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Financial Services Law Insights and Observations


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  • New NYDFS proposal to implement Commercial Finance Disclosure Law

    State Issues

    On September 14, NYDFS published a notice of proposed rulemaking under New York’s Commercial Financing Disclosure Law (CFDL) related to disclosure requirements for certain providers of commercial financing transactions in the state. As previously covered by InfoBytes, the CFDL was enacted at the end of December 2020, and amended in February to expand coverage and delay the effective date. (See S5470-B, as amended by S898.) Under the CFDL, providers of commercial financing, which include persons and entities who solicit and present specific offers of commercial financing on behalf of a third party, are required to give consumer-style loan disclosures to potential recipients when a specific offering of finance is extended for certain commercial transactions of $2.5 million or less. Last December, NYDFS announced that providers’ compliance obligations under the CFDL will not take effect until the necessary implementing regulations are issued and effective (covered by InfoBytes here).

    The newest proposed regulations (see Assessment of Public Comments for the Revised Proposed New Part 600 to 23 NYCRR) introduce several revisions and clarifications following the consideration of comments received on proposed regulations published last October (covered by InfoBytes here). Updates include:

    • A new section stating that a “transaction is subject to the CFDL if one of the parties is principally directed or managed from New York, or the provider negotiated the commercial financing from a location in New York.”
    • A new section requiring notice be sent to a recipient if a change is made to the servicing of a commercial financing agreement.
    • An revised definition of “recipient” to now “include entities subject to common control if all such recipients receive the single offer of commercial financing simultaneously.”
    • Clarifying language stating that the “requirements pertaining to the statement of a rate of finance charge or a financing amount, as that term appears in Section 810 of the CFDL, shall be in effect only upon the quotation of a specific commercial financing offer.”
    • Provisions allowing providers to perform calculations based upon either a 30-day month/360-day year or a 365-day year, with the acknowledgment that different methods of computation may lead to slightly different results.
    • An amendment stating that “a ‘provider is not required to provide the disclosures required by the CFDL when the finance charge of an existing financing is effectively increased due to the incurrence, by the recipient, of avoidable fees and charges.’”
    • An acknowledgement of comments asking that 23 NYCRR Part 600 be identical to California’s disclosure requirements (covered by InfoBytes here) “or as consistent as possible.” In response, NYDFS said that while it generally agrees, and has consulted with the California Department of Financial Protection and Innovation (DFPI), the regulations cannot be identical because the CFDL differs from the California Consumer Financial Protection Law and the Department cannot anticipate any future revisions DFPI may make to its proposed regulations.

    Comments on the proposed regulations are due October 31.

    State Issues Agency Rule-Making & Guidance Bank Regulatory State Regulators NYDFS Commercial Finance Disclosures New York CFDL California DFPI

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  • DFPI proposal would consider ISAs as student loans

    State Issues

    On September 9, the California Department of Financial Protection and Innovation (DFPI) issued a notice of proposed rulemaking to adopt new regulations and amend current regulations implementing the Student Loan Servicing Act (Act), which provides for the licensure, regulation, and oversight of student loan servicers by DFPI (formerly the Department of Business Oversight) (previously covered by InfoBytes here). The proposed rulemaking also outlines new clarifications to the Student Loans: Borrower Rights Law, which was enacted in 2020 (effective January 1, 2021) to provide new requirements for student loan servicers (previously covered by InfoBytes here).

    In its initial statement of reasons for the new regulations, DFPI noted that since the Act took effect five years ago, additional private student loan financing products have emerged, such as income share agreements and installment contracts, which use terminology and documentation distinct from traditional loans. DFPI commented that while lenders and servicers of these products have asserted that their products do not fall within the definition of a student loan and are not subject to the statute’s requirements, these education financing products serve the same purpose as traditional loans—“help pay the cost of a student’s higher education"—and are therefore student loans subject to the Act, and servicers of these products must be licensed and comply with all applicable laws. The proposed rulemaking, among other things, (i) defines the term “education financing products,” which now fall under the purview of the Act, along with other related terms; (ii) amends various license application requirements, including amended financial requirements for startup applicants; (iii) outlines provisions related to non-licensee (e.g., servicers that do not require a license but that are subject to the Student Loans: Borrower Rights Law) filing requirements; and (iv) specifies that servicers of all education financing products must submit annual aggregate student loan servicing reports to DFPI. The proposed rulemaking also removes certain unnecessary requirements based on DFPI’s experience in administering the Act to reduce the regulatory burden.

