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Financial Services Law Insights and Observations


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  • DFPI reiterates “aggressive” enforcement during pandemic

    State Issues

    On March 11, the California Department of Financial Protection and Innovation (DFPI) released a statement discussing the regulator’s expanded consumer protection efforts during the Covid-19 pandemic. Among other things, DFPI noted that it is “aggressively exercising its new authority to regulate a large group of newly covered financial services, including debt collectors, credit reporting and credit repair agencies, debt relief agencies and others,” and verifying compliance with state and federal laws protecting homeowners from “coronavirus-related foreclosures.” DFPI also stated it issued a cease-and-desist order filed against a student loan debt relief company (covered by InfoBytes here), and launched an investigation of lender efforts to evade state interest rate caps.

    State Issues State Regulators DFPI Consumer Protection Covid-19

  • DFPI addresses several MTA licensing exemptions

    Recently, California’s Department of Financial Protection and Innovation (DFPI) released several new opinion letters covering aspects of the California Money Transmission Act (MTA) related to virtual currency, agent of payee rules, and transactions in which recipients are paid before a company is reimbursed. Highlights from the redacted letters include:

    • Agent of Payee Exemption Online Gaming/Sports Betting. The redacted opinion letter reviewed whether a company’s payment processing services—which allow customers to use bank accounts to purchase stored value redeemable for goods and services, including “e-commerce, digital goods, financial services, travel, and online gaming/sports betting”—require licensure under the MTA. DFPI concluded that the company’s “pay-in” transactions qualify for the agent-of-payee exemption where the merchant is the payee, the customer is the payor, and the company is the agent of the payee, because the pay-in transactions are ultimately for goods and services since the customer is purchasing stored value redeemable in a closed loop of issuing merchant, and the company’s master agreement with the merchant states that payment to the company satisfies the customer’s obligation to pay the merchant. However, DFPI noted that the agent-of-payee exemption does not apply to transactions involving refunds and the pay-out of winnings. Pay-out transactions, DFPI explained, “constitute ‘receiving money for transmission’ because the [company] receives money from the [m]erchants for transfer to the [c]ustomers” and the customer does not provide goods or services to the merchant for which payment is owed.
    • Agent of Payee Exemption – Payments to Daily Fantasy Sports Providers. The redacted opinion letter, which supersedes an interpretive opinion issued last August (covered by InfoBytes here), reviewed whether MTA licensure is required for a company that plans to offer U.S.-based merchant clients (primarily daily fantasy sports providers) an ACH payment platform to allow customers to use bank accounts to purchase credits for their accounts with the merchants. According to DFPI, pay-in transactions for stored monetary value “constitute ‘receiving money for transmission’”; however, DFPI noted that based on provided information, the pay-in activities qualify for the agent-of-payee exemption because the merchant is the payee, the customer is the payor, and the company is the agent of the merchant. Additionally, the company’s “receipt of funds from the [c]ustomer satisfies the [c]ustomer’s payment obligation to the [m]erchant for the goods or services.” Here, DFPI also explained that the pay-in transactions are closed loop since the customer’s stored value can only be redeemed for goods or services provided by the issuing merchant or its affiliate. DFPI further explained that “selling or issuing” closed loop stored value is excluded from the definition of money transmission. In both the first and second opinion letters, DFPI reiterated that MTA licenses cannot be issued to companies engaged in the transmission of money to facilitate unlawful activities, such as sports betting.
    • Purchase and Sale of Cryptocurrency. The redacted opinion letter concluded that a company’s activities, which are limited to buying and selling virtual currency directly from and to consumers via ACH or wire transfer, do not trigger the licensing requirements of the MTA because the activities do “not involve the sale or issuance of a payment instrument, the sale or issuance of stored value, or receiving money for transmission.”
    • Paying Recipients Before a Company is Reimbursed. The redacted opinion letter examined whether a company’s payment reimbursement model requires licensure under the MTA. The company offers transactions that result in beneficiaries being paid before the company receives money from the sender. The company “obtains a payment authorization on the customer’s debit card for the transaction,” and the debit card authorization then “puts a hold on the cardholder’s funds for the purchase and guarantees that [the company] will be paid.” Once the customer authorizes the transaction, the funds are instantly moved to the recipient’s wallet or bank account for immediate use. To be reimbursed, however, the company must initiate a second step, which actually processes the payment and converts the hold status to payment/post status. According to DFPI, the company’s payment reimbursement model does not involve transactions that constitute money transmission because the company “never ‘receives money for transmission. . ., does not actually or constructively receive, take possession of, or hold money or monetary value for transmission. . ., incurs no transmission liability,” or puts consumer funds at risk.

