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Financial Services Law Insights and Observations

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  • DFPI proposes small-dollar lending pilot

    On August 6, the California Department of Financial Protection and Innovation (DFPI) issued a notice of proposed rulemaking (NPRM) to amend certain codes under the California Code of Regulations and to implement the Pilot Program for Increased Access to Responsible Small Dollar Loans (Pilot Program). The Pilot Program is administered by DFPI and established under the California Financing Law (covered by a Buckley Special Alert here). According to DFPI, the proposed regulations implement SB 235, “which authorizes a finder, defined as an entity that brings together a licensed lender and prospective borrower to negotiate a contract, to perform additional services on behalf of a lender,” and AB 237 “which, among other things, increases the upper dollar limit for a permissible Pilot Program loan from $2,500 to $7,500 and requires participating lenders to conduct reasonable background checks on finders.” The proposal would amend regulations of DFPI’s Pilot Program by, among other things: (i) revising general information and instructions to forms; (ii) increasing the upper limit from $2,500 to $7,500 on the amount of a permissible loan; (iii) “requir[ing] Pilot Program applicants to submit the policies and procedures they must maintain to address customer complaints and respond to questions raised by loan applicants and borrowers, including questions about finders”; (iv) permitting finders to disburse funds on behalf of lenders, collecting loan payments from borrowers, and issuing notices and disclosures to borrowers or perspective borrowers; and (v) removing a provision that prohibits finders from discussing marketing materials or loan documents with a borrower or prospective borrower.

    Licensing State Issues State Legislation Small Dollar Lending DFPI

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  • DFPI grants license to ISA servicer

    On August 5, the California Department of Financial Protection and Innovation (DFPI) announced an agreement to issue a license to a New York-based company that partners with educational institutions to offer Income Share Agreements (ISAs) to students to finance their post-secondary education and training. The agreement reflects DFPI’s decision to “treat these private financing products as student loans” for purposes of the California Student Loan Servicing Act (SLSA)” and represents “a significant first step toward providing greater oversight of the ISA industry.” As previously covered by InfoBytes, in 2018, the California governor approved AB 38 to amend the state’s Student Loan Servicing Act, which provides for the licensure, regulation, and oversight of student loan servicers by the California Department of Business Oversight (now DFPI). The agreement is the first of its kind to subject an ISA servicer to state licensing and regulation. In the agreement, DFPI explains that the SLSA defines a “student loan” “by the purposes for which financing is used,” and includes an “extension of credit” that is “solely for use to finance post-secondary education.” The SLSA expressly excludes certain types of credit, but does not exclude contingent debt or ISAs. Therefore, the agreement concludes, “the Commissioner finds that ISAs made solely for use to finance a postsecondary education are ‘student loans’ for the purposes of the SLSA.”

    As part of the agreement, the company, among other things: (i) must submit all audited financial statements; (ii) must report any ISAs it services as “student loans” for purposes of the SLSA; and (iii) “shall not service any ISAs or other forms of credit extended to California consumers that have been determined or declared unenforceable or void by the DFPI or any regulatory agency that licenses, charters, registers, or otherwise approves the issuer of the ISA.” In addition, DFPI will issue the company a regular, unconditional California SLSA license “within 5 business days of the Commissioner’s approval of [the company’s] Audited Financials.” According to DFPI, “some ISA issuers have contended that state and federal lending laws are inapplicable to ISAs, and students who finance education under ISAs did not enjoy the same regulatory protections as other borrowers,” and DFPI “expects to clarify requirements for ISA providers and servicers through future rulemaking.”

    Licensing State Issues DFPI Income Share Agreements Student Lending Student Loan Servicer

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  • DFPI takes action against student debt-relief company

    State Issues

    On August 9, the California Department of Financial Protection and Innovation (DFPI) issued a consent order with a student loan debt relief company, resolving allegations that the company violated the California Consumer Financial Protection Law (CCFPL) by collecting illegal advance fees prohibited under the federal TSR. According to DFPI, the announcement follows a “wider crackdown” initiated in February against student loan debt-relief companies in violation of the CCFPL and the Student Loan Servicing Act (covered by InfoBytes here). The company allegedly advertised promises of reducing student debt in exchange for an initial payment as high as $899 and an ongoing monthly fee of $39. DFPI alleges that over 1,000 California student loan borrowers signed up and were charged illegal up-front fees prohibited under the federal telemarketing law. The consent order requires the company to refund California student loan borrowers the approximate $870,000 it collected in fees and to pay a $500,000 penalty to DFPI. The company also agreed to cease its illegal conduct, cancel all unlawful contracts with consumers, and refund consumers within 60 days.

