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DFPI annual report highlights consumer protection efforts and upcoming regulations
On April 25, the California DFPI released its Annual Report of Activity under the California Consumer Financial Protection Law (CCFPL), highlighting investigations, public actions, and consumer outreach efforts under the CCFPL. According to the report, the DFPI (i) experienced a 70 percent increase in CCFPL complaints, which predominantly involved crypto assets and debt collectors; (ii) opened 734 CCFPL-related investigations and issued 181 public CCFPL actions; (iii) launched the Crypto Scam Tracker and a new consumer complaints portal; and (iv) advanced two rules, including unlawful, unfair, deceptive, or abusive acts and practices (UUDAAP) protections for small businesses and new registration requirements (pending final approval by the Office of Administrative Law) for earned wage access, debt settlement services, debt relief services, and private postsecondary education financing products.
The report emphasized that the new regulations specified that optional payments, such as tips, collected by California Financing Law (CFL)-licensed lenders would be considered charges under the law. According to the DFPI, these updates will reinforce the CFL by blocking potential loopholes and ensuring compliance among CFL-licensed lenders. Once these regulations would be approved, DFPI will oversee these financial service providers. Upon adoption, DFPI says it will be a pioneer in defining “earned wage access” as loans and regulating income advance services and the treatment of tips as charges, all through regulatory measures rather than statutory enactment.
Student loan servicer to pay DFPI $27, 500 for untimely response to information request
On April 24, the California DFPI entered into a consent order with a federal student loan servicer (respondent) that allegedly failed to provide the DFPI with timely access to requested borrower data. In late April of 2022, the U.S. Department of Education announced a one-time revision of income-driven repayments to address past inaccuracies. To take advantage of this adjustment, the Department of Education required borrowers to submit a loan consolidation application by April 30, 2024. The DFPI requested information from respondent on student loan borrowers for the purpose of completing outreach to impacted borrowers ahead of the loan consolidation application deadline. Respondent provided this information 17 days after the deadline set by the DFPI.
To resolve DFPI’s allegations, respondent agreed to pay a penalty in the amount of $27,500.
FTC, DFPI win MSJ against a fraudulent mortgage relief operation
On February 13, the FTC and California Department of Financial Protection (DFPI) announced that the U.S. District Court for the Central District of California granted their motion for summary judgment against several companies and owners that the agencies alleged were operating a fraudulent mortgage relief operation. As previously covered by InfoBytes, the FTC and DFPI filed a joint complaint against the defendants in September 2022 alleging that the defendants violated the FTC Act, the FTC’s Mortgage Assistance Relief Services Rule (the MARS Rule or Regulation O), the Telemarking Sales Rule, the Covid-19 Consumer Protection Act, and the California Consumer Financial Protection Law. In granting the motion for summary judgment, the court found the defendants violated all five laws. According to the motion, the defendants falsely represented that they could lower homeowners’ interest rates and reduce the principal balances, but, after taking the payment upfront, rarely delivered any agreed-upon services. The defendants also allegedly made misleading claims during telemarketing calls with homeowners regarding home foreclosure and mortgage payments, among other claims, including with homeowners with numbers on the national Do Not Call registry.
The court ordered the defendants to pay approximately $16 million in restitution and $3 million in civil penalties. Further, the court ordered that the defendants are subject to a (i) permanent ban on advertising, promoting, offering for sale, or selling, or assisting others in those acts, any debt relief product or service and all telemarketing; and (ii) prohibition against making misrepresentations or unsubstantiated claims regarding products or services.
SEC, DFPI charge unregistered crypto platform
On February 7, the SEC and DFPI announced charges against a Florida-based crypto platform, for failing to register the offer and sale of a crypto lending product that allowed U.S. investors to deposit or purchase crypto assets into an account in exchange for promised interest payments.
The SEC found that crypto asset accounts with the “interest feature” were offered and sold by the company as securities in the form of investment contracts but failed to register its offer and sale as required by law. Despite voluntarily halting the offering of the interest feature in 2022, the company agreed to pay a $1.5 million penalty to settle the SEC's charges. The SEC also noted that the company announced its intention to terminate all crypto-related products and services in the U.S. on February 22.
In addition, DFPI also entered a consent order with the platform to settle an investigation into the platform’s interest-earning program. The resolution is part of a multistate settlement facilitated by a task force led by California and Washington, comprising of eight state securities regulators. The investigation found that from 2020 through 2022, the platform engaged in the unregistered offer and sale of securities through its crypto interest-earning program. The platform offered the program to investors, allowing them to passively earn interest on crypto assets loaned to the platform. The platform maintained “total discretion” over revenue-generating activities to generate returns for investors, DFPI added. As part of the settlement with DFPI, the company agreed to pay a $1.5 million penalty to the DFPI on behalf of 51 U.S. jurisdictions, mirroring a similar settlement with the SEC for the same amount.
