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  • DFPI amends requirements for Increased Access to Responsible Small Dollar Loans Program

    State Issues

    On May 10, the California Department of Financial Protection and Innovation (DFPI) issued a notice of approval of amendments to regulations under the California Financing Law (CFL) related to the agency’s pilot program for increased access to responsible small-dollar loans (RSDL program). The RSDL program, which became operative in 2014, allows finance lenders licensed under the CFL and approved by the DFPI commissioner to charge specified alternative interest rates and charges, including an administrative fee and delinquency fees, on loans subject to certain requirements.

    The approved amendments, among other things, increase the upper dollar loan limit from $2,500 to $7,500, require applicants to submit mandatory policies and procedures for addressing customer complaints and responding to questions from loan applicants and borrowers, require lenders report additional information about the finders they use, and allow lenders to use qualified finders to disburse loan proceeds, collect loan payments, and issue notices and disclosures to borrowers. (See also DFPI’s final statement of reasons, which outlines specific revisions and discusses the agency’s responses to public comments.) The amendments are effective July 1.

    State Issues California State Regulators DFPI California Financing Law Pilot Program Small Dollar Lending

  • California governor orders state to create blockchain regulatory framework

    State Issues

    On May 4, the California governor issued an executive order calling on the state to create a transparent and consistent framework for companies operating in blockchain, cryptocurrency, and related financial technologies. This framework, the governor stated, should harmonize federal and California laws and balance innovation with consumer protection. The executive order outlined several priorities, including:

    • The framework should include input from a range of stakeholders for potential blockchain applications and ventures;
    • The Department of Financial Protection and Innovation (DFPI) should engage in a public process, including with federal agencies, to “develop a comprehensive regulatory approach to crypto assets harmonized with the direction of federal regulations and guidance” and should “exercise its authority under the California Consumer Financial Protection Law (CCFPL) to develop guidance and, as appropriate, regulatory clarity and supervision of private entities offering crypto asset-related financial products and services” in the state;
    • DFPI should publish consumer protection principles that include model disclosures, error resolution, and other criteria, and “seek input from stakeholders and licensees in order to publish guidance for California state-chartered banks and credit unions”;
    • DFPI should engage in actions to protect consumers, including initiating enforcement actions to enforce the CCFPL, enhancing its review of consumer complaints related to crypto asset-related financial products and services and working with companies to remedy such complaints, and publishing consumer education materials;
    • GovOps should issue a request for innovative ideas to explore opportunities for deploying blockchain technologies that address public-serving and emerging needs; and
    • Members of the Governor's Council for Postsecondary Education should “identify opportunities to create a research and workforce environment to power innovation in blockchain technology, including crypto assets” to “expose students to emerging opportunities.”

    The governor emphasized that while blockchain technology over the past decade “has laid the foundation for a new generation of innovation, spurring a rise in entrepreneurialism in sectors including financial technology,” among others, its impact “is both uncertain and profound” and carries risks and legal implications.

    State Issues California Digital Assets Blockchain Fintech DFPI CCFPL

  • California reinstates single commercial loan licensing exemption under the CFL

    On April 28, the California governor signed SB 577, which amends provisions relating to certain financial institutions, including California Financing Law (CFL), Escrow Agent, and Money Transmitter licensees.

    The bill reinstates a licensing exemption available to commercial lenders in California. Specifically, the bill reenacted a provision that formerly expired on January 1, 2022. This reinstated provision permits a lender to make a single loan within a 12-month period, if the loan is a commercial loan as defined by the CFL, without having to obtain a CFL license.

    The bill also updates contact information to be included on notices posted by California Money Transmitter licensees. Specifically, the bill establishes that California Money Transmitter licensees are required to prominently post, in English and in the same language used by the licensee to conduct business, on the premises of each branch office that conducts money transmission activities a certain notice, including specific contact information for the California Department of Financial Protection and Innovation.

    Finally, the bill removes obsolete language from provisions governing criminal and civil background requirements for Escrow Agent licensees.

    The bill is effective immediately.