    State Issues DFPI State Regulators Debt Relief Student Lending TSR CCFPL Enforcement Consumer Finance

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  • DFPI releases report on CRMLA

    State Issues

    On August 2, the California Department of Financial Protection and Innovation released a report examining residential mortgage lending, rates, consumer complaints, foreclosures, and other data elements during 2020. The DFPI compiled data submitted by licensed non-bank mortgage lenders under the California Residential Mortgage Lending Act (CRMLA). According to the report, “nonbank residential mortgage loans doubled from 2019 to 2020 as more Californians refinanced or obtained new loans in response to lower interest rates despite the economic downturn that resulted from the COVID-19 pandemic.” The report also noted that there was an approximate 68 percent decrease in foreclosures in response to Covid-19 moratoriums meant to protect consumers and an almost 19 percent decline in complaints. Other key findings include that (i) the number of mortgage loans originated increased by 100.5 percent; (ii) the number of loans brokered increased by 52.7 percent; and (iii) the aggregate average amount of loans serviced by licensees each month increased by 12.4 percent compared to 2019.

    State Issues DFPI Mortgages Non-bank Covid-19

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  • DFPI to start accepting debt collector licensing applications on September 1

    On July 12, the Nationwide Multistate Licensing System & Registry (NMLS) published an announcement reminding debt collectors that all persons must apply for a license through the California Department of Financial Protection and Innovation (DFPI) by December 31, 2021. As previously covered by InfoBytes, last September, California enacted the “Debt Collection Licensing Act” (the Act), which requires a person engaging in the business of debt collecting in the state, as defined by the Act, to be licensed and provides for the regulation and oversight of debt collectors by DFPI. Under the Act, debt collection licenses will be required starting January 1, 2022; however, debt collectors who submit applications before January 1, 2022 will be allowed to operate while their applications are pending. However, a debt collector that submits an application after December 31 must wait for DFPI to issue a license before it can operate in the state. All required application materials must be submitted through NMLS, and NMLS reminded applicants that fingerprints must also be submitted to the California Department of Justice. The application will be available on NMLS beginning September 1.

    Find continuing InfoBytes coverage on DFPI’s debt collector licensing requirements here.

    Licensing State Issues State Regulators DFPI Debt Collection NMLS

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  • DFPI reports significant decline in payday lending during pandemic

    State Issues

    On July 22, DFPI reported that California payday lenders made fewer than 6.1 million loans during the Covid-19 pandemic—a 40 percent decline from 2019. Key findings in the 2020 Annual Report of Payday Lending Activity Under the California Deferred Deposit Transaction Law, include: (i) nearly 61.8 percent of licensees reported serving consumers who received government assistance; (ii) borrowers who take out subsequent loans accounted for 69 percent of payday loans in 2020; (iii) licensees collected $250.8 million in payday loan fees, of which 68 percent came from borrowers who made at least seven transactions during the year; (iii) 49 percent of borrowers had average annual incomes of $30,000 or less, and 30 percent had average annual incomes of $20,000 or less; (iv) online payday loans made up one-third of all payday loans (41 percent of borrowers took out payday loans over the internet); and (v) cash disbursement continued to decrease in 2020, while other forms of disbursement, such as wire transfers, bank cards, and debit cards increased. DFPI also noted that during this time period the number of payday loan borrowers referred by lead generators declined by 69 percent, and that the number of licensed payday lending locations also dropped by 27.7 percent. DFPI acting Commissioner Christopher S. Shultz commented that the decrease in payday loans during the pandemic may be attributable to several factors, “such as stimulus checks, loan forbearances, and growth in alternative financing options,” adding that DFPI continues to closely monitor financial products marketed to consumer in desperate financial need.

    State Issues State Regulators DFPI Payday Lending Covid-19 Lead Generation

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  • DFPI issues NPRM on debt collector licensing requirements

    On June 23, the California Department of Financial Protection and Innovation (DFPI) issued a notice of proposed rulemaking (NPRM) to incorporate changes to its debt collection license requirements and application. As previously covered by InfoBytes, in 2020, California enacted the “Debt Collection Licensing Act” (the Act), which requires a person engaging in the business of debt collecting in the state, as defined by the Act, to be licensed and provides for the regulation and oversight of debt collectors by DFPI. In April, DFPI issued a NPRM to adopt new requirements for debt collectors seeking to obtain a license to operate in the state (covered by InfoBytes here). 

    Among other things, the most recent NPRM seeks to:

    • Revise the definition of “applicant” to clarify that an affiliate who is not applying for a license is not an applicant.
    • Include language requirements for documents filed with DFPI.
    • Clarify the requirements and appointment process of DFPI as the agent for service of process.
    • Eliminate the requirement that an applicant must file a copy of the California Department of Justice Request for Live Scan Service form for each individual with the Nationwide Multistate Licensing System & Registry (NMLS) instead of DFPI.
    • Remove requirements regarding the submission of the management chart being submitted to DFPI, the extent to which an applicant intends to utilize third parties to perform debt collection functions, and the filing with NMLS of policies and procedures.
    • Refine requirements for maintaining media records.
    • Refine the process of filing a change in control amendment for new officers, directors, partners, and other control people.
    • Establish new branch office registration procedures.
    • Eliminate requiring the submission of the total dollar amount of debt collected from consumers to determine whether a higher surety bond is required.
    • Remove provisions that would permit DFPI to set a higher surety bond amount.