DFPI fines online platform for omitting convenience fee disclosures
On January 9, DFPI issued a consent order against an online platform (respondent) that enables merchants to provide installment contracts to customers. The consent order resolved alleged violations of the California Consumer Financial Protection Law (CCFPL) arising from the convenience fees assessed by a third-party service provider when consumers opt to pay their installments online or by phone. According to the consent order, since 2021 respondent guaranteed that consumers entering into contracts on its platform had a fee-free payment method. However, for a time respondent failed to disclose potential optional convenience fees in the initial contract. Although the third-party servicer disclosed the convenience fees to consumers, DFPI took issue with the respondent’s failure to disclose these fees before transferring consumers to the third-party servicer to enter into the contracts. In other words, consumers only became aware of both the existence and amounts of these fees after entering into contractual obligations. DFPI accused respondent of deceiving consumers by failing to disclose this information first.
Under the terms of the consent order, respondent must pay a $50,000 penalty and must disclose information about the potential convenience fees that may be assessed by a servicer.
Federal court grants California DFPI motion for summary judgment on commercial financing disclosure requirements
Recently, the California DFPI announced it was granted a summary judgment by a federal court to uphold the DFPI’s commercial financing disclosure requirements applicable to small businesses as implemented by SB 1235, including the amount of funding provided, APR, finance charges, and payment amounts. The bill was adopted in 2018 and was previously covered by InfoBytes here, as well as when the California Office of Administrative Law approved the DFPI’s commercial financial disclosure regulations here in June 2022.
In this case, the plaintiff is an advocacy organization that sued the Commissioner of the DFPI, asserting two claims: (i) that the DFPI violated 42 U.S.C. § 1983 based on a violation of the First Amendment; and (ii) that the DFPI’s regulation is preempted by the Truth in Lending Act (TILA). The DFPI disagreed and sought summary judgment on three grounds: (i) the plaintiff lacks the standing to challenge the regulations; (ii) the regulations do not violate the First Amendment; and (iii) the regulations are not preempted by TILA.
The court granted the DFPI’s motion for summary judgment because it found that although the plaintiff had standing to bring suit, the DFPI’s disclosure requirements were lawful under the First Amendment and were not preempted by federal law.
District Court grants motion for summary judgment to DFPI in commercial financing disclosure case
On December 4, the U.S. District Court for the Central District of California granted the California DFPI’s motion for summary judgment which challenged the DFPI’s commercial financing regulations. According to the DFPI’s press release, the proposed regulations would require commercial financing providers to disclose key metrics to small businesses to help them understand their financing options, including the amount of funding provided, APR, finance charge, and payment amounts.
In their complaint, the plaintiffs argued that the regulations violated the First Amendment and were preempted by TILA. The court disagreed, holding that (1) the regulations do not violate the First Amendment under the test for compelled commercial speech since the required disclosures under the Regulations are “reasonably related” to substantial government interest and are not “unjustified or unduly burdensome”; and (2) because the CFPB made a “rational conclusion” that TILA does not preempt commercial financing regulations, the court would defer to the CFPB’s determination.
CFPB comments on California DFPI licensing provisions, income-based advances
On December 1, the CFPB posted a blog entry sharing its comment letter responding to the California DFPI’s notice of proposed rulemaking for “income-based advances” from earlier this year. As previously covered by InfoBytes, the DFPI’s proposed regulations would, among other things, clarify licensing provisions and the applicability of the CFL to certain activities. Within the CFPB’s comment letter, it stressed the importance of regulatory consistency of consumer financial products and services across federal and state law. The letter noted the CFPB’s view that companies offering “income-based advances” (also marketed as “earned wage access”) are subject to federal oversight, and the CFPB supports state oversight of such companies as well. Moreover, the CFPB said that DFPI’s particular treatment of income-based advances takes a similar approach to TILA and Regulation Z and that the CFPB plans to issue further guidance regarding the applicability of TILA to these products.
DFPI opens comment period for the Digital Financial Assets Law
On November 20, DFPI announced it is seeking public comment before it begins its formal rulemaking process on its Digital Financial Assets Law (DFAL), which was enacted on October 13. As previously covered by InfoBytes, DFAL created a licensing requirement for businesses engaging in digital financial asset business activity and is effective on July 1, 2025.
For comments that recommend rules, DFPI encourages comments that “propose specific rule language and provide an estimate, with justification, of the potential economic impact on business and individuals that would be affected by the language.” Additionally, DFPI requests metrics, applicable information about economic impacts, or quantitative analysis to support comments. Among other topics, DFPI especially asks for comments related to (i) application fees and potential fee adjustments based on application complexity; (ii) surety bond or trust account factors; (iii) if capital minimums should vary by the type of activity requiring licensure; and (iv) its stablecoin approval process.
Comments must be received by January 12, 2024. On January 8, 2024, DFPI will host a Virtual Informal Listening Session with stakeholders to discuss feedback on this informal invitation for comments.
DFPI shares trends in consumer crypto complaints
DFPI recently published a report on consumer crypto-related complaints collected through its new online complaint portal. According to the third-quarter 2023 CSO report, some of the most common complaints include (i) consumers being scammed into transferring digital assets from a legitimate crypto account to a fraudulent platform; (ii) consumers losing access to funds after transferring to an unknown wallet; (iii) consumers who invest in sham crypto investments by sending US dollars to a scammer’s platform, wallet, or bank; (iv) consumers making additional investments to scammers after receiving the first and only return; (v) consumers with concerns regarding their account activity on legitimate crypto platforms; and (vi) consumers approached by scammers via text message and social media. DFPI shared tips on how consumers can protect themselves against scams as well, noting that “[i]f it seems too good to be true, it probably is.”