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On November 17, the California Department of Financial Protection and Innovation (DFPI) issued an invitation for comments on proposed rulemaking under the California Consumer Financial Protection Law (CCFPL). The CCFPL provides DFPI with the authority to require companies that provide financial products and services to California consumers to register with the agency. DFPI is also able to “require registrants to generate and provide records to facilitate oversight of registrants and detect risks to California consumers.” The draft rule proposes requiring registration for industries that engage in the following financial products and services: debt settlement, student debt relief, education financing, and wage-based advances. According to DFPI’s notice, with respect to education financing, the proposed rulemaking covers providers of any form of credit where the credit’s purpose is to fund postsecondary education. It also covers “credit regardless of whether the provider labels the credit a loan, retail installment contract, or income share agreement, and regardless of whether the credit recipient’s payment obligation is absolute, contingent, or fixed.” Additionally, DFPI notes that “[w]ith respect to education financing with income-based payments, including contracts sometimes referred to as income share agreements,” DFPI proposes “reporting requirements that in some cases diverge from the reporting requirements for education financing with fixed payments.”
The proposed rulemaking provides definitions to implement the CCFPL registration regulations and addresses several registration provisions including the following:
- Provides that a person must not engage in the business of offering or providing the designated products and services without first registering with the commissioner unless exempt. The DFPI’s notice stipulates that registering with the commissioner “does not constitute a determination that other laws, including other licensing laws under the commissioner’s jurisdiction, do not apply” and the proposed rulemaking further provides that “granting registration to an applicant does not constitute a determination that the applicant’s acts, practices, or business model complies with any law or regulation.”
- Outlines registration requirements and designates NMLS to handle all applications, registrant filings, and fee payments on behalf of the commissioner. The proposed rulemaking lays out information that must be submitted and maintained as part of the registration application, as well as notices required by state law, and steps registrants must take when making changes to an application filing. An applicant’s failure to provide all or any part of the requested information may prevent approval, DFPI states.
- Outlines requirements for registrants seeking to conduct business at a new branch office or at a new location for an existing branch. Requests must be filed with NMLS within 30 calendar days of the date a registrant engages in business at the new branch office or new location.
- Addresses procedures related to annual assessments and pro rata payment requirements, as well as annual reporting requirements for registrants based on the products and services they provide.
- Outlines procedures and requirements for rescinding a summary revocation order when a former registrant submits a written request for reinstatement to the commissioner.
- Discusses procedures related to the effectiveness, surrender, and revocation of a registration. DFPI provides that a “registration issued under this subchapter is effective until it is revoked by the commissioner, is surrendered by the registrant, or becomes inoperative under subdivision (b) of Financial Code section 90009.5.”
DFPI’s notice also seeks comments on proposals to streamline the registration process and improve transparency and clarification on matters related to, among other things: (i) the types of information that may be subject to public disclosure; (ii) annual reporting requirements not included in the proposed rulemaking; and (iii) certain registration requirements that may be applicable to DFPI licensees and licensees and registrants of other state agencies. In addition, DFPI seeks stakeholder feedback on the economic impact of the draft rules on businesses and consumers in California.
Comments on the proposed rulemaking are due December 20.
On November 15, the California Department of Financial Protection and Innovation (DFPI) issued a second draft of proposed regulations under the Debt Collection Licensing Act (the Act). As previously covered by InfoBytes, California enacted the Act in 2020 to require a person engaging in the business of debt collecting in the state, as defined by the Act, to be licensed. The Act also provides for the regulation and oversight of debt collectors by DFPI. In April 2021, DFPI issued a notice of proposed rulemaking (NPRM) and proposed regulations to adopt new requirements for debt collectors seeking to obtain a license to operate in the state, and issued a notice of modifications to the NPRM in June to incorporate changes to its debt collection license requirements and application. (Covered by InfoBytes here and here.) Among other things, the proposed modifications:
- Amend the definition of “branch office” to include any location other than an applicant’s or licensee’s principal place of business “if activity related to debt collection occurs at the location and the location is held out to the public as a business location or money is received at the location or held at the location.” The definition of “holding a location out to the public” includes receiving postal correspondence, meeting with the public, including the location on correspondence, letterhead, or business cards, and including signage at the location, or making any other representation that the location is a business location.