    Licensing State Issues California State Legislation Commercial Finance DFPI California Financing Law Money Service / Money Transmitters

  • DFPI concludes MTA licensure not required for direct purchase and sale of cryptocurrency

    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 the purchase and sale of virtual currency. The redacted opinion letter examines whether a Company that offers customers the opportunities to deposit fiat currency to a Company account and then draw down that balance to purchase virtual currency from the company requires MTA licensure. The Company explained that virtual currency is purchased from a third party and is transferred to the customer’s Company-issued virtual currency wallet where it can then be stored, transferred to an external wallet, or sold for fiat currency. When a customer later wants to sell the purchased virtual currency for fiat currency, the transaction occurs in a similar fashion. The Company stated that “virtual currency sales to customers are from the Company’s own inventory,” and that for purposes of the opinion, DFPI “assumes these sales occur independently of the Company’s own transactions with third parties.”

    DFPI concluded that because the Company’s activities are limited to directly purchasing and selling cryptocurrency to customers, it does not require an MTA license because it does “not involve the sale or issuance of stored value or receiving money for transmission.” Specifically, DFPI stated that because the “customer’s fiat currency balance in the Company account does not meet the definition of stored value” and because “funds in that account can only be used for virtual currency purchases from the Company or transferred out to the customer’s external bank account,” the closed loop stored value “does not constitute issuance of stored value that is regulated under the MTA.” DFPI reminded the Company that its determination is limited to the presented facts and that any change could lead to different conclusions.

    Licensing Digital Assets State Issues State Regulators DFPI California Money Transmission Act California Cryptocurrency Fintech

  • DFPI concludes MTA licensure not required for digital asset trading platform

    On March 23, 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 a digital asset trading platform. The redacted opinion letter examines whether the inquiring Company (a registered money services business) requires licensure under the MTA. The Company requesting an interpretive opinion operates a software platform that allows retail and institutional investors to buy and sell digital assets, including cryptocurrency, and access related services, within the platform. The letter explains that U.S. customers must fund an account on the Company’s platform prior to purchasing cryptocurrency with either fiat currency (U.S. dollars) or cryptocurrency. The letter also describes, among other things, how customers can buy from and sell to the Company cryptocurrencies on one or more cryptocurrency exchanges using the platform. In these transactions, the Company would sell or buy cryptocurrency from the customer at the selected price and settle the trade using fiat or cryptocurrency held in its own accounts. Simultaneously, the Company would execute a trade for its own benefit on the exchange offering the price selected by the customer. Customer funds would not be used to buy or sell cryptocurrency from or to the exchange. After executing a transaction, a customer may choose to withdraw all or part of the customer’s fiat or cryptocurrency from the platform, or may choose to maintain a balance to execute future transactions.

    The DFPI stated that it “has not concluded whether a wallet storing cryptocurrency constitutes a form of monetary value representing a claim against the issuer and accepted for use as a means of redemption for money or monetary value or payment for goods or services.” As such, the DFPI will not require the Company to be licensed under the MTA to provide customers with an account via a proprietary software platform to transfer and store cryptocurrency in order to execute trades directly with the Company. 

    Licensing State Issues Digital Assets State Regulators DFPI California California Money Transmission Act Digital Currency Cryptocurrency Fintech Money Service Business

  • DFPI releases report one year after enactment of CCFPL

    State Issues

    On March 24, the California Department of Financial Protection and Innovation (DFPI) released a statutory report regarding measures the Department has taken since expanding its authority under the California Consumer Financial Protection Law (CCFPL). As previously covered by a Buckley Special Alert, the California Legislature passed Assembly Bill 1864, enacting the CCFPL, which, among other things: (i) established UDAAP authority for DFPI; (ii) authorized 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 the Department of Business Oversight’s enforcement powers in contrast to Dodd-Frank and existing California law; and (iii) provided 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. According to the report, over the past year DFPI has collected nearly $1 million in restitution for consumers, fielded hundreds of additional complaints related to the law, and launched more than 100 investigations. DFPI also created new divisions which expanded oversight and outreach, including the Consumer Financial Protection Division, Office of Financial Technology Innovation, Office of the Ombuds, and a Targeted Outreach Team responsible for working with historically underserved communities that include veterans, senior citizens, students, and immigrants. Other key takeaways from the report include, among other things, that DFPI (i) issued four invitations for comments to solicit stakeholder feedback on various aspects of implementation of the CCFPL and received 76 comment letters; (ii) opened 106 investigations that resulted in 49 public actions under the CCFPL; and (iii) established a research team to help identify emerging financial activities; scout for unlawful, unfair, deceptive, and abusive practices; and make policy recommendations based on consumer impact.

