Alston & Bird Consumer Finance Blog

Licensing

Application Deadline Looms Under California Debt Collection Licensing Act

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On September 25, 2020, California Governor Gavin Newsom approved Senate Bill 908 – enacting the Debt Collection Licensing Act (DCLA). The DCLA, which takes effect January 1, 2022, requires a person or entity engaging in the business of debt collection in California to be licensed and provides for regulatory oversight of debt collectors by the Department of Financial Protection and Innovation (DFPI). Pursuant to the DCLA, debt collectors who submit an application by Dec. 31, 2021 may continue to operate in California pending the denial or approval of their application. On April 23, 2021, the Commissioner of the DFPI (the Commissioner) issued proposed regulations (the Regulations) to adopt procedures for applying for a debt collection license under the DCLA. On June 23, 2021, after consideration of public comments, the Commissioner issued a Notice of Modifications to the Regulations (the Modifications). On November 15, 2021, the Commissioner issued a second Notice of Modifications to the Regulations (the Additional Modifications).

The Regulations

The Regulations – among other things –  define relevant terms, include information regarding application procedures, and contain other miscellaneous information regarding licensing. The definition of “debt collector” was substantially the same as the broad definition under the enacted DCLA (which in turn is very similar to the Rosenthal FDCPA definition) and encompasses a wide array of activity in relation to consumer debt, including mortgage debt. Likewise, the regulations define “debt buyer” identical to the existing definition in Section 1788.50 of the Civil Code, which contains an exception for purchasers of a loan portfolio predominantly consisting of consumer debt that has not been charged off. See our prior post on the DCLA for more information regarding the scope of the licensure requirement.

The Regulations designate NMLS for the submission and processing of applications and reference and rely upon uniform NMLS forms and procedures. The application process includes completion of the NMLS uniform licensing form (MU1), including by any affiliates to be licensed under the same license. The application process includes collection of information regarding other trade names, web addresses used by the applicant, contact employees, organizational information (including information on any indirect owners), a detailed statement of business activities, certificates of good standing, and sample dunning letters. Applicants do not need to provide bank account information in Section 10 of Form MU1 or information on a qualifying individual in Section 17 of Form MU1. Fingerprinting (which is processed outside of NMLS), criminal history checks, and credit report authorizations are required for certain related individuals, including officers, directors, managing members, trustees, responsible individuals, and any individual owning directly or indirectly 10% or more of the applicant. An investigative background report is also required for any such individual who is not residing in the United States. Branches must also be licensed through NMLS uniform forms (MU3). Notice and additional filing requirements apply upon any change in the information submitted. The Regulations also contain surety bond requirements and outline the Commissioner’s authority in reviewing and examining applicants.

First Notice of Modification to the Regulations

On June 23, 2021 the Commissioner issued the Modifications which made several changes to the Regulations including, revising the definition of “applicant” to make clear that an affiliate who is not applying for a license is not an “applicant” – this revision, however, does not seem to impact the ability of applicants to include affiliates under a single license. Further, the Modifications added an English language requirement for documents filed with the DFPI. The Modifications also eliminated certain requirements to provide the Commissioner with additional copies of documents submitted through NMLS and otherwise revised requirements to allow information to be processed predominately through NMLS. The Modifications also eliminated the need to file certain fingerprinting documents in NMLS. Additionally, the Modifications added a requirement to explain derogatory credit accounts for any individual subject to credit reporting requirements. The Modifications also removed requirements that applicants provide information concerning compliance reporting and audit structure, the extent to which they intend to use third parties to perform any of their debt collection functions, that applicants file a copy of their policies and procedures with the NMLS, and certain annually collected financial information. The Modifications also eliminate the Commissioner’s ability to modify surety bond amounts.

Second Notice of Modification to the Regulations

On November 15, 2021 the Commissioner issued the Additional Modifications to the Regulations which amended the definitions of “branch office” and “debt collector.” “Branch office” was amended to mean any location other than the applicant’s or licensee’s principal place of business so long as “activity related to debt collection occurs” at that location and that the location is “held out to the public as a business location or money is received at the location or held at the location.” The Additional Modifications state that “holding a location out to the public” includes the receipt of postal correspondence and meeting with the public at the location, placing the location on letterhead, business cards, and signage, or making “any other representation to the public that the location is a business location.”

The definition of “debt collector” was amended to reference the definition set forth in the DCLA, rather than actually defining the term. Thus, any future revisions to the DCLA definition will automatically apply to the regulations as well.