- Amend the definition of “debt collector” to align with the Act, which defines “debt collector” as “any person who, in the ordinary course of business, regularly, on the person’s own behalf or on behalf of others, engages in debt collection. The term includes any person who composes and sells, or offers to compose and sell, forms, letters and other collection media used or intended to be used for debt collection. The term ‘debt collector’ includes ‘debt buyer’ as defined in Section 1788.50 of the Civil Code.”
Comments on the second draft of modifications must be received by December 2.
Recently, the California Department of Financial Protection and Innovation (DFPI) reminded companies licensed under the California Financing Law that they must transition onto the Nationwide Multistate Licensing System & Registry (NMLS) by December 31. Licensees not currently on the NMLS must establish an account in the system and transfer information to DFPI through NMLS on or before the deadline. Applicants and transitioning licensees are required to submit IRS and Secretary of State documentation identifying the employer identification number and the state where the company is registered as a business. DFPI further stated that the time for “DFPI to process the licensee’s NMLS transition does not [affect] the licensure status of the licensee, and may occur after the licensee’s December 31, 2021 deadline to submit the licensee’s information to the DFPI through NMLS.”
Recently, the Utah Department of Commerce adopted amendments to the Utah Residential Mortgage Practices and Licensing Rules to eliminate unnecessary and redundant licensee expenses for criminal background checks and credit reports. Among other things, the amendments provide that if a licensee submits a fingerprint background report to the Nationwide Multistate Licensing System & Registry (NMLS) “that is current according to the NMLS and is dated within 90-days of the date of the application to renew, the Division shall use that fingerprint background report in satisfaction of the requirement of. . .subsection [R162-2c-204]. If there is no current fingerprint background report in the NMLS, the licensee shall submit a fingerprint background report to the NMLS with the licensee’s application to renew.” The same condition also applies to current credit reports dated within 30-days of the date the renewal application was submitted to the NMLS. The amendments also update certain license qualification provisions related to moral character and felony convictions, and eliminate provisions concerning employee incentive programs related to licensed entities. These provisions took effect October 26.
Recently, the California Department of Financial Protection and Innovation (DFPI) released several new opinion letters covering aspects of the California Money Transmission Act (MTA) related to virtual currency and agent of payee rules. Highlights from the redacted letters include:
- Cryptocurrency and Agent of Payee Exemption. The redacted opinion letter reviewed whether MTA licensure is required for a company’s proposal to offer payment processing services that would enable merchants to receive payments in U.S. dollars from buyers of goods and services, automatically exchange these payments into dollar-denominated tokens on a blockchain network, and to store the tokens in a custodial digital wallet. DFPI currently does not require licensure for companies to receive U.S. dollars from a buyer for transfer to a merchant’s wallet as dollar tokens. DFPI explained that even if it did regulate this activity, the structure of the company’s payment processing services satisfies the requirements of the agent-of-payee exemption, wherein the company acts as the agent of the merchant pursuant to a preexisting written contract and the company’s receipt of payment satisfies the buyer’s obligation to the merchant for goods or services. DFPI further explained that while storing dollar tokens in a custodial digital wallet or making subsequent transfers out of a wallet do not currently require licensure under the MTA, DFPI may later determine the activities are subject to regulatory supervision.