    Comments on the notice of proposed rulemaking are due October 28.

    State Issues State Regulators DFPI Student Lending Licensing Student Loan Servicer Consumer Finance California Student Loan Servicing Act

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  • DFPI orders crypto lender to cease offering unqualified securities

    State Issues

    On August 8, the California Department of Financial Protection and Innovation (DFPI) issued a desist and refrain order to a now-bankrupt cryptocurrency lender and its CEO after determining that the company allegedly made material misrepresentations and omissions in the offering of crypto interest accounts, particularly with respect to understating the risks of depositing digital assets with the company. According to DFPI, since June 2018, the company funded part of its lending operations and proprietary trading through the sale of unqualified securities in the form of digital asset interest-earning accounts known as “Earn Rewards” accounts. DFPI found that the company allegedly offered these accounts to consumers without first qualifying them as securities in compliance with California’s Corporate Securities Law. Additionally, DFPI contended that the company failed to fully disclose material aspects of its business and Earn Rewards accounts, and claimed that the CEO failed to disclose material aspects of the company’s business, made materially misleading statements, or omitted material facts necessary to ensure the statements were not misleading. In June, the company suspended the fulfillment of customer withdrawals from its crypto interest accounts and filed for Chapter 11 bankruptcy reorganization on July 13. 

    DFPI ordered the company and CEO to desist and refrain from further offers and sale of securities in California, including but not limited to the Earn Rewards accounts, unless such sale has been qualified under California law or unless the security or transaction is exempt from qualification. The company and CEO were also both ordered to desist and refrain from offering securities in California by means of untrue statements of material fact or omissions of material fact.

    State Issues Digital Assets State Regulators DFPI California Cryptocurrency Enforcement Securities

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  • California requires consumer credit contract notices to be provided in multiple languages

    State Issues

    On August 15, the California governor signed SB 633, which expands the obligation of creditors who obtain more than one person’s signature on a consumer credit contract when providing cosigners a notice regarding their obligation if the borrower does not pay the debt. Under existing law, these notices had to be provided in English and in Spanish. A creditor who provides a consumer a contract in a foreign language will now have to provide the cosigner notice in the language in which the contract is written. In addition to expanding the languages the notice must be provided in, the required cosigner notice must be provided even if the individuals are married to each other. SB 633 also requires the California Department of Financial Protection and Innovation to provide translations of these notices on its website by January 1, 2023, along with any translations of languages later added to state law. Additionally, notice must be provided only on a separate sheet preceding the contract.

    State Issues State Legislation California Consumer Finance DFPI

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  • DFPI enters into settlement with unlicensed point-of-sale lender

    State Issues

    On August 3, the California Department of Financial Protection and Innovation (DFPI) announced a settlement with a Florida-based point-of-sale lender for allegedly engaging in the business of finance lending in California without obtaining a license. According to the settlement, after conducting an inquiry, DFPI determined that the company violated California Financial Code section 22100(a) “by making loans through the operation of buy now, pay later’ point-of-sale products” without obtaining a proper license. The company voluntarily agreed to the consent order, and, among other things: (i) agreed to desist and refrain from engaging in the business of a finance lender or broker in California unless/until it obtains a California Financing Law (CFL) license authorizing the company to conduct business as a finance lender or broker; (ii) must pay an administrative penalty of $2,500; and (iii) refund fees totaling $13,065. The company also agreed that it will only make loans, deferred payment products, and extensions of credit to California residents under the authority of a CFL license and in compliance with the statute.