    DFPI’s notice specifies that comments on the most recent proposed modifications are due July 12.

    Licensing State Legislation State Regulators DFPI Debt Collection NMLS

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  • DFPI: Bitcoin ATM kiosk not subject to MTA licensure

    Recently, California’s Department of Financial Protection and Innovation (DFPI) released three new opinion letters (see here, here, and here) covering aspects of the California Money Transmission Act (MTA) related to bitcoin automated teller machines (ATMs) and kiosks. The letters explain that the sale and purchase of bitcoin through an ATM kiosk as described by the inquiring companies is not subject to licensure under the MTA because it does not meet California’s definition of “money transmission.” In each instance, the transaction would only be between the consumer/bitcoin purchaser using the ATM kiosk and the respective company. DFPI reminded the companies, however, that its determination is limited to the activities specified in the letters and does not extend to any other activities that the companies may engage in. Moreover, the letters do not relieve the companies from any FinCEN, federal, or state regulatory obligations.

    Licensing State Issues State Regulators DFPI California Money Transmission Act Virtual Currency

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  • DFPI issues proposal on debt collector licensing applications

    Recently, the California Department of Financial Protection and Innovation (DFPI) issued a notice of proposed rulemaking (NPRM) to adopt new requirements for debt collectors seeking to obtain a license to operate in the state. As previously covered by InfoBytes last September, California enacted the “Debt Collection Licensing Act” (the Act), which requires a person engaging in the business of debt collecting in the state, as defined by the Act, to be licensed and provides for the regulation and oversight of debt collectors by DFPI. Under the Act, debt collection licenses will be required starting January 1, 2022; however, debt collectors who submit applications before January 1, 2022 will be allowed to operate while their applications are pending.

    Among other things, the NPRM seeks to:

    • Include new sections for definitions of key terms, such as affiliate, debt buyer and debt collector.
    • Adopt several licensing application forms and require applicants to apply for a license through the Nationwide Multistate Licensing System & Registry (NMLS).
    • Provide requirements for obtaining a debt collector license, including for affiliates applying for a single license.
    • Add other licensure requirements, including requiring applications to (i) identify all direct owners, executive officers, and indirect owners; (ii) include the principal place of business, in addition to all branch locations; (iii) submit background checks and fingerprints; (iv) submit to a credit report check; and (v) post surety bonds of at least $25,000.
    • Specify the information required to enable the Commissioner of Financial Protection and Innovation to investigate applicants to determine whether they meet the standards for licensure.
    • Outline the process for challenging information entered in NMLS, as well as the grounds for which the Commissioner may deny an application.

    According to DFPI’s notice, if adopted, the final rule would take effect on or about November 19, 2021 and permit debt collectors to apply for a license prior to January 1, 2022. Additionally, DFPI announced its intention to adopt additional regulations later in 2022 to specify the requirements for maintaining books and records and set forth the amounts required for a surety bond based on a licensee’s volume of debt collection activity.

    Comments on the NPRM are due by June 8.

    Licensing State Issues State Regulators DFPI Debt Collection NMLS

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  • DFPI announces settlement on deceptive educational financing practices

    State Issues

    On April 26, the California Department of Financial Protection and Innovation (DFPI) announced a settlement with a San Francisco-based coding school, requiring removal of a bankruptcy dischargeability provision from the school’s student contracts and notification to students that this type of financing can be discharged in a bankruptcy filing. According to the consent order, a non-dischargeability provision used in the school’s installment agreements was “misleading because, contrary to the Bankruptcy Non-Dischargeability Provision, the Contract is not . . . subject to the limitations on dischargeability pursuant to . . . the United States Bankruptcy Code.” Therefore, the school violated the California Consumer Financial Protection Law, which prohibits companies from participating in practices that are unlawful, unfair, deceptive, or abusive. As part of the settlement, the school must (i) notify students that the bankruptcy dischargeability provision language is not accurate; (ii) retain a third party to review the terms of the school’s finance contract to certify that it follows the relevant regulations and laws; and (iii) go through a marketing compliance review to certify that the information is accurate and not misleading. According to DFPI Commissioner Manuel P. Alvarez, the consent order “helps ensure that future students can confidently enter into educational financing contracts without being subjected to false or misleading terms.”

    State Issues DFPI Deceptive Bankruptcy Student Lending CCFPL Enforcement

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