Skip to main content
Menu Icon
Close

InfoBytes Blog

Financial Services Law Insights and Observations

Filter

Subscribe to our InfoBytes Blog weekly newsletter and other publications for news affecting the financial services industry.

  • DFPI, Fed to oversee bank’s self-liquidation

    Fintech

    On June 1, the California Department of Financial Protection and Innovation (DFPI) announced that it issued a joint cease-and-desist order with the Federal Reserve Board to fulfill the voluntary liquidation of a crypto-friendly bank. Focusing on providing financial services in the crypto-asset industry, the bank began operating in 2013. In 2023, however, the bank announced its voluntary liquidation, following a mass exodus of high-profile clients. In the fourth quarter of 2022, the bank experienced a sudden drop in deposits, triggered by the collapse of a crypto-exchange company in the previous quarter. DFPI noted that in its most recent examinations of the bank, the bank showed deficits in security and compliance with regulations. Within 10 days of the order, the bank must submit a voluntary self-liquidation plan acceptable to DFPI and upon approval, must implement that plan to wind down its operations “in a safe and sound manner and in compliance with all applicable federal and state laws, rules, and regulations.” The bank has advised that the liquidation will include full repayment of all of its deposits.

    Fintech Federal Issues State Issues Federal Reserve DFPI California State Regulators

  • Fintech fined over interest charges billed as tips and donations

    Fintech

    A California-based fintech company recently entered separate consent orders with California, Connecticut, and the District of Columbia to resolve allegations claiming it disguised interest charges as tips and donations connected to loans offered through its platform. The company agreed to (i) pay a $100,000 fine in Connecticut and reimburse Connecticut borrowers for all loan-related tips, donations, and fees paid; (ii) pay a $30,000 fine in the District of Columbia, including restitution; and (iii) pay a $50,000 fine in California, plus refunds of all donations received from borrowers in the state. The company did not admit to any violations of law or wrongdoing.

    The Connecticut banking commissioner’s consent order found that the company engaged in deceptive practices, acted as a consumer collection agency, and offered, solicited, and brokered small loans for prospective borrowers without the required licensing. The company agreed that it would cease operations in the state until it changed its business model and practices and was properly licensed. Going forward, the company agreed to allow consumers to pay tips only after fully repaying their loans. The consent order follows a temporary cease and desist order issued in 2022.

    A consent judgment and order reached with the D.C. attorney general claimed the company engaged in deceptive practices by misrepresenting the cost of its loans and by not clearly disclosing the true nature of the tips and donations. The AG maintained that the average APR of these loans violated D.C.’s usury cap. The company agreed to ensure that lenders accessing the platform are unable to see whether a consumer is offering a tip (or the amount of tip) and must take measures to make sure that withholding a tip or donation will not affect loan approval or loan terms. Among other actions, the company is also required to disclose how much lenders can expect to earn through the platform.

    In the California consent order, the Department of Financial Protection and Innovation (DFPI) claimed that the majority of consumers paid both a tip and a donation. A pop-up message encouraged borrowers to offer the maximum tip in order to have their loan funded, DFPI said, alleging the pop-up feature could not be disabled without using an unadvertised, buried setting. These tips and/or donations were not included in the formal loan agreement generated in the platform, nor were borrowers able to view the loan agreement before consummation. According to DFPI, this amounted to brokering extensions of credit without a license. Additionally, the interest being charged (after including the tips and donations) exceeded the maximum interest rate permissible under the California Financing Law, DFPI said, adding that by disclosing that the loans had a 0 percent APR with no finance charge, they failed to comply with TILA.

    Fintech State Issues Licensing Enforcement Washington California Connecticut Interest TILA DFPI State Regulators State Attorney General

