We previously wrote about California Governor Newsom’s 2020-2021 Budget and an accompanying trailer bill that would rename the Department of Business Oversight (“DBO”) and significantly increase its ability to oversee financial services providers in the state. The proposed law hit a roadblock in May when it was handed to the Legislature for further deliberation and review outside of the typical budgeting process. On August 31, the last day of the standard legislative session, the Legislature passed Assembly Bill 1864, an amended version of the trailer bill. AB-1864 largely tracks the language in the trailer bill with the addition of some new and important exemptions. If the bill is not vetoed by Governor Newsom before September 30, the bill will take effect on January 1, 2021. Governor Newsom is expected to sign the bill.
On September 29, 2020, from 3:00 p.m. to 4:30 p.m. ET, Ballard Spahr will hold a webinar on AB-1864. To register, click here.
AB-1864 is one of three recently-passed California bills that will impact consumer financial services providers in California. We will be publishing blog posts on the other two bills shortly. Those bills are SB-908, which will require debt collectors to be licensed beginning January 1, 2022, and AB-376, which includes the Student Loan Borrower Bill of Rights.
Below is a high-level overview of AB-1864.
DBO: New Name, Expanded Powers
When the bill becomes law, the DBO will be renamed the Department of Financial Protection and Innovation (“DFPI”) and the agency will gain the authority to enforce all California laws relating to “persons offering or providing consumer financial products or services in [the] state.” The name change will not affect the validity of any action or proceeding by or against the DBO or its predecessor commissioners and departments. Also, with respect to any entity that is licensed, registered, or subject to the agency’s oversight, the bill clarifies that the DFPI has the authority to, bring a civil action or other proceeding pursuant to 12 USC § 5552 to enforce the Consumer Financial Protection Act of 2010 (12 USC § 5481 et seq.) (the “CFPA”). This simply restates authority already given under the CFPA to enforce the CFPA or regulations issued under it for such entities.
California Consumer Financial Protection Law
AB-1864 also includes the California Consumer Financial Protection Law (“CCFPL”). Seeking to remedy the “financial victimization of economically vulnerable consumers” and thereby, among other things, preventing the “increased caseloads for safety net programs,” especially in reaction to the global COVID-19 pandemic, the CCFPL includes robust and sweeping consumer protections to be enforced by the DFPI. These include the oversight of “covered persons,” the ability to require such “covered persons” to register with the agency, and broad rulemaking and enforcement rights.
CCFPL Applicability – Important, And New, Exemptions
The CCFPL applies to “covered persons” – an expansive term including persons who engage in offering or providing “consumer financial products or services,” their service providers, and affiliates when acting as a service provider. This will include entities that are not currently subject to DBO oversight, and who previously were not subject to oversight by a primary regulator, notably debt collectors, credit reporting agencies, certain fintech companies – including some who offer point-of-sale financing – and some merchants who extend credit directly to consumers.
AB-1864, however, includes new, important, and somewhat expansive exemptions from the CCFPL provisions of the bill. Exempted from the CCFPL are persons acting under the authority of one of the following licenses, certificates, or charters issued by the DFPI:
- Escrow agents licensed under Division 6 of the Financial Code;
- Finance lenders, brokers, program administrators, and mortgage loan originators licensed under Division 9 of the Financial Code;
- Broker-dealers and investment advisers licensed under Division 1 of Title 4 of the Corporations Code;
- Residential mortgage lenders, mortgage servicers, and mortgage loan originators licensed under Division 20 of the Financial Code;
- Check sellers, bill payers, and prorates licensed under Division 3 of the Financial Code;
- Capital access companies licensed under Division 3 of Title 4 of the Corporations Code; and
- Any person licensed, chartered, or who have been issued a certificate under the Financial Institutions Law.
Organizations subject to oversight of the Farm Credit Administration when acting under such authority are also newly exempted.
As originally contemplated in Governor Newsom’s 2020-2021 Budget and the accompanying trailer bill, continuing to be exempt from the CCFPL’s provisions will be licensees of any California state agency to the extent the licensee is acting under the authority of such license and banks, bank holding companies, trust companies, savings and loan associations, savings and loan holding companies, and credit unions when such entities are acting under the authority of a license, certificate or charter under federal law or the laws of another state.
Deferred deposit lenders and student loan servicers licensed by the DFPI are notably not exempted from the CCFPL’s new provisions.