    State Issues Licensing DFPI State Regulators California Financing Law Enforcement California Buy Now Pay Later

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  • DFPI issues annual reports on 2021 mortgage, payday loan trends

    State Issues

    Recently, the California Department of Financial Protection and Innovation (DFPI) issued two reports: Annual Report of Activity Under the California Residential Mortgage Lending Act and the Annual Report Of Payday Lending Activity Under The California Deferred Deposit Transaction Law. The DFPI’s first report noted decreases in the number and cumulative amounts of loan originations and payday loans in 2021 compared to 2020. Additionally, it found that the number of loans originated by licensees decreased from 1,130,230 in 2020 to 1,018,286 in 2021. The report also found that the number of brokered loans increased from 17,715 in 2020 to 18,508 in 2021. In addition, the report found that licensees’ complaints regarding non-traditional mortgage loans increased from 13,421 in 2020 to 17,404 in 2021.

    In its second report, the DFPI noted that the Covid-19 pandemic “likely played a role” in the decrease in payday lending in the state. The number of individuals taking out payday loans also fell from 1.128 million in 2020 to 790,143 in 2021. Other highlights of the reports include, among other things, that: (i) the number of payday loan customers referred by lead generators rose from 98,555 in 2020 to 109,486 in 2021; (ii) approximately 20 percent of licensees made payday loans over the Internet during 2021, with online payday loans accounting for about 45.2 percent (2,047,889) of all payday loans; and (iii) approximately 416,000 payday loan customers, or about 53 percent of the total, obtained their loans online.

    State Issues California Payday Lending DFPI

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  • DFPI issues proposal on debt collection licensing

    On July 15, the California Department of Financial Protection and Innovation (DFPI) issued an invitation for comments on draft text for a proposed second rulemaking (NPRM) related to the scope, annual report, and document retention requirements under the Debt Collection Licensing Act (the Act). As previously covered by InfoBytes, in 2020, California passed and adopted the Act, which requires a person engaging in the business of debt collection in California to be licensed and provides for the regulation and oversight of debt collectors by DFPI. Previously, DFPI issued an NPRM (which was later amended) to adopt new debt collector licensing requirements by regulation (covered by InfoBytes here).

    The newest NPRM follows an August 2021 initial request for comments on anticipated rulemaking related to the scope, annual report, and bond amount increase provisions of the Act (covered by InfoBytes here). The NPRM seeks input from stakeholders on topics related to:

    • Definitions and terms. Amendments and expansions to certain defined terms, including “employee,” “engage in the business of debt collection,” and “net proceeds generated by California debtor accounts.”
    • Exemptions. Under the NPRM, employees of debt collectors will not be required to be licensed under the Act “when acting within the scope of their employment” with a licensed debt collector. Additionally, the Act’s listed exemptions apply only to the underlying applicant or licensee—the exemption is not applicable to parent entities, subsidiaries, or to affiliates. The NPRM further provides that creditors collecting consumer debts in their own names are not considered to be debt collectors for licensing purposes, unless they meet certain criteria. The NPRM also lists other exemptions for persons solely servicing non-defaulted debts on behalf of an original creditor, healthcare providers, local, state, or federal government bodies, or public utilities acting under the supervision of the California Public Utilities Commission.
    • Consumer credit transactions. The NPRM specifies that the following types of debt are not considered “consumer debt” to be regulated under the Act: most residential rental debt, debt owed to an HOA or other equivalent written agreement, deferred debt from a consumer’s acquisition of healthcare or medical services, and failed personal checks.
    • Annual reports. The NPRM’s reporting requirements state, with respect to annual reporting requirements, that the “total number of California debtor accounts should be counted by transaction, not by debtor” (i.e., should a single debtor have multiple accounts, each account should be counted separately). The NPRM also outlines criteria for reporting the total number of accounts and dollar amounts.
    • Record retention. With respect to document retention, licensees will be obliged to follow specific criteria for preserving the records “of any contact with, or attempt to contact, anyone associated with a debtor account, regardless of who initiated the contact and whether the attempt at contact is successful.” Licensees will be required to retain this information, as well as additional documents, for at least seven years after the account is settled, returned to the creditor, sold, or collection attempts have stopped.

