State Law

OCC’s Final “True Lender” Rule Takes Effect

December 27, 2020 By Stephen Ornstein

A&B ABstract:

On October 27, 2020, the Office of the Comptroller of the Currency (“OCC”) issued a noteworthy final rulemaking that sets forth when a national bank or federal savings association originates a loan and is deemed the “true lender” in the context of a partnership between a bank and a non-bank third party, known commonly as a marketplace lending arrangement.

Under the rule, the OCC considers the bank the “True Lender” if it: (i) is named as the lender in the loan agreement, or (ii) funds the loan. The rule clarifies, however, that under these arrangements, the bank retains the compliance, underwriting, and credit risk obligations associated with the origination of such loans. The rule becomes effective on December 29, 2020.

Background

Marketplace lending arrangements involve a partnership between a bank and a non-bank third party to offer consumers or small businesses, as the case may be, a variety of often non-traditional consumer and business loan products that are marketed and originated through innovative technologies. The advantage of these products is that consumers and small businesses are able to access credit quickly, in certain cases from their smart phones, without the laborious underwriting and approval procedures associated with traditional brick and mortar lending.

The bank partner, who is the named originator in the lending documents, is able to export the often very favorable interest rate of the state where it is located without regard to state usury and fee limits, and is in most instances, exempt from state loan originator/servicer licensing requirements by virtue of being a bank.

Scrutiny of Marketplace Lending Arrangements

Marketplace lending arrangements have faced scrutiny from governmental regulators and courts over the past several years, and some have been derided as “rent-a charter” schemes under which the non-bank partner essentially offers the particular loan products with minimal input from the bank partner to, among other things, evade state usury and fee limitations and licensing requirements that would ordinarily be applicable to the non-bank partner.

The OCC Rulemaking

In the rule, however, the OCC observed that marketplace lending arrangements expand credit opportunities beyond the reach of the customary lending traditionally offered by banks. The OCC recognized some of the challenges raised about such arrangements, and issued the rule to provide “legal certainty” regarding these partnerships and to encourage banks to enter into them. Under the rule, a bank makes a loan when, as of origination, the bank (i) is names as the lender in the loan agreement or (ii) funds the loan.

To dispel any notion that the rule will facilitate “rent-a-charter” arrangements, the OCC clarifies that when making loans under these marketplace arrangements, banks are responsible for:

establishing and maintaining prudent underwriting practices that (1) are commensurate with the types of loans the bank will make and consider the terms and conditions under which they will be made; (2) consider the nature of the markets in which the loans will be made; (3) provide for consideration, prior to credit commitment, of the borrower’s overall financial condition and resources, the financial responsibility of any guarantor, the nature and value of any underlying collateral, and the borrower’s character and willingness to repay as agreed; (4) establish a system of independent, ongoing credit review and appropriate communication to management and to the board of directors; (5) take adequate account of concentration of credit risk; and (6) are appropriate to the size of the institution and the nature and scope of its activities.

Lenders’ Compliance Obligations

Notably, the OCC also tasks banks with the responsibility to (i) undertake comprehensive loan documentation practices, (ii) adopt internal risk management controls, and (iii) ensure compliance with all laws applicable to the marketplace lending programs offered. Further, the OCC warns banks to ensure that they adequately supervise their third-party partners, and that the loans offered under such arrangements do not contain predatory, unfair or deceptive or abusive features.

Takeaways

The OCC rulemaking is a significant victory for marketplace lending arrangements, and provides needed guidance regarding ensuring that these partnerships comply with applicable law. The OCC rule, like the recent OCC and FDIC rulemakings affirming the “Valid-When-Made” doctrine, has been harshly criticized by certain state regulators and consumer groups for circumventing state usury, licensing and consumer protection laws. Further, this OCC rulemaking may be amended or withdrawn by the incoming Biden Administration, especially since the current OCC Director serves in an acting capacity, and could be replaced by a more consumer-oriented leader.

Consistent with the OCC rule, we recommend that parties in marketplace lending arrangements heed the following to ensure that the bank is deemed the “true lender”:

the bank must play the primary role in underwriting and making credit decisions;
the bank must play a major role in creating, branding and marketing the program; these tasks may not be performed exclusively by the non-bank partner;
the bank needs to make the required disclosures to the consumer in its name;
The consumer should be aware that it’s receiving a loan from the bank; not the non-bank partner;
the bank should hold the predominant economic interest in the transaction through an examination of the totality of the circumstances and
at a minimum, the non-bank partner should be licensed under applicable state law to buy the loans from the bank and to service the loans.

California AG Proposes Regulatory Changes to CCPA

December 22, 2020 By Consumer Finance Team

On December 10, the California Attorney General’s office provided “Notice of Fourth Set of Modifications” to regulations under the California Consumer Privacy Act. The new proposed regulatory text would modify the current regulations which took effect in August. The latest proposal responds to comments on a prior draft and primarily addresses the presentation of the right to opt out of sales of personal data. The California AG has provided a web page with full details on this latest rulemaking effort.

Alston & Bird Analyzes New Guidance on Remote Work in Client Alert

December 7, 2020 By Consumer Finance Team

As the COVID-19 pandemic continues to persist across the nation, some state regulators have begun to consider, or have adopted, measures to allow employees of licensed entities to work from home, both during the pandemic and permanently thereafter.

Alston & Bird has issued a client alert unpacking a pair of state rules that extend or make permanent regulations authorizing financial institutions to allow employees to work from home.

Alston & Bird Analyzes New California Privacy Rights Act in Client Alert

November 9, 2020 By Consumer Finance Team

On November 3, California voters approved a ballot initiative containing the California Privacy Rights Act of 2020. The ballot initiative significantly revises the existing California Consumer Privacy Act to create arguably the most comprehensive state privacy law in the United States.

Alston & Bird has now issued a client alert explaining key impacts of this law. The client alert outlines essential steps for compliance, explains impacts on existing law, and outlines the operation of a dedicated new privacy regulator and enforcement authority, the California Privacy Protection Agency. You can read the client alert here.

California Enacts Debt Collector Licensure Law

November 2, 2020 By Nanci Weissgold, Anoush Garakani

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.