CCFPL: New Registration Requirements
The DFPI is permitted to prescribe regulations requiring any covered person to submit a registration, pay a fee to the agency, submit background checks for certain key personnel, and obtain a bond or satisfy other financial standing requirements. Registration fees may be “scaled based on the size or market participation of the entity” and covered persons may be required to register via the Nationwide Multistate Licensing System and Registry (“NMLS”). The DFPI may also issue rules requiring registrants to submit annual or other special reports to the agency. Any DFPI rules requiring registration will sunset on January 1 of the fourth year following the year registration was initially required; however, the legislature may extend such requirements after holding public hearings to obtain input on the desirability or feasibility of extending, revising, or terminating such requirements. We note that Governor Newsom’s 2020-20201 Budget largely contemplates future funding of the DFPI to come from these registration fees.
These registration requirements will not apply to persons who are licensed by the DFPI and who are acting pursuant to such license, who are licensed or registered with another agency unless the person is offering or providing a financial product or service that is not regulated by such agency, nor will they apply to covered persons who are licensed by the DFPI or a federal agency and engage in deposit-taking activities unless the person is offering or providing a financial product or service that is not regulated by the such agency.
CCFPL: New Rulemaking and Enforcement Authority
The DFPI will have new rulemaking and enforcement authority over “covered persons” relating to unlawful, unfair, deceptive, or abusive acts and practices (“UDAAP”). The DFPI may also issue and enforce rules defining UDAAPs as they relate to “commercial financing,” as that term is defined in Cal. Fin. Code 22800(d), or financial products and services offered or provided to small business recipients, nonprofits, and family farms. And, as to entities that are required to submit registrations, the DFPI will have broad rulemaking authority to prescribe rules “to facilitate oversight . . . and assessment and detection of risks to consumers.”
The DFPI is also tasked with the issuance of rules relating to consumer complaints and inquiries. These rules may require covered persons to provide timely responses to consumer complaints submitted to the DFPI. Such responses will need to identify steps that have been taken to respond to the consumer complaint or inquiry, include responses received by the covered person from the consumer, and identify follow-up actions taken or intended to be taken by the covered person. Consumer reporting agencies under the Fair Credit Reporting Act are exempted from these requirements.
The DFPI may also issue rules (1) ensuring features of consumer financial products or services are fully, accurately, and effectively disclosed to consumers in a manner that permits consumers to understand the costs, benefits, and risks associated with the product or service, in light of the facts and circumstances, and (2) clarifying the applicability of state credit cost limitations, including rate and fee caps. Rules clarifying the applicability of credit costs limitations may not establish a new usury rate for any product, unless the agency has been granted separate, independent authority to set such rates.
The DFPI may bring civil or administrative actions seeking rescission or reformation of contracts, refunds of money or returns of real property, restitution, disgorgement, payment of damages, public notifications of violations, limitations on activities or functions of violators, and monetary penalties. In any such action, the DFPI may seek penalties that range from the greater of $2,500 for each act or omission that is the subject of the action or $5,000 for each day during which the violation continues, up to, for knowing violations, the lesser of one-percent of the person’s total assets, $1,000,000 for each day during which the violation continues, or $25,000 for each act or omission that is the subject of the action.
Additional Aspects of the CCFPL
The CCFPL requires the DFPI to establish a “Financial Technology Innovation Office.” It also includes an anti-retaliation provision that prohibits covered persons and service providers from retaliating against an employee for, among other things, objecting to or refusing to participate in any activity, policy, practice or assigned task if the employee reasonably believes it to be in violation of any law, rule, order, standard, or prohibition subject to the jurisdiction of the DFPI. The CCFPL requires the DFPI’s Commissioner to report to the Legislature annually. The report will include (1) a summary of enforcement actions in prior year; (2) a review of business models in use among covered persons; (3) a review of proposed regulations; (4) details on activities conducted by the Financial Technology Innovation Office; (5) a summary of the DFPI’s outreach and education efforts; and (6) any other request by the Legislature.
In addition to a new name, the DBO will be gaining authority over significantly more California financial services providers, the ability to enforce consumer finance laws that previously did not have a primary regulator, and a substantially increased rulemaking authority. We may have to wait and see how aggressive the DFPI is in exercising its new UDAAP rulemaking and enforcement authority, but we note that its authority is expansive. And, while the newly created exemptions to the CCFPL may provide some with a sense of solace, we caution that Governor Newsom’s 2020-2021 Budget has provided the DFPI with funding to significantly ramp-up its operations and hiring. We will continue to track these developments as they occur.