The California Department of Business Oversight (DBO) has issued an invitation for comments from stakeholders in developing regulations to implement SB 1235, the bill signed into law on September 30, 2018 that requires consumer-like disclosures to be made for certain commercial financing products, including small business loans and merchant cash advances.  Companies providing such financing are not required to comply with the new disclosure requirements until the DBO’s final regulations become effective.

The DBO’s invitation provides an important opportunity for providers of commercial financing products to engage with and educate the DBO as it develops proposed regulations.  Comments must be submitted by January 22, 2019.

In the invitation, the DBO lists the following 14 specific potential topics for rulemaking:

  • Definitions (The DBO’s questions include whether the definitions can be read to cover transactions, individuals, or entities not intended to be regulated by the disclosure requirements or result in ambiguity regarding whether a transaction, individual, or entity is subject to the disclosure requirements.)
  • Commercial financing requiring estimated term disclosures (The DBO asks what commercial financing transactions may require an estimated term disclosure and why and suggests that stakeholders provide sample contracts that may require such a disclosure.)
  • Disclosure of method, frequency, and amount of payments for commercial financing with flexible or contingent repayment obligations (The DBO suggests that stakeholders provide examples of these types of financing and asks how providers should make the disclosures required for such contracts.)
  • Annualized rate disclosure (The DBO notes different methods that might be used for the annualized rate disclosure and asks about the benefits and drawbacks of each disclosure and ways to reduce potential confusion to financing applicants caused by the disclosure.)
  • Types of commercial financing (The DBO asks for examples of transactions other than fixed-rate, fixed-payment financing that are subject to SB 1235 (noting such examples may include merchant cash advances and recourse and non-recourse factoring), anticipated compliance obstacles in such transactions, and how the DBO can address such obstacles.)
  • Types of financing requiring estimated annualized rates (The DBO asks for the types of commercial financing that will require estimated annualized rates and why.)
  • Fees and charges included in an annualized rate calculation (The DBO asks what fees and charges should be included in the calculation.)
  • Calculating estimated terms and estimated annualized rates (The DBO asks how estimated terms and rates should be calculated for the transactions subject to SB 1235, such as transactions with payments set as a percentage of a business’s gross receipts.)
  • Reliance upon internal underwriting criteria to calculate estimated terms and estimated annualized rates (The DBO asks if the calculation methodology it establishes should require a provider to rely upon the internal assumptions or calculations it used to underwrite the transaction.)
  • Explanatory and qualifying language in connection with estimated terms and estimated annualized rates (The DBO asks what explanatory and qualifying language providers should include when disclosing such estimates.)
  • Disclosures for factoring and asset-based lending transactions with master financing agreements (The DBO asks what rules it should establish to clarify when disclosures based on estimates are permitted and to govern what examples, such as financing amount, a provider may use in disclosures.)
  • Tolerances (The DBO asks what accuracy requirements and tolerances it should establish and why.)
  • Disclosure formatting (The DBO asks what information should be highlighted or prioritized and about the placement and font to be used.)
  • Prepayment policies (The DBO asks what prepayment policies and charges are common for transactions subject to SB 1235 and how such policies and charges are currently characterized to customers.)

Ballard Spahr attorneys Chris Willis, Scott Pearson, and Taylor Steinbacher discuss recent noteworthy developments in California law. Chris, who chairs Ballard’s Consumer Financial Services Litigation Group, and Scott, a partner in the Consumer Financial Services group, discuss the recently decided California Supreme Court De La Torre case, which makes licensed lenders vulnerable to claims that high-interest rate loans over $2,500 may be unconscionable. Chris and Taylor, an associate in the Consumer Financial Services group, discuss the California Consumer Privacy Act of 2018, a statute giving substantial new privacy rights to California consumers. Finally, Scott and Chris discuss reactions to, and the effects of, the 2017 California Supreme Court McGill case. That case limits the ability to enforce arbitration clauses in cases requesting public injunctive relief.

To listen and subscribe to the podcast, click here.

Less than three months after California passed the California Consumer Privacy Act of 2018 (CCPA), Governor Jerry Brown signed SB 1121 this week, making a number of technical and substantive changes to the law.

Of particular note: SB 1121 modifies the financial institution carve-out language in CCPA section 1798.145(e). While the change is a welcome development for entities subject to regulation under the Gramm-Leach-Bliley Act (GLBA), it does not grant full exemption from the CCPA. Therefore, GLBA-regulated entities that collect information online will need to analyze the CCPA’s requirements and how they apply to a specific business.