Conclusion  

Debt Collection agencies and participants in California should anticipate additional regulations from the DFPI as aspects of the DCLA continue to be hammered out – in the interim any entity subject to licensing who has not done so already should submit an application before end of year to ensure continued operations.

Highlights of Washington Department of Financial Institutions’ Recent Mortgage Industry Webinar

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A&B ABstract: In a webinar earlier this month, the Washington Department of Financial Institutions provided updates on licensing, rulemaking, and recent examination findings.

On June 2, the Washington Department of Financial Institutions (“DFI”) held a webinar covering mortgage industry updates in the state.  Among the topics discussed were:

Licensing Updates

Between May 2020 and May 2021, the DFI has seen a substantial increase in licensing activities involving issuances and renewals for both mortgage loan originators and companies, including MLO temporary authority to operate.

Rulemaking Updates

On June 15, the DFI will hold an industry stakeholders meeting to consider amending the rules under the Consumer Loan Act (“CLA,” WAC 208-620) and the Mortgage Broker Practices Act (“MBPA,” WAC 620-660) to allow MLOs to work from home without licensing the residence as a branch office.  The proposed rules will implement enacted Senate Bill 5077 (2021 Wash. Sess. Laws 15), which takes effect on July 25.

Examination Updates

During the first quarter of 2021, the DFI conducted examinations for the review period of October 2020 through April 2021.  Commonly identified violations included:

For mortgage loan servicing:
  • Failure to file accurate annual assessments;
  • Failure to suppress adverse credit reporting for CARES Act forbearances, most often during the initial months of forbearance;
  • Failure to maintain records (typically involving subservicers);
  • Inaccurate adjustable rate change information (i.e., incorrect margin or index); and
  • Inaccurate consolidated annual reports.
For mortgage loan origination, under the CLA:
  • Failure to update surety bond amounts as required by WAC 208-620-320;
  • Failure to date residential mortgage loan applications (initial and revised) as required by WAC 208-620-550(18);
  • Failure to have day-to-day operations managers licensed as an MLO; and
  • Failure to have a written supervisory plan in place.
For mortgage loan origination, under the MBPA:
  • With respect to quarterly mortgage condition reports (“MCRs”), failure to timely file and/or failure to file accurate MCRs;
  • Failure to develop and implement an adequate Anti-Money Laundering program;
  • Failure to provide updated lock-in agreements when lock terms change;
  • Failure to include a link to the company’s NMLS consumer access website on all internet advertisements; and
  • Advertising violations, namely using disallowed phrases (such as “best” or “lowest” when describing rates, fees, and programs) or advertising “no closing costs” or that something is “free”.

Takeaways

The webinar suggests that the pandemic has created both a surge in license applications and renewals, as well as increases in the volume of mortgage loans, for Washington licensees.

The examination findings serve as a reminder to Washington State licensees to be mindful of their own compliance management and quality control processes, in order to ensure that they are conducting business activities in compliance with all statutes and regulations (to include the CLA and MBPA).

California Enacts Debt Collector Licensure Law

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A&B Abstract:

On September 25, California Governor Gavin Newsom signed into law Senate Bill 908, which, in part, enacts the California Debt Collection Licensing Act (“Act”). Effective January 1, 2022, the Act will require the licensure of persons that engage in debt collection in California with California residents.   Notably, the Act also applies to entities collecting debt on their own behalf.  The Act’s requirements are in addition to those arising under the California Rosenthal Fair Debt Collection Practices Act (the “Rosenthal Act”), which regulates the practices of debt collectors.

A New Licensing Obligation

The Act provides that “[n]o person shall engage in the business of debt collection in this state without first obtaining a license [from the California Department of Financial Protection and Innovation (“DFPI”), which succeeds the Department of Business Oversight effective January 1, 2021].”

What is debt collection and who is a debt collector?

The Act defines “debt collection” as “any act or practice in connection with the collection of consumer debt.”

“Consumer debt” is defined as “money, property, or their equivalent, due or owning, or alleged to be due or owing, or alleged to be due or owing, from a natural person by reason of a consumer credit transaction,” and specifically includes mortgage debt and “charged-off consumer debt” as defined in Section 1788.50 of the California Civil Code.

“Debt collector” means any person who, “in the ordinary course of business, regularly, on the person’s own behalf or on behalf of others, engages in debt collection.” The term includes any person, “who composes and sells, or offers to compose and sell, forms, letters and other collection media used or intended to be used for debt collection.” The term also includes a “debt buyer” as defined in Section 1788.50 of the California Civil Code.