    Comments to the NPRM are due August 29.

    Licensing State Issues State Regulators DFPI California Debt Collection

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  • DFPI concludes MTA licensure not required for donations to NPOs

    Recently, the California Department of Financial Protection and Innovation (DFPI) released a new opinion letter covering aspects of the California Money Transmission Act (MTA) related to certain agent of payee requirements. The redacted opinion letter examines whether the inquiring company’s product for donations to nonprofit organizations (NPOs) is exempt from the MTA. DFPI also reviewed whether: (i) money held by the company in an operating account, related to MTA-exempt activities such as NPO donations, is stored value; and (ii) closed loop transactions, and specific bank-issued open-loop gift cards without cash access, are exempt from the MTA. The Washington state-headquartered company sells reward programs to businesses that are used to incentivize purchases by their customers, reward customer loyalty, and reward employee performance. The opinion letter does not address closed loop gift cards and open loop gift cards, as DFPI previously issued an opinion letter regarding these products on February 19, 2020, nor does it address a yet-to-be introduced reward program that deposits cash into a recipient’s account or provides credit to a specified credit card as the company already acknowledges that this service constitutes regulated activity under the MTA. 

    However, the opinion letter does address circumstances when an NPO donation is selected by a recipient from the company’s reward options. In this instance, the reward amount is transferred from the company’s operating account to its custodial bank account designated “For the Benefit Of Customers” held at a national bank. The company then “aggregates contributions to each NPO and distributes these amounts, less its 8% administrative fee, directly to the NPOs on a weekly basis.” According to the company, “[f]unds do not move out of the NPO Account until these payments are made and the NPO Account is not used for any purposes other than NPO Donations.” DFPI concluded that the company’s current NPO agreement satisfies the agent of payee requirements for exemption from the MTA, and that as such, NPO donations are not a regulated activity. Specifically, the company’s NPO agreement provides that the company is appointed as the NPO’s agent and is obligated to remit all funds collected on the NPO’s behalf to the NPO. Receipt of the funds from the company’s client “constitutes receipt by the NPO, even if the NPO does not receive the funds from [the client].” The company, and not the client or recipient, is solely responsible to the NPO, DFPI said, adding that “[c]lient funds temporarily being held in [the company’s bank] operating account in prepayment for closed loop gift cards, bank-issued open loop gift cards, and NPO donations are not stored value.”

    Licensing State Issues DFPI Nonprofit California Money Transmission Act California State Regulators

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  • DFPI seeks to regulate commercial financial products and services under the CCFPL

    State Issues

    Recently, the California Department of Financial Protection and Innovation (DFPI) issued a notice of proposed rulemaking (NPRM) to adopt regulations to implement certain sections of the California Consumer Financial Protection Law (CCFPL) related to commercial financial products and services. (See also text of the proposed regulations here.) As previously covered by a Buckley Special Alert, the CCFPL became law in 2020 and, among other things, (i) establishes UDAAP authority for the DFPI; (ii) authorizes the DFPI to impose penalties of $2,500 for “each act or omission” in violation of the law without a showing that the violation was willful (thus going beyond both Dodd-Frank and existing California law); (iii) provides the DFPI with broad discretion to determine what constitutes a “financial product or service” within the law’s coverage; and (iv) provides that enforcement of the CCFPL will be funded through the fees generated by the new registration process as well as fines, penalties, settlements, or judgments. While the CCFPL exempts certain entities (e.g., banks, credit unions, certain licensees), the law expands the DFPI’s oversight authority to include debt collection, debt settlement, credit repair, check cashing, rent-to-own contracts, retail sales financing, consumer credit reporting, and lead generation.

    The NPRM proposes new rules to implement sections 22159, 22800, 22804, 90005, 90009, 90012, and 90015 of the CCFPL related to the offering and provision of commercial financing and other financial products and services to small businesses, nonprofits, and family farms. According to DFPI’s notice, section 22800 subdivision (d) authorizes the Department to define unfair, deceptive, and abusive acts and practices in connection with the offering or provision of commercial financing. Section 90009, subdivision (e), among other things, authorizes the Department’s rulemaking to include data collection and reporting on the provision of commercial financing or other financial products and services.