    Licensing State Issues DFPI California Money Transmission Act State Regulators

  • DFPI requests comment on CCFPL regulations

    State Issues

    On February 4, the California Department of Financial Protection and Innovation (DFPI) released an Invitation for Comments on a proposed rulemaking to implement the California Consumer Financial Protection Law (CCFPL). As previously covered by InfoBytes, in September 2020, the governor signed AB 1864, which enacts the CCFPL and established the DFPI name change from the Department of Business Oversight. The CCFPL authorizes DFPI to establish rules relating to the covered persons, service providers, and consumer financial products or services outlined in the law. The invitation for comments describes specific topics for stakeholder consideration when providing comments, but DFPI notes that commenters may provide feedback on “any potential area for rulemaking.” Highlights of the topics for comment include:

    • Exemptions. Whether or not DFPI should clarify the scope of the entities exempt from CCFPL.
    • Registration Requirements. What industries should be required to first register with DFPI and what rules should be established to facilitate industry oversight, including records and reporting requirements.
    • Complaint Handling. What requirements DFPI should establish with regard to timely responses to consumer complaints and inquiries, including timelines and substance of response.
    • Consumer UUDAAP. Description of acts or practices that stakeholders believe qualify as “unlawful, unfair, deceptive, or abusive” in consumer transactions, including suggested “requirements DFPI should adopt to prevent the act or practice.”
    • Commercial UDAAP and Data Collection. Description of acts or practices that stakeholders believe qualify as unfair, deceptive, and abusive in the commercial space, and whether or not DFPI should define specific acts or practices as unfair, deceptive, or abusive. Additionally, whether or not DFPI should require the collection and reporting of commercial financing data.
    • Disclosures. Whether or not DFPI should prescribe rules covering the features of consumer financing disclosures and if so, what the requirements should cover.
    • California Credit Cost Limitations. Whether or not DFPI should clarify the applicability of state credit cost limitations, including rate and fee caps, to consumer financial products and services.

    Comments must be submitted by March 8.

    State Issues DFPI Consumer Finance State Regulators State Legislation UDAAP

  • DFPI issues first enforcement action against student debt-relief company

    State Issues

    On February 3, the California Department of Financial Protection and Innovation (DFPI) announced the first-ever enforcement action under its new structure against a student loan debt-relief company and an investigation into others. According to the order, DFPI alleges, among other things, that an Irvine-based debt-relief company violated the Telemarketing Sales Rule (TSR) and the California Consumer Financial Protection Law (CCFPL) by charging consumers fees ranging from $2,100 to $26,510 to “‘wipe away’ their student loans by getting them ‘dismissed’ or ‘discharged,’” which the company could not achieve. Moreover, consumers often financed the payment of the company’s fees, resulting in more debt and the company refused to issue refunds when requested by some consumers. DFPI alleges the company’s actions constitute unlawful and deceptive practices under the CCFPL and violated the TSR’s prohibition of charging fees before performing services. Lastly, DFPI alleges the company was required to obtain a license under the state’s Student Loan Servicing Act (SLSA) because its actions constitute “servicing” student loans under the statute. The order requires the company to refund the fees collected from 18 consumers by March 15 and to pay a civil penalty of $45,000.

