The California Department of Business Oversight rejected Minneapolis-based Sezzle Inc.'s application to make loans under the California Financing Law after it determined that the point-of-sale lender engaged in illegal unlicensed lending in the state.

The regulator said that Sezzle has been extending interest-free online financing to consumers who are unable to qualify for typical financing options. Customers pay Sezzle 25% of the purchase price at the time of the transaction before paying the remainder in three equal installments over six weeks.

Merchants pay Sezzle a portion of each transaction, and consumers who are late to make payments or who wish to reschedule them pay the company as well.

The department said credit sales made by Sezzle's merchant partners were not bona fide but instead were "structured to evade otherwise applicable consumer protections."

Reacting to the regulator's ruling, Sezzle Executive Chairman and CEO Charlie Youakim said a competitor operating under a similar sales model between the dates of the company's application and the regulator's public statement was approved, adding that he and the firm "believe there is a path to resolution."