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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.
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.
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.
On January 10, the California Department of Financial Protection and Innovation (DFPI) announced a settlement with a Los Angeles-based rent-to-own furniture provider for allegedly failing to comply with the Karnette Rental-Purchase Act (Karnette Act) in connection with its subscription agreements. This settlement constitutes the first action against a rent-to-own firm for violating the California Consumer Financial Protection Law (CCFPL). According to the settlement, in addition to charging excessive late fees, the company failed to: (i) disclose whether the property subject to the rental-purchase agreement is new or used; (ii) clearly and conspicuously provide the Karnette Act’s mandated contractual disclosures; and (iii) adhere to the Karnette Act’s prescribed formula for calculating the maximum cash price, among other things. As part of the settlement, the company must desist and refrain from violating the CCFPL, refund customers late fee overcharges, offer its rent-to-own products and services in compliance with the Karnette Act and applicable consumer laws, and report on its activities semi-annually to the DFPI. According to DFPI Commissioner Clothilde V. Hewlett, the consent order “reminds California businesses and consumers that the DFPI will be exercising its expanded authority under the new law.”
On November 17, the California Department of Financial Protection and Innovation (DFPI) issued an invitation for comments on proposed rulemaking under the California Consumer Financial Protection Law (CCFPL). The CCFPL provides DFPI with the authority to require companies that provide financial products and services to California consumers to register with the agency. DFPI is also able to “require registrants to generate and provide records to facilitate oversight of registrants and detect risks to California consumers.” The draft rule proposes requiring registration for industries that engage in the following financial products and services: debt settlement, student debt relief, education financing, and wage-based advances. According to DFPI’s notice, with respect to education financing, the proposed rulemaking covers providers of any form of credit where the credit’s purpose is to fund postsecondary education. It also covers “credit regardless of whether the provider labels the credit a loan, retail installment contract, or income share agreement, and regardless of whether the credit recipient’s payment obligation is absolute, contingent, or fixed.” Additionally, DFPI notes that “[w]ith respect to education financing with income-based payments, including contracts sometimes referred to as income share agreements,” DFPI proposes “reporting requirements that in some cases diverge from the reporting requirements for education financing with fixed payments.”
The proposed rulemaking provides definitions to implement the CCFPL registration regulations and addresses several registration provisions including the following:
- Provides that a person must not engage in the business of offering or providing the designated products and services without first registering with the commissioner unless exempt. The DFPI’s notice stipulates that registering with the commissioner “does not constitute a determination that other laws, including other licensing laws under the commissioner’s jurisdiction, do not apply” and the proposed rulemaking further provides that “granting registration to an applicant does not constitute a determination that the applicant’s acts, practices, or business model complies with any law or regulation.”
- Outlines registration requirements and designates NMLS to handle all applications, registrant filings, and fee payments on behalf of the commissioner. The proposed rulemaking lays out information that must be submitted and maintained as part of the registration application, as well as notices required by state law, and steps registrants must take when making changes to an application filing. An applicant’s failure to provide all or any part of the requested information may prevent approval, DFPI states.
- Outlines requirements for registrants seeking to conduct business at a new branch office or at a new location for an existing branch. Requests must be filed with NMLS within 30 calendar days of the date a registrant engages in business at the new branch office or new location.
- Addresses procedures related to annual assessments and pro rata payment requirements, as well as annual reporting requirements for registrants based on the products and services they provide.
- Outlines procedures and requirements for rescinding a summary revocation order when a former registrant submits a written request for reinstatement to the commissioner.
- Discusses procedures related to the effectiveness, surrender, and revocation of a registration. DFPI provides that a “registration issued under this subchapter is effective until it is revoked by the commissioner, is surrendered by the registrant, or becomes inoperative under subdivision (b) of Financial Code section 90009.5.”
DFPI’s notice also seeks comments on proposals to streamline the registration process and improve transparency and clarification on matters related to, among other things: (i) the types of information that may be subject to public disclosure; (ii) annual reporting requirements not included in the proposed rulemaking; and (iii) certain registration requirements that may be applicable to DFPI licensees and licensees and registrants of other state agencies. In addition, DFPI seeks stakeholder feedback on the economic impact of the draft rules on businesses and consumers in California.