The original carve-out language provided that:

“This title shall not apply to personal information collected, processed, sold, or disclosed pursuant to the federal Gramm-Leach-Bliley Act (Public Law 106-102), and implementing regulations, if it is in conflict with that law.”

As we have previously discussed, that language raised a number of issues, such as what would constitute a “conflict” between the GLBA and the CCPA, and whether the language was even consistent with the GLBA insofar as personal information is not collected, processed, sold, or disclosed pursuant to the GLBA. The provision also failed to address the relationship between the CCPA and California’s Financial Information Privacy Act.

The new language tries to resolve some of those issues, stating:

“This title shall not apply to personal information collected, processed, sold, or disclosed pursuant to the federal Gramm-Leach-Bliley Act (Public Law 106-102), and implementing regulations, or the California Financial Information Privacy Act … . This subdivision shall not apply to Section 1798.150.”

The new language removes the phrase “if it is in conflict with that law,” incorporates the California Financial Information Privacy Act, and adds a sentence providing that financial institutions are still subject to Section 1798.150. The preamble explains those changes as follows:

“The bill would also prohibit application of the act to personal information collected, processed, sold, or disclosed pursuant to a specified federal law relating to banks, brokerages, insurance companies, and credit reporting agencies, among others, and would also except application of the act to that information pursuant to the California Financial Information Privacy Act.”

While the revised language is no doubt welcomed by GLBA-regulated entities, it should not be interpreted as a full exemption. Rather, GLBA entities will remain subject to the provisions and requirements of the CCPA if they engage in activities falling outside of the GLBA—which they almost certainly do.

By way of explanation, the GLBA regulates financial institutions’ management of nonpublic personal information, which is defined in 15 U.S.C. § 6809 as personally identifiable financial information: 1) provided by a consumer to a financial institution; 2) resulting from any transaction with the consumer or any service performed for the consumer; or 3) otherwise obtained by the financial institution.

The CCPA defines “personal information” much more broadly to include “information that identifies, relates to, describes, is capable of being associated with, or could reasonably be linked, directly or indirectly, with a particular consumer or household.” The CCPA identifies numerous examples such as online identifiers, Internet Protocol addresses, email addresses, browsing history, search history, geolocation data, and information regarding a consumer’s interaction with a website or online application or advertisement. Notably, the CCPA’s definition also includes any “inferences drawn” from any personal information that is used “to create a profile about a consumer reflecting the consumer’s preferences, characteristics, psychological trends, predispositions, behavior, attitudes, intelligence, abilities, and aptitudes.”

Therefore, to the extent that GLBA-regulated entities are using targeted online advertising, tracking web page visitors, and/or collecting geolocation data—to name a few examples—either through their web pages or apps, they will need to analyze the CCPA’s requirements.

As for the new statutory language providing that “[t]his subdivision shall not apply to Section 1798.150,” the impact of that sentence cannot be overstated.

Section 1798.150 sets forth a private right of action for consumers to seek statutory damages of not less than $100 and not greater than $750 “per consumer per incident or actual damages, whichever is greater” if the consumer’s information “is subject to an unauthorized access, exfiltration, theft, or disclosure as a result of the business’s violation of the duty to implement and maintain reasonable security procedures and practices.” In other words, GLBA-regulated entities will still be subject to millions of dollars of potential damages if they experience a data breach.

It appears likely that California Governor Jerry Brown will sign a bill passed on August 31 by the state’s Senate, Senate Bill 1235, which would create consumer-style disclosure requirements for certain commercial loans and other finance products, such as merchant cash advances and factoring transactions.

Notably, the new disclosure requirements would apply to sponsors of bank-model lending programs in addition to companies directly extending certain forms of commercial credit pursuant to California Finance Lender licenses.  The requirements would apply whenever the company receiving financing is located in California, even if the company providing the financing is located outside the state.  Although the bill contains several ambiguities and potential loopholes created by last-minute amendments, Governor Brown is expected to sign it over industry opposition.