- Asset-Backed Tokens and Other Cryptocurrency. The redacted opinion letter asked DFPI whether an MTA license is required to (i) provide technical services to enable owners of metal to create digital assets representing interests in that metal; (ii) facilitate trading in these digital assets; or (iii) provide digital wallets to customers. The company intends to create a platform to facilitate the creation, sale, and trading of metal asset-backed tokens, whereby a customer purchases metal asset-backed tokens (ABTs) or currency tokens using fiat currency stored in an FBO account. Customers will not be allowed to transmit fiat currency to each other except to facilitate the purchase of ABTs or currency tokens, to receive proceeds from ABTs, or to pay platform fees. DFPI explained that while issuing stored value is generally considered money transmission, “[p]roviding technical services to assist in the creation of a [m]etal ABT and [i]ndustrial [t]okens and issuing a digital wallet holding the [m]etal ABT does not require licensure.” DFPI noted that the company is not itself issuing the ABT or industrial tokens. DFPI further concluded that the company does not need an MTA license to issue a digital wallet holding metal ATBs because the digital wallet is not stored value nor can the wallet’s contents be redeemed for money or monetary value or be used as payment for goods or services. DFPI separately indicated that a license is not currently required to facilitate the sale of ABTs, nor the issuance and sale of currency tokens. However, DFPI warned the company that the opinion only pertains to MTA, and that the company should be aware that metal ABTs and industrial tokens “could be considered a commodity and California Corporations Code section 29520 generally prohibits the sale of a commodity, unless an exception applies.”
- Cryptocurrency-to-Precious Metals Dealer. The redacted opinion letter reviewed whether an online cryptocurrency-to-precious metals dealer, which accepts a variety of different cryptocurrencies in exchange for precious metals and also purchases precious metals from customers using different cryptocurrencies, requires MTA licensure. The company referenced a 2016 decision where DFPI determined that a company operating a software technology platform to facilitate the purchase and sale of gold was not engaged in money transmission, that gold and other precious metals were not payment instruments, that the transactions did not represent selling or issuing stored value, and that “the activity did not constitute receiving money for transmission because the sale or repurchase of gold was a bargained-for-exchange and did not involve transmission to a third party.” The company argued that purchasing and selling precious metals with cryptocurrency is similar and should not trigger MTA’s licensing requirement. DFPI agreed that the company’s business activities do not meet the definition of money transmission because precious metals are not payment instruments, and as such, purchasing and selling precious metals for cryptocurrency does not represent the sale or issuance of a payment instrument. Additionally, DFPI concluded that the company is not selling or issuing stored value, nor do the transactions “involve the receipt of money or monetary value for transmission within or outside the U.S.”
- Virtual Currency Wallet. The redacted opinion letter asked whether an MTA license is required to operate a platform that will provide customers with an account to store and transfer virtual currencies. The company will also provide customers access to an exchange where they can facilitate the purchase or sale of virtual currencies in exchange for other virtual currencies. Fiat currency will not be used on the platform. DFPI stated that it does not currently require companies to obtain an MTA license to operate a platform that provides customers with an account to store and transfer virtual currencies. DFPI further stated that a license is not required to operate a platform that gives customers access to an exchange to purchase or sell virtual currencies in exchange for other virtual currencies.
- Purchase of Cryptocurrency. The redacted opinion letter examined whether a company that offers clients a direct opportunity to buy cryptocurrency in exchange for fiat currency requires MTA licensure. The company explained, among other things, that there is no transmission of cryptocurrency to third parties and that it does not offer money transmission services. DFPI concluded that because the company’s activities are limited to directly selling cryptocurrency to clients, it “does not require an MTA license because it does not involve the sale or issuance of a payment instrument, the sale or issuance of stored value, or receiving money for transmission.”
DFPI reminded the companies that its determinations are limited to the presented facts and circumstances and that any change could lead to different conclusions. Moreover, the letters do not relieve the companies from any FinCEN or federal regulatory obligations.