    Among other things, the NPRM:

    • Clarifies that the CCFPL makes it unlawful for covered providers, as defined, to engage in unfair, deceptive, or abusive acts or practices;
    • Provides standards for determining whether an act or practice is unfair, deceptive, or abusive;
    • Defines small business, nonprofit, and family farm, among other terms;
    • Clarifies DFPI's ability to enforce the regulation’s provisions;
    • Requires covered providers to submit annual reports containing information about their provision of commercial financing or other financial products and services to small businesses, nonprofits, and family farms;
    • Identifies persons excluded from the reporting requirement;
    • Specifies the information required in the reports, as well as provide guidance on calculating or determining certain information;
    • Clarifies the obligations of those also submitting annual reports to DFPI as licensees under the California Financing Law.

    Written comments on the NPRM are due by August 8.

    State Issues Agency Rule-Making & Guidance DFPI California Commercial Finance UDAAP Small Business Financing

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  • CA approves commercial financing disclosure regs

    State Issues

    On June 9, the California Office of Administrative Law (OAL) approved the Department of Financial Protection and Innovation’s (DFPI) proposed commercial financial disclosure regulations. The regulations implement commercial financing disclosure requirements under SB 1235 (Chapter 1011, Statutes of 2018). (See also DFPI press release here.) As previously covered by InfoBytes, in 2018, California enacted SB 1235, which requires non-bank lenders and other finance companies to provide written, consumer-style disclosures for certain commercial transactions, including small business loans and merchant cash advances.

    Notably, SB 1235 does not apply to (i) depository institutions; (ii) lenders regulated under the federal Farm Credit Act; (iii) commercial financing transactions secured by real property; (iv) a commercial financing transaction in which the recipient is a vehicle dealer, vehicle rental company, or affiliated company, and meets other specified requirements; and (v) a lender who makes no more than one applicable transaction in California in a 12-month period or a lender who makes five or fewer applicable transactions that are incidental to the lender’s business in a 12-month period. The act also does not cover true leases (but will apply to bargain-purchase leases), commercial loans under $5,000 (which are considered consumer loans in California regardless of any business-purpose and subject to separate disclosure requirements), and commercial financing offers greater than $500,000.

    California released four rounds of draft proposed regulations between 2019 and 2021 to solicit public comments on various iterations of the proposed text (covered by InfoBytes here). In conjunction with the approved regulations, DFPI released a final statement of reasons that outlines specific revisions and discusses the agency’s responses to public comments.

    Among other things, the regulations:

    • Clarify that a nondepository institution providing technology or support services to a depository institution’s commercial financing program is not required to provide disclosures, provided “the nondepository institution has no interest, or arrangement or agreement to purchase any interest in the commercial financing extended by the depository institution in connection with such program, and the commercial financing program is not branded with a trademark owned by the nondepository institution.”
    • Provide detailed instructions for the content and layout of disclosures, including specific rows and columns that must be used for a disclosure table and the terms that must appear in each section of the table, that are to be delivered at the time a specific type of commercial financing offer equal to or less than $500,000 is extended.
    • Cover the following commercial loan transactions: closed-end transactions, commercial open-end credit plans, factoring transactions, sales-based financing, lease financing, asset-based lending transactions. Disclosure formatting and content requirements are also provided for all other commercial financing transactions that do not fit within the other categories.
    • Require disclosures to provide, among other things, the amount financed; itemization of the amount financed; annual percentage rate (the regulations provide category-specific calculation instructions); finance charges (estimated and total); payment methods, including the frequency and terms for both variable and fixed rate financing; details related to prepayment policies; and estimated loan repayment terms.

    The regulations take effect December 9.

    State Issues State Regulators Agency Rule-Making & Guidance DFPI California Disclosures Commercial Finance Nonbank

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