  • DFPI examines whether some payment services are exempt from MTA

    The California Department of Financial Protection and Innovation (DFPI) recently released a new opinion letter covering aspects of the California Money Transmission Act (MTA) relating to whether certain payment services are exempt or subject to licensure. The redacted opinion letter examines three payment services provided by the inquiring company. DFPI first analyzed and determined that payments received by a law firm collection agent from a different entity’s collection attorneys and remitted to said entity are exempt pursuant to MTA Financial Code section 2011. DFPI next considered whether the MTA’s agent of payee exemption applies to certain tax payment transactions wherein a customer’s payment obligation to the company is extinguished once the customer has submitted a payment through a particular contractor. According to DFPI, transactions conducted pursuant to a contract between the company and the contractor (appointed as a limited agent for the sole purpose of receiving payments on the company’s behalf from taxpayers) are exempt from the MTA under the agent of payee exemption. Finally, DFPI considered whether the agent of payee exemption applies to certain payments to government entities. DFPI explained, among other things, that the language contained within the contracts with each government entity “establishes that the government entity has appointed [the company] to act as its agent and that payment to [the company] extinguishes the payor’s payment obligation to the government entity.” As such, DFPI determined that “transactions conducted pursuant to contracts containing such language are exempt from the MTA under the agent of payee exemption.”

    Licensing State Issues State Regulators DFPI California Money Transmission Act

  • DFPI cracks down on crypto platforms’ AI claims

    State Issues

    On April 19, the California Department of Financial Protection and Innovation (DFPI) announced enforcement actions against five separate entities and an individual for allegedly offering and selling unqualified securities and making material misrepresentations and omissions to investors in violation of California securities laws. According to DFPI, the desist and refrain orders allege that the subjects (which touted themselves as cryptocurrency trading platforms) engaged in a variety of unlawful and deceptive practices, including promising investors high yield returns through the use of artificial intelligence to trade crypto assets, falsely representing that an insurance fund would prevent investor losses, and using investor funds to pay purported profits to other investors. The subjects also allegedly took measures to make the scams appear to be legitimate businesses through the creation of professional websites and social media accounts where influencers and investors shared testimonials about the money they were supposedly making. The orders require the subjects to stop offering, selling, buying, or offering to buy securities in the state, and demonstrate DFPI’s continued crackdown on high yield investment programs.

    State Issues Securities Enforcement California State Regulators Digital Assets DFPI Artificial Intelligence Cryptocurrency

  • DFPI says escrow trust accounts are not stored value under MTA

    The California Department of Financial Protection and Innovation recently released a new opinion letter covering aspects of the California Money Transmission Act (MTA) and the Escrow Act related to persons engaging in business as an escrow agency within the state. The redacted opinion letter examines a request from the inquiring company for confirmation that it does not require either an internet escrow agent license or a money transmitter license in the state of California in connection with its proposed business model (details on the model have been omitted). DFPI responded that under the Escrow Law, “it is unlawful for any person to engage in business as an escrow agent within this state except by means of a corporation duly organized for that purpose licensed by the commissioner as an escrow agent.” The definition of an “internet escrow agent,” DFPI explained, was added to Financial Code section 17003, subdivision (b) to mean “any person engaged in the business of receiving escrows for deposit or delivery over the Internet.” DFPI concluded that based on the facts asserted within the request, the inquiring company has not demonstrated that its proposed model is exempt from the Escrow Law.

    DFPI further considered whether the inquiring company’s proposed model meets the definition of stored value under the MTA, and whether it qualifies for several exemptions under the statute. DFPI explained that the transactions under consideration are not considered “stored value under the definition in Financial Code section 2003, subdivision (x), because they do not represent a claim against the issuer; rather, the money comes under [the inquiring company’s] possession and control and therefore must be placed in an escrow trust account. “An escrow trust account is not the same as stored value,” DFPI said, adding that since the transaction is not stored value, it is unnecessary to address the remaining arguments regarding the MTA.

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

  • DFPI proposes new CCFPL modifications on complaints and inquiries

    State Issues

    On April 14, the California Department of Financial Protection and Innovation (DFPI) released a third round of modifications to proposed regulations for implementing and interpreting certain sections of the California Consumer Financial Protection Law (CCFPL) related to consumer complaints and inquiries. DFPI modified the proposed text in December and March (covered by InfoBytes here and here) in response to comments received on the initially proposed text issued last year to implement Section 90008 subdivisions (a) (b), and (d)(2)(D) of the CCFPL (covered by InfoBytes here). Subdivisions (a) and (b) authorize the DFPI to promulgate rules establishing reasonable procedures for covered persons to provide timely responses to consumers and the DFPI concerning consumer complaints and inquiries, whereas subdivision (d)(2)(D) permits covered persons to withhold certain non-public or confidential information when responding to consumer inquiries.