    DFPI also announced it issued subpoenas to four other student loan debt-relief companies to determine whether the companies engage in or have engaged in any unlawful, unfair, deceptive, or abusive acts or practices and whether their activities require a license. Responses to the subpoenas are due in March.

    State Issues DFPI State Regulators Debt Relief Student Lending TSR CCFPL Licensing

  • DFPI signs MOUs with EWA companies

    State Issues

    On January 27, California’s Department of Financial Protection and Innovation (DFPI) announced that it entered into memorandums of understanding (MOUs) with five earned wage access (EWA) companies. According to DFPI, the MOUs represent the first agreements of their kind between fintechs and a state regulator, and are intended to “pave a path so [EWA] companies can continue operating in California, in advance of possible registration under the California Consumer Financial Protection Law [CCFPL], which took effect this year and defines the companies as newly covered financial services.” (Buckley Special Alert coverage on the CCFPL available here.) The five EWA companies represent two advance pay models: “an employer-based model which offers early access to wages in partnership with an employer as a benefit and a direct-to-consumer model which does not require employer participation.”

    Under the terms of the MOUs, the companies have agreed to deliver quarterly reports providing DFPI with a better understanding of their products and services, as well as the risks and benefits to consumers in the state. Reports will include information concerning “changes to consumer contracts, fees to consumers, consumer complaints, the average number of advances per month, duration before consumer payback, and the number of consumers making no repayment, partial repayments, or requesting cancellations or deferrals, among other stipulations.” The companies have also agreed to regular periodic DFPI examinations and are required to follow industry best practices, including by, among other things, (i) not offering any financial products that are “contingent on any tips the consumer chooses to make or does not make”; (ii) complying with TILA by limiting annual percentage rates on advanced funds to 36 percent; (iii) disclosing to consumers any potential fees that may be assessed prior to advancing the funds; (iv) limiting the amount of funds advanced to a consumer to no more than 50 percent of the consumer’s next paycheck; and (v) allowing consumers to revoke EFT authorization up to three days before a scheduled repayment date.

    As previously covered by InfoBytes, last November the CFPB issued an advisory opinion on EWA products, which clarified that “a Covered EWA Program does not involve the offering or extension of ‘credit’” under Regulation Z, which implements TILA. The Bureau noted that the “totality of circumstances of a Covered EWA Program supports that these programs differ in kind from products the Bureau would generally consider to be credit.”

    State Issues DFPI Fintech Earned Wage Access MOUs

  • DFPI: Certain bitcoin ATMs/kiosks not subject to MTA licensure

    Recently, California’s Department of Financial Protection and Innovation (DFPI) released a new opinion letter covering aspects of the Money Transmission Act (MTA) related to bitcoin automated teller machines (ATMs) and kiosks. The letter explains that the sale and purchase of bitcoin through ATMs/kiosks in third-party retail locations described by the applicant company are not subject to licensure under the MTA because the sale and purchase of bitcoin from the company’s own inventory through a kiosk does not meet California’s definition of “money transmission.” In each instance, the transaction would only be between the consumer using the ATM/kiosk and the company, the bitcoin would be sent directly to the customer’s virtual currency wallet, and any bitcoin sold would be provided exclusively from the company’s own inventory. DFPI reminded the company that its determination is limited to the activities specified in the letter and does not extend to any other activities that the company may engage in. Moreover, the letter does not relieve the company from any FinCEN, federal, or state regulatory obligations.

