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California requires consumer credit contract notices to be provided in multiple languages
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.
DFPI enters into settlement with unlicensed point-of-sale lender
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.
DFPI issues annual reports on 2021 mortgage, payday loan trends
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.
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.
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.”
DFPI seeks to regulate commercial financial products and services under the CCFPL
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.
CA approves commercial financing disclosure regs
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.
DFPI requests comments on oversight of crypto asset-related financial products and services
On June 1, the California Department of Financial Protection and Innovation (DFPI) issued a request for public comments from stakeholders on developing guidance related to the oversight of crypto asset-related financial products and services. DFPI will proceed with rulemaking under the authority of the California Consumer Financial Protection Law (CCFPL). The request is in accordance with an executive order issued by the California governor last month, which called on the state to create a transparent and consistent framework for companies operating in blockchain, cryptocurrency, and related financial technologies. (Covered by InfoBytes here.) DFPI’s request outlines various topics and questions concerning regulatory priorities, CCFPL regulation and supervision, and marketing monitoring functions, but notes that stakeholders “may comment on any potential area for rulemaking relating to crypto asset-related financial products and services,” including under other statutes administered or enforced by DFPI such as the Corporate Securities Law, Escrow Law, California Financing Law, or Money Transmission Act. The deadline to submit comments is August 5.
DFPI issues NPRM to implement process for handling consumer complaints and inquiries under the CCFPL
Recently, the California Department of Financial Protection and Innovation (DFPI) issued a notice of proposed rulemaking (NPRM) to adopt regulations to implement and interpret certain sections of the California Consumer Financial Protection Law (CCFPL) related to consumer complaints and inquiries. (See also text of the proposed regulations here.) As previously covered by a Buckley Special Alert, AB 1864 was signed in 2020 to enact the CCFPL, which, among other things: (i) establishes UDAAP authority for DFPI; (ii) authorizes 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, arguably representing an enhancement of DFPI’s enforcement powers in contrast to Dodd-Frank and existing California law; (iii) provides DFPI with broad discretion to determine what constitutes a “financial product or service” within the law’s coverage; and (iv) provides that administration of the law 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), DFPI’s oversight authority was expanded 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 section 90008, subdivisions (a), (b), and (d)(2)(D), of the CCFPL related to consumer complaints and inquires. According to DFPI’s notice, section 90008 subdivisions (a) and (b) authorize DFPI to promulgate rules establishing reasonable procedures for covered persons to provide timely responses to consumers and DFPI concerning consumer complaints and inquiries. Additionally, subdivision (d)(2)(D) “permits covered persons to withhold nonpublic or confidential information, including confidential supervisory information, in response to a consumer request to the covered person for information regarding a consumer financial product or service.”
Among other things, the NPRM:
- Identifies entities exempt from the consumer complaints and inquiries requirements;
- Requires covered persons to respond to consumer complaints and to establish policies and procedures for receiving and responding to complaints, including providing a complaint form, acknowledging receipt of complaints, tracking complaints, the timeline for responding to complaints, the contents for such a response, and recordkeeping of such complaints;
- Sets forth requirements for responding to complaints, including documenting when complaints do not require further investigation, performing an investigation of a complaint if warranted, and requiring corrective action to resolve a complaint such as an account adjustment, credit, or refund, and appropriate steps to prevent recurrence of the issue, which may include policy changes and employee training;
- Requires designation of an officer with primary responsibility for the complaint process;
- Requires covered persons to submit to DFPI a quarterly complaint report, which will be made public, and an annual inquiries report;
- Sets forth requirements for covered persons to respond to inquiries from consumers and develop and implement written policies and procedures for responding to such inquiries;
- Provides that covered persons must develop and implement written policies and procedures for responding to requests from DFPI regarding consumer complaints; and
- Exempts certain information, such as nonpublic or confidential information, including confidential supervisory information, from disclosure to consumers.
Written comments on the NPRM are due by July 5.
DFPI says debt collection licenses “unavoidably delayed”
On May 23, the California Department of Financial Protection and Innovation (DFPI) sent a notice to applicants and prospective applicants announcing unforeseen delays in the issuance of licenses under the Debt Collection Licensing Act. The FBI informed DFPI that new changes are needed to state agency protocols for requesting federal background checks. Prospective licensees are encouraged to continue submitting applications through the Nationwide Multistate Licensing System. DFPI stated that during this delay (which “is necessary to enable the Department to effectuate the licensing background check required under the Debt Collection Licensing Act”), “applicants may continue to engage in business, and the Department will not take action for unlicensed activity against applicants who filed their applications after December 31, 2021.” DFPI will reach out to applicants with instructions for submitting fingerprints for background checks when the process becomes available, and advised licensees that “[f]or purposes of including California debt collector license numbers when contacting or communicating with debtors as required under Civil Code section 1788.11, an applicant who has filed its application through NMLS may indicate “license number pending” or similar verbiage until a license is issued.” DFPI will notify applicants when it begins issuing licenses and encourages applicants to check the Department’s website for updates.