    DFPI considered comments on the most recent proposed modifications and is now proposing further additional changes:

    • Amended definitions. The proposed modifications change “officer” to “complaint officer” and expand the definition to mean “an individual designated by the covered person with primary authority and responsibility for the effective operation and governance of the complaint process, including the authority and responsibility to monitor the complaint process and resolve complaints.” References to “officer” have been changed to “complaint officer” throughout.
    • Complaint processes and procedures. The proposed modifications make clarifying edits to the requirements for annual notices issued to consumers (disclosures must be provided “in a clear and conspicuous manner”), and specify that complaints pertaining solely to entities not involved in the offering or providing of the financial product or service being reported on should not be included in the number of complaints received.
    • Inquiry processes and procedures. The proposed modifications clarify that should an inquirer indicate any dissatisfaction “regarding a specific issue or problem” concerning a financial product or service or allege wrongdoing by the covered person or third party, the inquiry should be handled as a complaint.

    Comments are due April 29.

    State Issues Agency Rule-Making & Guidance State Regulators DFPI CCFPL Consumer Complaints

  • California joins multistate settlement with securities brokerage

    State Issues

    On April 6, the California Department of Financial Protection and Innovation (DFPI) joined a multi-state settlement with a securities brokerage company stemming from an investigation spearheaded by state securities regulators from Alabama, Colorado, California, Delaware, New Jersey, South Dakota, and Texas relating to certain alleged operational and technical failures. According to DFPI, the investigation was triggered by a March 2020 incident in which the brokerage company experienced several platform outages during a period in which hundreds of thousands of investors relied on the company’s app to make trades, thus preventing some users from being able to process trades. The settlement order sets out multiple alleged violations by the brokerage company, including negligently disseminating inaccurate information to customers, failing to have a “reasonably designed customer identification program,” inadequately supervising critical technology, having a deficient system for dealing with customer inquiries, failing to exercise due diligence before approving certain option accounts, and failing to report all customer complaints to FINRA and state securities regulators.

    While the company neither admitted nor denied the findings, it agreed to pay up to $10.2 million in penalties and will continue to implement recommendations to address the alleged misconduct. DFPI noted in its announcement that it “found no evidence of willful or fraudulent conduct” by the company, and said the company fully cooperated with the investigation.

    State Issues Securities State Regulators California DFPI Settlement

  • Crypto lender to provide refunds to Californians

    State Issues

    On March 27, the California Department of Financial Protection and Innovation (DFPI) announced that a New Jersey-based crypto lending platform has agreed to provide more than $100,000 in refunds to California residents. The refunds, subject to bankruptcy court approval, stem from the lender’s conduct following the collapse of a major crypto exchange last November. As previously covered by InfoBytes, in December, DFPI moved to revoke the lender’s California Financing Law license following an examination, which found that the lender “failed to perform adequate underwriting when making loans and failed to consider borrowers’ ability to repay these loans, in violation of California’s financing laws and regulations.” At the time the lender announced it was limiting platform activity and pausing client withdrawals. The lender eventually filed a petition for chapter 11 bankruptcy. An investigation also revealed that due to the lender’s failure to timely notify borrowers that they could stop repaying their loans, borrowers remitted at least $103,471 in loan repayments to the lender’s servicer while they were unable to withdraw funds and collateral from the platform. A hearing on the lender’s petition to direct its servicer to return borrowers’ loan repayments is scheduled for April 19.

    The lender agreed to an interim suspension of its lending license while the bankruptcy and revocation actions are pending. It also agreed to a final order to discontinue unsafe or injurious practices, as well as a desist and refrain order. Among other things, the lender has agreed to continue to direct its agents to pause collection of repayments on loans belonging to California residents while its license is suspended (including turning off autopay), will continue to set interest rates to 0 percent, and continue to not levy any late fees associated with any payments or report any loans that became delinquent or defaulted on or after November 11, 2022, to credit reporting agencies while the bankruptcy and revocation actions are pending.