Exclusions

The Act contains several exclusions from both its licensing obligation and the Act’s substantive provisions. Notably, the Act excludes from its scope, depository institutions, which is defined to include FDIC-insured out-of-state state-chartered banks, licensees under the California Financing Law, licensees under the California Residential Mortgage Lending Act, licensees under the California Real Estate Law, and a trustee performing acts in connection with a nonjudicial foreclosure, among others. Additionally, the Act does not apply to debt collection regulated by California’s Student Loan Servicing Act (Cal. Fin. Code §§ 28000 et seq.).

However, it should be noted that the Act authorizes the Commissioner of the DFPI to take action against those exempt from the Act, for violations of the Rosenthal Act (Cal. Civ. Code §§ 1788 et seq.) or the California Fair Debt Buying Practices Act (Cal. Civ. Code §§ 1788.50 et seq.).  Such actions may include, after notice and an opportunity for a hearing, ordering the person to (1) desist and refrain from engaging in the business of further continuing the violation, or (2) pay ancillary relief, which may include refunds, restitution, disgorgement, and payment of damages, as appropriate, on behalf of a person injured by the conduct or practice that constitutes the subject matter of the assessment.

California Debt Collector Application

Persons wishing to obtain a California Debt Collector License must submit an application to the DFPI. Among other requirements under the Act, applicants must submit:

  • A completed license application signed under the penalty of perjury;
  • An application and an investigation fee; and
  • A sample of the initial consumer debt validation letter required by 15 U.S.C. § 1692g that the licensee will use in correspondence with California consumers.

The DFPI has not yet released an application for this license. However, the Act authorizes the DFPI to require that applications be submitted through the NMLS.  We anticipate the DFPI will require that applications be submitted and processed through the NMLS.

Duties of Debt Collector Licensees

The Act imposes express duties on licensed debt collectors. Specifically, all licensed debt collectors must: (1) develop policies and procedures reasonably intended to promote compliance with the Act; (2) file any required reports with the Commissioner; (3) comply with the provisions of the Act and any regulation or order of the Commissioner; and (4) submit to periodic examination by the DFPI as required by the Act and any regulations promulgated thereunder.

Licensees must also maintain a surety bond in a minimum amount of $25,000.  The Commissioner is authorized to require licensees to submit bonds, riders, and endorsements electronically through the NMLS’s electronic surety bond function.

Additionally, each licensee will be required to pay an annual fee, representing the debt collector’s “pro rata share of all costs and expenses reasonably incurred in the administration of [the Act], as estimated by the commissioner, for the ensuing year and any deficit actually incurred or anticipated in the administration of [the Act] in the year in which the annual fee is levied.”

Licensees are also required to file an annual report with the Commissioner, on or before March 15, that contains all relevant information that the Commissioner reasonably requires concerning the business and operations conducted by the licensee in California during the preceding calendar year, including information regarding collection activity. The report must, at minimum, require disclosure of all of the following:

  • The total number of California debtor accounts purchased or collected on in the preceding year;
  • The total dollar amount of California debtor accounts purchased in the preceding year;
  • The face value dollar amount of California debtor accounts in the licensee’s portfolio in the preceding year;
  • The total dollar amount of California debtor accounts collected in the preceding year, and the total dollar amount of outstanding debt that remains uncollected;
  • The total dollar amount of net proceeds generated by California debtor accounts in the preceding year;
  • Whether or not the licensee is acting as a debt collector, debt buyer, or both; and
  • The case number of any action in which the licensee was held liable by final judgment under the Rosenthal Act (Cal. Civ. Code §§ 1788 et seq.) or the California Fair Debt Buying Practices Act (Cal. Civ. Code §§ 1788.50 et seq.).

Notably, these individual annual reports will be made available to the public for inspection.

DFPI Authority Under the Act

As noted above, the Act grants the Commissioner with broad authority to administer the Act, through investigations and examinations, and to adopt rules and regulations consistent with that authority.

If the Commissioner determines that a person who is required to be licensed under the Act is engaged in business as a debt collector without a license, or a person or licensee has violated any provision of the Act, the Commissioner may, after notice and an opportunity for a hearing, order such person to (1) desist and refrain from engaging in the business of further continuing the violation, or (2) pay ancillary relief, which may include refunds, restitution, disgorgement, and payment of damages, as appropriate, on behalf of a person injured by the conduct or practice that constitutes the subject matter of the assessment.  In addition, the Commissioner has the authority to suspend or revoke licenses issued under the Act.