    State Issues DFPI California Consumer Finance CCFPL UDAAP

  • DFPI addresses MTA licensing requirements

    Recently, the California Department of Financial Protection and Innovation (DFPI) released new opinion letters covering aspects of the California Money Transmission Act (MTA) related to a digital currency trading platform and the referral of customers to financial institutions. Highlights from the redacted letters include:

    • Digital Currency Trading Platform. The redacted opinion letter examines whether the inquiring Company requires licensure under the MTA. The letter describes that the Company’s customers would transfer digital currency into the account they have with the Company, with the balance being reflected in the customer’s wallet issued by the Company. The letter further explains that the Company would provide California residents access to its digital currency trading platform to buy, sell, or hold digital currency and provide liquidity services. The letter also describes, among other things, how customers could use the platform, transfer digital currency into the account, and transfer fiat currency by transferring it from their own bank account or by debit or credit card to the Company. Customers would not be able to send fiat or digital currency to others, except in the context of a sale. DFPI concluded that while the Company’s wallets holding fiat currency meet the definition of stored value, licensure under the MTA was not required because the Company offered fiat currency wallets to customers solely to facilitate the trade of digital currency. DFPI also noted that the Company does not require licensure under the MTA to perform Platform trading services or to issue wallets holding digital currencies.
    • Referral of customers to financial institutions. The redacted opinion letter examines whether the inquiring Company’s referral service is subject to the MTA. The letter describes that under this service, the Company would refer customers to banks, trust companies, and other entities which are either licensed as money transmitters in California or exempt from licensure. Under the proposed referral service, customers would be re-directed to a financial institution’s website where they could set up and fund an account. Customers wishing to buy, sell, or exchange cryptocurrency or fiat currency could do so from the Company’s website and use a third party’s software platform to input their order details. The platform would check to make sure that the customer has sufficient assets in the customer’s account with the financial institution to purchase the cryptocurrency. The financial institution would be the only party to hold, receive, or transmit all cryptocurrencies in the customer’s account. DFPI concluded that the referral service does not meet the definition of money transmission because the service entails connecting customers with financial institutions from which customers can buy, sell, or exchange cryptocurrency. Further, DFPI noted that the transactions between customers and financial institutions are also not money transmission because the customer would simply exchange cryptocurrency directly with the financial institution. Accordingly, DFPI held that licensure under the MTA is not required because the Company will not sell or issue payment instruments, sell or issue stored value, or receive money for transmission by offering the referral service.

    Licensing State Issues State Regulators DFPI California Money Transmission Act Digital Assets Digital Currency Fintech Cryptocurrency California

  • DFPI reminds financial institutions of their sanctions compliance obligations

    State Issues

    On March 4, the California Department of Financial Protection and Innovation (DFPI) issued guidance, in light of the evolving situation in Ukraine, to remind financial institutions of their sanctions compliance obligations under state and federal law. Licensees are reminded that they are prohibited from participating in financial transactions with individuals and entities listed on the SDN List, and encouraged to review specific, more limited sanctions that have been placed on several Russian entities. This information can be found on OFAC's website.

    Additionally, licensees are strongly encouraged to immediately ensure their systems, programs, and processes comply with OFAC regulations, and review and monitor all transactions (particularly trade finance transactions and funds transfers) to identify and block transactions subject to sanctions. Licensees should also follow OFAC directions related to blocked funds.

    DFPI further warned that Russia’s invasion of Ukraine increases the risk that listed individuals and entities will attempt to evade sanctions by using virtual currency transfers, and encouraged licensees to review OFAC Guidance to protect against these risks. Licensees engaged in transactions involving virtual currencies are instructed to implement policies, procedures, and processes to protect against the unique risks posed by virtual currencies and should “consider virtual currency-specific control measures including sanctions lists, geographic screening, and any other measures appropriate to the licensee’s specific risk profile.”