    State Issues Digital Assets State Regulators California DFPI Cryptocurrency California Financing Law Bankruptcy Consumer Finance

  • DFPI releases more proposed CCFPL modifications on complaints and inquiries

    State Issues

    On March 23, the California Department of Financial Protection and Innovation (DFPI or the Department) released a second round of modifications to proposed regulations for implementing and interpreting certain sections of the California Consumer Financial Protection Law (CCFPL) related to consumer complaints and inquiries. As previously covered by InfoBytes, DFPI issued a notice of proposed rulemaking (NPRM) last May to implement Section 90008 subdivisions (a) (b), and (d)(2)(D) of the CCFPL. Subdivisions (a) and (b) authorize the DFPI to promulgate rules establishing reasonable procedures for covered persons to provide timely responses to consumers and the DFPI concerning consumer complaints and inquiries, and subdivision (d)(2)(D) permits covered persons to withhold certain non-public or confidential information when responding to consumer inquiries. The first round of proposed modifications to the NPRM was released in December (covered by InfoBytes here).

    DFPI considered comments received on the initially proposed text and the proposed modifications and is now proposing the following additional changes:

    • Applicability. The proposed modifications clarify that Sections 1072, 1073, and 1074 apply only to covered persons required to be licensed by the DFPI or registered with the DFPI “pursuant to Financial Code sections 90009 and 90009.5, including any rules promulgated thereunder.”
    • Amended definitions. The proposed modifications add an additional exclusion from the definition of “complaint[,]” excluding a “notice of error filed with a remittance transfer provider.” “Complainant” is amended to clarify that it does not include individuals who are not residents of California at the time “the act, omission, decision, condition, or policy giving rise to the complaint was applied to the consumer.”
    • Complaint processes and procedures. Among other things, the proposed modifications add requirements that (i) covered persons issue initial and annual disclosures to California residents that include the procedures for filing a complaint; (ii) the main home page or main contact page include the set hours a live representative is normally available to accept oral complaints; (iii) all written communications—not just the final decision—related to a complaint must be submitted in the language in which the contract was negotiated; and (iv) make changes to DFPI’s annual complaint report requirements, including a new category related to nuisance complaints.

    Comments are due April 7.

    State Issues State Regulators DFPI CCFPL Consumer Complaints Agency Rule-Making & Guidance California

  • DFPI clarifies licensing provisions for several state laws

    The California Department of Financial Protection and Innovation (DFPI) recently filed a notice of proposed rulemaking with the Office of Administrative Law, seeking to add several sections to Title 10, Chapter 3 of the California Code of Regulations relating to the California Consumer Financial Protection Law (CCFPL), the California Financing Law (CFL), the California Deferred Deposit Transaction Law (CDDTL), and the California Student Loan Servicing Act (SLSA). (See also DFPI initial state of reasons here.) Among other things, the proposed regulations provide specific registration requirements for covered persons under the CCFPL and outline requirements for exemption from registration under the CCFPL for licensees under the CFL, CDDTL, and SLSA.

    According to DFPI’s notice, the CCFPL grants the Department authority to require covered persons engaged in the business of offering and providing a consumer financial product or service to be registered but does not specify requirements for registration. The proposed regulations clarify these requirements, which include establishing an application process, outlining fees, and specifying persons and conditions for exemption. The proposed regulations also establish annual reporting requirements for filing reports with DFPI. The Department explained that “[e]xisting law exempts from CCFPL registration certain licensees who provide consumer financial products or services ‘within the scope of’ their licenses issued under other Department laws.” The proposed regulations clarify the meaning of “within the scope of” and specify that licensees under the CFL and the CDDTL are exempt from registering under the CCFPL. “[E]xempt licensees who provide products or services that would otherwise be subject to registration under the CCFPL [are required] to submit supplemental information on these activities in their annual reports required under their license,” DFPI explained.

    With respect to the SLSA, DFPI noted that “[a]lthough an SLSA license does not confer upon a licensee the authority to originate financing within the scope of their license, the regulations exempt SLSA licensees from registration requirements for education financing when they meet specified requirements.”

    The proposed regulations also clarify the applicability of the CFL to certain activities, by, among other things, providing that “an advance of funds to be repaid from a consumer’s future earned or unearned pay is a loan subject to the CFL” and that “providers of income-based advances and education financing who are registered under the CCFPL and whose charges do not exceed the charges permitted under the CFL” are exempt from licensure under the CFL. The proposed regulations also clarify provisions relating to collecting loan payments, monthly subscription fees, and loan contracts.

    Comments on the proposed regulations are due May 17.

    Licensing State Issues California State Regulators DFPI CCFPL California Financing Law Student Loan Servicing Act

Pages

Upcoming Events