Takeaway

Effective January 1, 2022, California will require “debt collectors” engaged in the business of debt collection in the state to obtain a debt collection license.  The Act also authorizes the DFPI to enforce the provisions of the Rosenthal Act against “debt collectors,” which the Act defines consistent with the Rosenthal Act.

The Act should be of particular note for persons that service and collect on their own debt, as California joins a growing list of states that require a license for first-party collection activity.  Unlike other state debt collection laws, certain licensees in California may avail themselves of an exemption from the Act’s licensing obligation. Those currently acting as debt collectors in California that do not qualify for an exemption should closely monitor DFPI guidance for the release of application procedures.

New Jersey Releases Application Procedures for Student Loan Servicers

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A&B ABstract: As we have previously discussed, effective November 27, 2019, Senate Bill 1149 (2019 N.J. Laws 200) (the “Act”), creates New Jersey’s “Student Loan Bill of Rights” and prohibits any person from “act[ing] as a student loan servicer, directly or indirectly, without first obtaining a license” from the Department of Banking and Insurance (“DOBI”).

Although the Act became effective in 2019, the DOBI did not provide an application or an application mechanism to apply for a New Jersey student loan servicer license in 2019. The DOBI recently released guidance on the application process and operational requirements for those wishing to service student loans in New Jersey.

Background:

On September 1, 2020, the DOBI released Bulletin No. 20-31 (the “Bulletin”), which provides application procedures to apply for a license. The DOBI will begin to accept license submissions from all persons on September 15, 2020. The application must be submitted through the Nationwide Mortgage Licensing System (“NMLS”).

Persons that are currently acting as student loan servicers in the state that submit license forms prior to the close of business on December 31, 2020 may continue to operate as student loan servicers, pending DOBI’s approval of the license forms. All student loan servicers that are not exempt from licensure must submit all requirements for a license by December 31, 2020.

License Types

The Act creates two separate license types. The New Jersey Student Loan Servicer license is required for persons servicing student loans other than Federal Contract Student Loans (“FCSLs”). A Federal Contract Student Loan license is required for persons servicing student loans pursuant to a contract awarded by the United States Secretary of Education under 20 U.S.C.S. 1087f.

Persons servicing FCSLs will be automatically issued a limited, irrevocable license, upon adequately demonstrating their eligibility. Those servicing FCLSs and student loans other than FCLSs are required to obtain a both a Federal Contract Student Loan license and a New Jersey Student Loan Servicer license, and must comply with all requirements applicable to both license types.

Exemptions

As we previously noted, the Act’s licensure requirement does not apply to: (1) any state or federally chartered bank, savings bank, savings and loan association or credit union; (2) any wholly owned subsidiary of any bank or credit union; and (3) any operating subsidiary where each owner of the operating subsidiary is wholly owned by the same bank or credit union.

New Jersey Student Loan Servicer Application

Persons seeking to obtain a New Jersey Student Loan Servicer license must complete a license application through the NMLS. Amongst other application requirements, applicants must submit:

  • A nonrefundable license fee of $5,000;
  • A nonrefundable investigation fee of $500;
  • A surety bond in the amount of $30,000 plus an additional $30,000 per branch;
  • A financial statement demonstrating net worth of $250,000 prepared by a CPA or public account dated within 90 days of the applicant’s fiscal year end;
  • A business plan; and
  • An ownership chart.

Beginning in 2021, all student loan servicer licenses will expire at the close of business on December 31 each year. Renewals will be processed through the NMLS.

Federal Contract Student Loan Servicer License Application

As noted, applicants that service FCSLs must apply for a license to engage in student loan servicing pursuant to a contract awarded by the Secretary of Education. Applicants must complete a license form and submit the form through the NMLS. Applicants must submit:

  • A nonrefundable license fee of $5,000;
  • A certification indicating that the person is servicing student loans pursuant to a contract awarded by the Secretary of Education. The certification must be signed and sworn to under oath before a notary public;
  • For those solely servicing federal contract student loans, a surety bond in the amount of $30,000, plus an additional $30,000 for each branch office. Those servicing both federal contract student loans and student loans of any other type seeking both license types, is only required to obtain one surety bond in the amount of $30,000.

Operational Requirements and Penalties

The Bulletin discusses operational requirements for all student loan servicers. Among other operational requirements, all student loan servicers (regardless of license status) must: (1) maintain records; (2) file a report with the DOBI annually, setting forth information concerning business conducted in the previous calendar year; and (3) comply with all DOBI investigations and examinations.

