The California Department of Business Oversight (DBO) has denied point-of-sale (POS) lender Sezzle to offer loans after finding it engaged with illegal unlicensed lending.
In Sezzle’s application for California Financing Law (CFL) license, it claimed it provided interest-free online financing to consumers. The startup targets young consumers unable to meet traditional financial options such as credit cards.
When making a purchase, the consumer only pays 25% of the purchase price at the point-of-sale, with Sezzle paying the rest. The consumer repays the remainder in three equal instalments bi-weekly.
Merchants pay Sezzle a cut of each transaction and consumers pay fees if they miss a payment or wish to reschedule the repayment.
The DBO claimed, “Under the guise of purchasing from merchants already-consummated credit sale contracts – which may not be covered by the CFL – Sezzle designed its financing product to evade California and federal law.”
After an investigation, the regulator believes Sezzle has been making unregulated loans to Californian consumers, violating CFL law.
It concluded the credit sales made by Sezzle’s merchants were not bona fide but were structured to evade consumer protections.
The DOB stated that it considered POS financing transactions as a loan when the consumer, merchant and third-party financer treat the transaction like a loan, when the relationship between merchant and third-party financer is ‘extensive, when the role of the third-party financer and financing terms are not clearly disclosed to the consumer, or when the transaction is not otherwise regulated.
Furthermore, the regulator has distributed a legal opinion advising a second, unnamed lender that its POS lending meets Civil Code and case law definition of loans and therefore needs to apply for a California Financing Law license.
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