The bill’s central feature is a requirement that “providers” make a series of disclosures before consummation of a covered transaction and must obtain the recipient’s signature on the disclosures which include the “total dollar cost of the financing” and the “total cost of the financing expressed as an annualized rate.”  As used in the bill, the term “provider” includes both a “person who extends a specific offer of commercial financing to a recipient,” and certain bank-model program sponsors, i.e., “a nondepository institution, which enters into a written agreement with a depository institution to arrange for the extension of commercial financing by the depository institution to a recipient via an online lending platform administered by the nondepository institution.”

“Commercial financing” is defined broadly to include “an accounts receivable purchase transaction, including factoring, asset-based lending transaction, commercial loan, commercial open-end credit plan, or lease financing transaction intended by the recipient for use primarily for other than personal, family, or household purposes.”  This would appear to include commercial credit cards but not commercial sales finance contracts.  There are exemptions and carve-outs for, among other things, depository institutions, financings of more than $500,000, closed-end loans with a principal amount of less than $5,000, and transactions secured by real property.

For more information about the bill, see our legal alert.

 

Resolving an ambiguity in the California Finance Lender’s Law (CFLL), the California Supreme Court unanimously held that borrowers may use the unconscionability doctrine to challenge the interest rate on consumer loans of $2,500 or more, despite the fact that the CFLL has deregulated interest rates on such loans.  Although unconscionability claims of this nature will be difficult to prosecute, the decision creates heightened risk for nonbank consumer lenders doing business in California, particularly when lending at high rates.  Furthermore, because the decision could be followed in other states or applied in other contexts, such as small business lending, it also could impact loans made under other statutes that have deregulated interest rates, as opposed to statutes that affirmatively authorize interest rates established by contract.

In addition to copycat lawsuits by private plaintiffs alleging their interest rates are unconscionable, high-rate lenders could even face enforcement actions challenging their rates.  In California, it is possible that the state’s Attorney General, local prosecutors, or the California Department of Business Oversight (which has regulatory and supervisory jurisdiction over CFLL licensees) will pile on.

On October 16, 2018, from 12 p.m. to 1 p.m. ET, Ballard Spahr attorneys will hold a webinar, “The Sky is Not The Limit: California Supreme Court Re-Regulates Deregulated Interest Rates.”  The webinar registration form is available here.

See our legal alert for a fuller discussion of the California Supreme Court’s decision.

 

 

On July 28, 2017, California Governor Jerry Brown’s Office of Business and Economic Development recognized the California Department of Business Oversight for a successful Lean Six Sigma project that dramatically reduced the processing time for applications to amend financial services licenses.  Through the project, the Department cut the processing time from an average of 100 days to only 1.9 days!

We have previously commented that the time it takes state authorities to process license applications can be a significant factor for FinTech and other financial services companies to consider when determining how to structure their business.  State regulators who want to improve the business climate in their states would be well-advised to follow California’s lead in tackling this important issue.

California’s legislative effort to allow consumers to sue financial institutions for fraud even though they have agreed to arbitrate such disputes passed the Assembly Judiciary Committee this week and is expected to pass the full Assembly later this summer.  The bill, which passed the state Senate in May, would amend California’s civil procedure rules governing arbitration to prohibit courts from granting a motion to compel arbitration made by a financial institution which seeks to apply an otherwise valid arbitration agreement to a purported contractual relationship fraudulently created by the institution with the consumer’s personal identifying information and without the consumer’s consent.

We believe that this legislative effort is an exercise in futility since the bill, if passed, will be preempted by the Federal Arbitration Act (FAA), which makes arbitration agreements “valid, irrevocable, and enforceable.”  For example, the U.S. Supreme Court has held that states are prohibited from creating categorical exceptions to the FAA that Congress did not authorize.  Thus, it reversed a decision of West Virginia’s highest court which  refused to permit arbitration of personal injury and wrongful death claims brought against nursing homes.  And, this past May, in Kindred Nursing Centers Limited Partnership v. Clark, the Court reversed the Kentucky Supreme Court’s ruling that powers of attorney must specifically authorize the representative to enter into an arbitration agreement on behalf of the grantor, holding that the state court violated the fundamental FAA principle that arbitration agreements must be placed “on an equal footing with all other contracts” and cannot be singled out for special treatment.  Notably, even Professor Jeff Sovern, who is generally supportive of anti-arbitration initiatives and arguments, has asked,  “if California enacts the law, how can it avoid being preempted under the Federal Arbitration Act, as SCOTUS has interpreted it?”

Scores of consumer advocate groups have registered support for the California bill, while a similar number of industry and trade groups have voiced opposition.