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

  • DFPI launches debt collection investigation

    State Issues

    On January 19, California’s Department of Financial Protection and Innovation (DFPI) announced the issuance of subpoenas to a dozen debt collection companies as part of its investigation into consumer complaints about alleged unlawful, unfair, deceptive, or abusive debt collection practices. This is DFPI’s first significant action since the California Consumer Financial Protection Law—which, among other things, expanded DFPI’s UDAAP authority by adding a prohibition on “abusive” acts or practices to California law—went into effect January 1 (covered by a Buckley Special Alert). According to DFPI, consumers across the country have filed complaints against the companies, alleging the debt collectors make repeated phone calls, fail to validate debts, and threaten to sue consumers for debts they do not owe. DFPI notes that the state’s new Debt Collection Licensing Act (enacted last September and covered by InfoBytes here) requires a person engaging in the business of debt collecting in the state of California to be licensed and provides for the regulation and oversight of debt collectors by the agency.

    State Issues State Regulators DFPI Debt Collection Enforcement

  • California proposes changes to Escrow Law

    State Issues

    Recently, the California Department of Financial Protection and Innovation (DFPI) issued a notice of proposed regulations (and accompanying statement of reasons) seeking to amend the state’s Escrow Law to clarify (i) the meanings of personal property and prohibited compensation; (ii) maintenance of books and preservation of records; and (iii) the annual report requirements. Among other things, the proposal adds “gametic material” to the definition of personal property to clarify that escrow agents may conduct transactions that hold and disburse funds under assisted reproduction agreements. Additionally, the update to the escrow books and records provisions are to “ensure that CPAs may participate in engagements to meet the annual audit report requirement for Escrow Law licensees without violating any rule of professional conduct.” Comments on the proposed regulatory amendments are due by February 15.

    State Issues DFPI Escrow State Regulators

  • DFPI: Certain Bitcoin ATMs not subject to MTA licensure

    Recently, California’s Department of Financial Protection and Innovation (DFPI) released new opinion letters covering aspects of the Money Transmission Act (MTA) related to Bitcoin automated teller machines (ATMs). Each of the three letters (available here, here, and here), which contain slightly different fact patterns, explain that the Bitcoin ATMs described by the applicant companies are not subject to licensure under the MTA because they are not considered to be engaging in the business of money transmission. In each instance, the transaction would only be between the consumer using the kiosk and the company, the transaction would be completed instantly, and no third parties would be involved in the transmission of the Bitcoin to the customer’s virtual wallets. DFPI reminded each company that while it was not a subject of their inquiry, if they choose to offer virtual currency other than Bitcoin, they may have obligations under California’s broker-dealer laws to the extent that any of those virtual currencies are securities.

    Licensing State Issues State Regulators DFPI California Money Transmission Act

  • California DFPI issues MCA enforcement action covering future receivables

    State Issues

    On November 12, the California Department of Financial Protection and Innovation (DFPI) issued a consent order with a commercial financing company, resolving allegations that the company’s merchant cash advance (MCA) product was structured as a lending transaction and offered to California merchants without first obtaining a license as required by the California Financing Law (CFL). According to the DFPI, the MCA agreements in question provide the company with “broad authority to declare ‘default’ on its merchants and when doing so may use extensive recourse allowed under its [a]greement,” including in the event of insufficient funds requiring the full funding amount to be repaid, which DFPI argues, “does not put the risk of the ‘purchase’ of receivables on [the financing company]’s shoulders, but rather the risk of repayment on the merchant’s shoulders, just like a loan.” Moreover, the agreements provide for an indefinite repayment period, placing the “risk of repayment on the merchant by leaving the repayment period open until fully repaid (with fees and interest).” The consent order distinguishes between outstanding and future receivables, noting that under California law, commercial financiers purchasing a share of a merchant’s outstanding receivables without recourse (e.g., factoring), is generally not considered lending, but there is no similar recognition by the legislature or courts with respect to future receivables.  

    The consent order requires the company to (i) desist from lending in California unless and until licensed under the CFL; (ii) refund fees or payments collected from California merchants in excess of the 10 percent state interest rate cap for non-CFL licensees; and (iii) pay $20,000 to the DFPI to cover the cost of the investigation.

    State Issues DFPI Merchant Cash Advance Commercial Lending