “merchant fees” violate California Financial Code § 22309 depends on a determination of what “in advance” refers to: Defendants contend the law prohibits any charges “ ‘in advance’ of when the loan is made” (Dkt. No. 210 at 19). Plaintiffs contend the law prohibits any charges “in advance” of “payments … made on the loan,” but do not specify whether that prohibition applies to any charges paid in advance of any loan payments or charges paid in advance of when the loan is fully repaid. (Dkt. No. 209 at 10). Plaintiffs assert GreenSky’s “merchant fee” is assessed after the loan is made, but before any payments on that loan are made, and therefore violates California Financial Code § 22309.  But, whatever “in advance” means, Plaintiffs do not allege when GreenSky receives its merchant fee—whether it receives that fee before loan payments are made, or as a part of the loan payments. So, Plaintiffs’ claim GreenSky’s conduct is unlawful under the Unfair Competition Law because GreenSky violates California Financial Code § 22309 is dismissed with leave to amend. If amended, the Court will not entertain another motion on this issue until summary judgment.