Comments on the proposed rulemaking are due December 20.
On September 22, the California Department of Financial Protection and Innovation (DFPI) announced its first enforcement action against a California-based debt collector and debt buyer for allegedly violating the California Consumer Financial Protection Law (CCFPL) by threatening to sue consumers and furnishing negative information to a credit bureau without first notifying consumers about the alleged debt—a practice commonly known as “debt parking.” According to DFPI, consumers complained that their credit scores dropped significantly as a result. The respondent also, among other things, allegedly left voicemails that did not disclose the caller’s identity, threatened illegal lawsuits and wage garnishment (even though it never actually commenced any legal proceedings), and failed to notify consumers in writing within 30 days of transmitting negative information to the credit bureau. Under the order, the respondent is required to pay a $375,000 fine and must desist and refrain from unlawful acts or practices associated with the FDCPA, the Rosenthal Fair Debt Collection Practices Act, and the Consumer Credit Reporting Agencies Act.
On August 9, the California Department of Financial Protection and Innovation (DFPI) issued a consent order with a student loan debt relief company, resolving allegations that the company violated the California Consumer Financial Protection Law (CCFPL) by collecting illegal advance fees prohibited under the federal TSR. According to DFPI, the announcement follows a “wider crackdown” initiated in February against student loan debt-relief companies in violation of the CCFPL and the Student Loan Servicing Act (covered by InfoBytes here). The company allegedly advertised promises of reducing student debt in exchange for an initial payment as high as $899 and an ongoing monthly fee of $39. DFPI alleges that over 1,000 California student loan borrowers signed up and were charged illegal up-front fees prohibited under the federal telemarketing law. The consent order requires the company to refund California student loan borrowers the approximate $870,000 it collected in fees and to pay a $500,000 penalty to DFPI. The company also agreed to cease its illegal conduct, cancel all unlawful contracts with consumers, and refund consumers within 60 days.
On April 26, the California Department of Financial Protection and Innovation (DFPI) announced a settlement with a San Francisco-based coding school, requiring removal of a bankruptcy dischargeability provision from the school’s student contracts and notification to students that this type of financing can be discharged in a bankruptcy filing. According to the consent order, a non-dischargeability provision used in the school’s installment agreements was “misleading because, contrary to the Bankruptcy Non-Dischargeability Provision, the Contract is not . . . subject to the limitations on dischargeability pursuant to . . . the United States Bankruptcy Code.” Therefore, the school violated the California Consumer Financial Protection Law, which prohibits companies from participating in practices that are unlawful, unfair, deceptive, or abusive. As part of the settlement, the school must (i) notify students that the bankruptcy dischargeability provision language is not accurate; (ii) retain a third party to review the terms of the school’s finance contract to certify that it follows the relevant regulations and laws; and (iii) go through a marketing compliance review to certify that the information is accurate and not misleading. According to DFPI Commissioner Manuel P. Alvarez, the consent order “helps ensure that future students can confidently enter into educational financing contracts without being subjected to false or misleading terms.”
On March 30, the California Department of Financial Protection and Innovation (DFPI) announced it has permanently banned an individual and three companies he owns or controls for allegedly evading Property Assessed Clean Energy (PACE) laws. According to DFPI, the respondents, among other things, engaged in unfair and deceptive marketing tactics by “marketing their product as a ‘no-cost’ government-funded program” and “using an unenrolled company to advertise and solicit consumers for PACE financing.” DFPI claimed the respondents offered and sold PACE financing without enrolling with a PACE program administrator, failed to clearly and accurately inform consumers about how PACE financing works, and “misled consumers about their relationships with public agencies, lenders, PACE program administrators, and each other.” Under the terms of the consent order, the respondents agreed to cease and desist from offering PACE financing to consumers, agreed not to use “PACE” in business names, websites, marketing materials, or construction communications, and agreed not to seek future enrollment with any PACE program administrator.