The Bulletin notes that the Commissioner of the DOBI may suspend, revoke, or refuse to review the license of licensees who violate the Act.  Further, the Commissioner is empowered to bring a civil action against any person who violates the Act, and may seek a monetary penalty of note more than $10,000 for the first violation, and $20,000 for the second and each subsequent offense.

The Act also created a private right of action for borrowers who suffer ascertainable loss of money as a result of the use or employment by a student loan servicer of any method, act, or practice declared unlawful under the Act. Borrowers are eligible for terrible damages as well as attorney’s fees, filing fees, and reasonable costs of suit.

Takeaway:

Those currently servicing student loans in New Jersey should be prepared to submit a license application when the license application becomes active on September 15, 2020. All those currently engaged in student loan servicing in New Jersey must apply by December 31, 2020, or risk engaging in unlicensed activity after that date. Applicants should ensure that if they are servicing FCSLs that they apply for both license types.

Louisiana Enacts Virtual Currency Company Law

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A&B ABstract:  On June 13, Louisiana enacted a comprehensive new law imposing a licensing obligation on entities that engage in virtual currency business activity.

Effective August 1, 2020, House Bill 701 (the “Law”) will require the licensure of entities that engage in virtual currency business activity in Louisiana with Louisiana residents. The Law provides that an application will be provided through the Nationwide Mortgage Licensing System and Registry (“NMLS”), and we have confirmed with the regulator that the application will become live on the NMLS on August 1.

A New Licensing Obligation

The Law provides that “[a] person shall not engage in virtual currency business activity, or hold itself out as being able to engage in virtual currency business activity, with or on behalf of a resident…”

What is Virtual Currency Business Activity?

“Virtual currency business activity” means:

  1. “Exchanging, transferring, or storing virtual currency or engaging in virtual currency administration, whether directly through an agreement with a virtual currency control services vendor.
  2. Holding electronic precious metals or electronic certificates representing interests in precious metals on behalf of another person or issuing shares or electronic certificates representing interests in precious metals.
  3. Exchanging one or more digital representations of value used within one or more online games, game platforms, or family of games for either of the following:
    1. Virtual currency offered by or on behalf of the same publisher from which the original digital representation of value was received.
    2. Legal tender or bank credit outside the online game, game platform, or family of games offered by or on behalf of the same publisher from which the original digital representation of value was received.”

Exemptions/Applicability

Notably, the licensure provision excludes activity governed by the Electronic Fund Transfer Act, the Securities Exchange Act, the Commodities Exchange Act, and the Louisiana securities laws. Regulated financial institutions, attorneys providing escrow services, and title insurance companies providing escrow services are among the entities exempt from licensure.

Additionally, we note that not every virtual currency business may have to obtain a licensure under the Law. A person whose volume of virtual currency business activity in the United States dollar equivalent of virtual currency will not exceed $35,000 annually may engage in business without a license provided that they meet the statutory requirements and notify the Louisiana Office of Financial Institutions.

Enforcement/Violations

The Law grants the Office of Financial Institutions (“Office”) enforcement authority against licensees, registrants, and unlicensed persons.

First, the Office may bring an enforcement action against any such person who “materially violates any provision of this [Law], a rule adopted pursuant to the [Law], or any other law of [Louisiana] which applies to virtual currency business activity of a violator with, or on behalf of, a resident.”

Second, the Office may bring an enforcement action against such a person who “does not cooperate substantially with an investigation by the [Office], fails to pay a fee, or fails to submit a report or documentation.”

Third, the Office may bring an enforcement action against any such person who “in the conduct of its virtual currency business activity with, or on behalf, of a resident” engages in an unsafe or unsound act or practice, an unfair or deceptive act or practice, fraud or intentional misrepresentation, or misappropriation of legal tender, virtual currency, or other value held by a fiduciary, among other conduct.

Fourth, the Office may take enforcement action if a federal or state agency takes an action against the licensee, registrant, or person that would constitute an enforcement measure if the Office had taken the action.

Finally, a licensee. registrant, or unlicensed person may be subject to enforcement action for being “convicted of a crime related to its virtual currency business activity with, or on behalf of, a resident or involving fraud or felonious activity that, as determined by [the Office], makes the licensee, registrant, or person unsuitable to engage in virtual currency business activity.”

We do not note any private right of action under the Law or any remedies for consumers for a licensee that has violated any provisions of the Law.

Takeaway:

Louisiana’s passage of the Law is a state’s latest foray into cryptocurrency licensing, and signals the state’s willingness to continue to regulate cryptocurrency businesses.

Entities that will be required to obtain a license under the Law should be ready to apply on August 1, 2020, when the application becomes live on the NMLS.