    Additionally, DFPI cautioned that the “Russian invasion significantly elevates the cyber risk for the U.S. financial sector,” and licensees are instructed to take measures to mitigate cybersecurity threats, including adopting core cybersecurity hygiene measures, eliminating any non-essential networking protocols, ensuring procedures are able to address a ransomware attack, and reevaluating “plans to maintain essential services, protect critical data, and preserve customer confidence considering the realistic threat of extended outages.” Licensees are encouraged to track alerts from the Cybersecurity and Infrastructure Security Agency.

    Licensees conducting business in Ukraine and/or Russia should also “take increased measures to monitor, inspect, and isolate traffic from Ukrainian or Russian offices and service providers,” and “segregate networks for Ukrainian or Russian offices from the global network.”

    NYDFS also recently issued similar guidance for New York state regulated entities on its cybersecurity and virtual currency regulations in response to the Russian invasion and recently imposed sanctions. (Covered by a Buckley Special Alert.)

    State Issues Digital Assets Financial Crimes State Regulators DFPI California NYDFS OFAC Department of Treasury OFAC Sanctions OFAC Designations Ukraine Ukraine Invasion Russia Privacy/Cyber Risk & Data Security

  • DFPI reminds licensees of March 15 CFL annual report filing deadline

    On February 17, the California Department of Financial Protection and Innovation (DFPI) issued a reminder to all licensees under the California Financial Law (CFL) that annual reports are due to the commissioner by March 15. Forms and instructions for submitting the 2021 annual report are available on DFPI’s CFL webpage. DFPI also warned licensees that the commissioner may suspend or revoke a licensee’s license if an annual report is not submitted by the deadline. Specifically, Financial Code section 22715(a) states that the “commissioner may by order summarily suspend or revoke the license of any licensee if that person fails to file the report required by Section 22159 within 10 days after notice by the commissioner that the report is due and not filed. If, after an order is made, a request for hearing is filed in writing within 30 days and the hearing is not held within 60 days thereafter, the order is deemed rescinded as of its effective date.” DFPI also provided a penalty matrix reflecting assessable penalties based on a late-filing date.

    Licensing State Issues State Regulators DFPI California California Financing Law

  • States settle with company on fraudulent MLO certifications

    State Issues

    On February 10, the Conference of State Bank Supervisors announced that the California Department of Financial Protection and Innovation, Maryland’s Office of the Commissioner of Financial Regulation, and the Oregon Division of Financial Regulation have reached a settlement agreement with the owner of a California-based company for providing false certificates claiming that mortgage loan originators (MLOs) took mandatory eight-hour continuing education courses as required for licensure under state and federal law. The three state financial regulators brought separate enforcement actions alleging violations of the Secure and Fair Enforcement for Mortgage Licensing Act (SAFE Act) against the individual and his family (collectively, “respondents”) for their role in the “multi-state fraud scheme that involved hundreds of mortgage loan originators.” According to the announcement, the respondents have “agreed to fully cooperate and provide testimony against implicated mortgage loan originators,” and have “agreed to a lifetime restriction from direct and indirect involvement in businesses that provide mortgage lending-related education.” In addition to a $75,000 monetary penalty (which will be divided between the three states), the respondents have agreed to a non-compliance penalty of $15 million should they fail to fully comply with the terms of the settlement agreement. 

    The action follows a multistate $1.2 million settlement reached last month with 441 MLOs. As previously covered by InfoBytes, the enforcement action included the participation of 44 state agencies from 42 states, and required the settling MLOs to surrender their licenses for three months, pay a $1,000 fine to each state that is a signatory to the consent order in which the MLO holds a license, and take pre-licensing and continuing-education courses before petitioning or reapplying for an MLO endorsement or license.

    State Issues Settlement Enforcement Mortgages CSBS State Regulators Mortgage Origination SAFE Act DFPI California Maryland Oregon

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