On October 28, the Financial Action Task Force (FATF) updated pre-existing guidance on its risk-based approach to virtual assets (VAs) and virtual asset service providers (VASPs). The updated guidance revises guidance originally released in 2019. According to FATF standards, countries are required to “assess and mitigate their risks associated with virtual asset financial activities and providers; license or register providers and subject them to supervision or monitoring by competent national authorities.” The guidance includes updates on certain key areas, such as: (i) expanding the definitions of VAs and VASPs; (ii) applying FAFT standards to stablecoins; (iii) adding guidance regarding the risks and the tools available to countries for the purpose of addressing money laundering and terrorist financing risks for peer-to-peer transactions; (iv) revising VASP licensing and registration guidance; (v) adding guidance for the public and private sectors on the implementation of the “travel rule”; and (vi) adding a section for principles of information-sharing and co-operation amongst VASP Supervisors. FATF also noted that the “guidance addresses the areas identified in the FATF’s 12-Month Review of the Revised FATF Standards on virtual assets and VASPs requiring further clarification and also reflects input from a public consultation in March - April 2021.”
Recently, the Texas Finance Commission promulgated amendments to regulations governing residential mortgage licensees. Specifically, rules applicable to (i) licensed Mortgage Loan Companies under the Residential Mortgage Loan Company Licensing and Registration Act, Tex. Fin. Code Ann. § 156.001 et seq., and (ii) licensed Mortgage Bankers and Mortgage Loan Originators (MLOs) under the Mortgage Banker Registration and Residential Mortgage Loan Originator Act and the Texas Fair Enforcement for Mortgage License Act, Tex. Fin. Code Ann. § 157.001 et seq., included several substantive updates.
The amendments to rules governing Mortgage Loan Company licensees include:
- 7 TAC 80.300, which provides in part that a “primary contact person” instead of the qualifying individual will receive any notice of examination.
- 7 TAC 80.101, .102, .105-.107, which sets forth new sponsorship requirements for MLOs, clarifies renewal procedures, and implements a 10-day notice requirement for any material changes made to a licensee’s Form MU1.
- 7 TAC 80.203, .204, .206, which sets forth new requirements for advertising, records storage, office locations, branch offices, and administrative offices, including requirements for licensees engaging in remote work.
- 7 TAC 80.2, which updates references to definitions.
The amendments to rules governing Mortgage Banker and Mortgage Loan Originator licensees include:
- 7 TAC 81.300, which provides in part that a “primary contact person” instead of the qualifying individual will receive any notice of examination.
- 7 TAC 81.101-.111, which sets forth new sponsorship requirements for MLOs, clarifies renewal procedures, implements a 10-day notice requirement for any material changes made to a licensee’s Form MU4, details new background check procedures for MLOs, and provides new criteria for reviewing an MLO applicant’s criminal history.
- 7 TAC 81.203, .204, .206, which sets forth new requirements for advertising, records storage, office locations, branch offices, and administrative offices, including requirements for licensees engaging in remote work.
- 7 TAC 81.2, which updates references to definitions.
These amendments are effective on November 4, 2021. It is recommended Mortgage Company, Mortgage Banker, and MLO licensees in Texas review the amendments to these new rules.
On October 28, the Conference of State Bank Supervisors (CSBS) issued a reminder to individuals and businesses operating in the mortgage, money transmission, debt collection and consumer financial services industry that they should begin renewing their licenses in the Nationwide Multistate Licensing System (NMLS) on November 1 to avoid licensing delays. According to CSBS, early renewal is critical due to an increase in the number of licensees eligible for renewal. Renewal periods in most states run from November 1 to December 31, and licensees are encouraged to review state-specific renewal requirements early. State regulators may employ operational efficiencies to streamline the renewal process, CSBS stated, adding that it also plans to implement an online request process on November 1 for licensees to resolve and check in on NMLS access issues, including password reset/unlocking, changes in email addresses, and confirming renewal status. The online request process is available on the NMLS Call Center Information webpage, available here. As a reminder federally-registered mortgage loan originators and institutions are also required to renew their registrations through NMLS by December 31.
Recently, the California Department of Financial Protection and Innovation (DFPI) released two new opinion letters covering aspects of the California Money Transmission Act (MTA) related to bitcoin automated teller machines (ATMs) and kiosks and the Agent of Payee exemption.
- Bitcoin ATM Kiosk. The redacted opinion letter explains that the sale and purchase of bitcoin through ATMs/kiosks described by the inquiring company is not activity that is subject to licensure under the MTA. DFPI states that the customer’s purchase of bitcoin directly from the company “does not involve the sale or issuance of a payment instrument, the sale or issuance of stored value, or receiving money for transmission.” In each instance, the transaction would only be between the customer using the ATM/kiosk and the company, the bitcoin would be sent directly to the customer’s virtual currency wallet, no third parties are involved in the transmission, and the company does not hold digital wallets on behalf of customers. DFPI reminds the company that its determination is limited to the presented facts and circumstances and that any change could lead to a different conclusion. Moreover, the letter does not relieve the company from any FinCEN or federal regulatory obligations.
- Agent of Payee Exemption. The redacted opinion letter analyzes a proposed future service to be provided by the inquiring company and determines whether the service meets the agent of payee exemption from the MTA. The company and its global affiliates “provide a global, fully integrated suite of back-end service, including sales compliance management, fraud prevention, risk management, tax and regulatory fee calculation, billing optimization, and remittance services to manufacturers, merchants, and retailers” (collectively, “brands”) that want to sell or license products and services to shoppers. The company proposes a future service, which will allow brands to sell products directly to shoppers and transfer the products to the shoppers. The company will not take title to or purchase the products and will continue to provide its suite of back-end services including payment processing, tax and regulatory fees calculations, and refund processing. The company’s contracts with the brands appoint the company as the agent of the brands for facilitating product sales and receiving payments and funds from shoppers. Agreements will also be entered between the company and the shoppers with terms that state a shopper’s payment to the company is considered payment to the brand, which extinguishes the shopper’s payment liability. The company will accept funds for the sale of products on behalf of the brands, and at the conclusion of the sale, will settle the funds paid by the shoppers and remit sales taxes to the appropriate authorities. The company will be the entity responsible for paying and reporting taxes accrued by the sales to shoppers.
DFPI states that the company will “receive money for transmission,” thus triggering the license requirement in the MTA, by receiving funds from the shoppers in the sales transactions. However, the company qualifies for the Agent of Payee exemption because the company will be the recipient of money from the shoppers as an agent of the brands pursuant to a written contract, and payments from the shoppers to the company as the agent will satisfy the shoppers’ payment obligation to the brands. DFPI further notes that refunds facilitated by the company on behalf of the brands will be a reversal of the original transactions with the shoppers, and therefore will not require licensure. Finally, DFPI notes that by contract, the company will be legally responsible for paying local sales taxes on transactions. According to the agreement, because the company will pay taxes on its own behalf, and will not be paying taxes owed by the shoppers, its tax payments will not constitute money transmission. DFPI reminds the company that its determination is limited to the presented facts and circumstances and that any change could lead to a different conclusion.
Recently, the Connecticut Department of Banking entered into a consent order with a North Carolina-based company resolving allegations that it violated Connecticut collection practices laws and regulations by allegedly using a name other than the company’s legal name when collecting unpaid debts without a Connecticut consumer collection agency license. The Department’s investigation stemmed from a newspaper article in which a Connecticut resident complained that he received bills from a company in an attempt to collect $314 for a Covid-19 test. The company responded to the Department’s inquiry by stating that a collection agency license was not required because the collections were made by an in-house division of the company, and not on behalf of a third party. The company also cited cases in which federal courts dismissed similar allegations under the federal FDCPA. After an investigation, the Department alleged that the company constituted as a “creditor” and by using a different name, was in violation of the Regulations of Connecticut State Agencies, “which prohibits the use of any business, company or organization name other than the true name of the creditor’s organization.” The consent order requires that the company pay a civil money penalty of $10,000 and that the company cease and desist from using any name other than its true legal name to collect debts.