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New Proposed Registration Requirements for Covered Financial Products and Services Under the California Consumer Financial Protection Law

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Last year, California passed the California Consumer Financial Protection Law (“CCFPL”), which renamed the Department of Business Oversight as the Department of Financial Protection and Innovation (“DFPI”) and expanded the authority of the department, including increased regulatory authority related to certain financial products. Under that widened purview, the DFPI has now proposed regulations requiring registration for certain financial product providers, including education financing and wage-based advances.

The CCFPL as Enacted

Under the statute, certain regulatory burdens apply to “covered persons” and “service providers” that broadly encompass entities offering extensions of credit and other consumer financial services and products, with certain exceptions and exemptions. With respect to the currently proposed regulations, the CCFPL allows the DFPI, with certain exemptions, to prescribe rules regarding registration requirements applicable to a covered person engaged in the business of offering or providing a consumer financial product or service. The CCFPL also states, however, that registration will not be required for any covered person licensed by the department under another law and who is providing a financial product or service within the scope of that license. The DFPI has sought comments regarding the proposed regulations including specifically “to clarify whether and when the registration requirements apply to Department licensees and licensees and registrants of other state agencies.” Comments on this and other potential issues with the proposed regulations may be submitted by December 20.

The Proposed Regulations

The proposed regulations, if finalized, would require registration for “subject products,” including for covered persons providing wage-based advances or education financing. Waged-based advances are defined in the proposed regulations as “funds paid to workers by a provider other than an obligor that are based on wages or compensation that a worker or the worker’s obligor has represented, and that a provider has reasonably determined, have been earned but have not, at the time of the advance, been paid to the worker for work performed for or on behalf of an obligor or obligors.” Education financing is defined to include any credit “extended for the purpose of funding postsecondary education and costs of attendance at a postsecondary institution, including, but not limited to, tuition, fees, books and supplies, room and board, transportation, and miscellaneous personal expenses.”

The proposal contemplates registration through the Nationwide Multistate Licensing System (NMLS), including use of uniform forms (“MU1”). Applicants are not required to complete Section 10 (“Bank Account Information”) or Section 17 (“Qualifying Individuals”) of Form MU1. With respect to described business activities, in addition to any other relevant activities, education financers would need to designate “private student loan lending,” while those providing wage-based advances fall into the category of “other – consumer finance” on the form. Registrants would also need to disclose other trade names, designate contact employees, provide organizational charts (including indirect owners), management charts, and detailed business descriptions. Registrants would also need identify certain individuals, including principal officers, directors, managing members, general partners, individuals controlling (directly or indirectly) 10% or more, and responsible individuals. Identified individuals do not need to complete fingerprinting. Branch offices would also be registered, including identification of branch managers, separately using form MU3. Changes in information submitted would also be updated in NMLS. Annual financial reporting and disclosures, as well as fees are proposed too.

Outside of NMLS, the regulations, if finalized as proposed, would require an applicant for registration to submit directly to DFPI supplemental information including sample forms. Education financers would need to include copies of third-party contracts and agreements as well as marketing material and additional sample documents. With respect to those providing wage-based advances, the supplemental application would also include additional sample contracts and agreements used to provide the service as well as additional information regarding the product cycle.

Conclusion  

The registration requirements are not effective until DFPI completes the comment period and other rulemaking procedures. It is unclear what the effective date of any future finalized regulations would be. It is also not clear if current industry participants will be able to continue to operate while registrations are pending once the rules are finalized. We will continue to monitor the situation as the regulations proceed.

New CFPB Chief Rohit Chopra Confirmed by Senate and Takes Immediate Action Against Big Tech Firms

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A&B Abstract:

On September 30, 2021, the Senate confirmed Rohit Chopra to serve as director of the Consumer Financial Protection Bureau (CFPB) in a 50-48 vote along party lines. He had been serving as a member of the Federal Trade Commission (FTC) where he had been a vocal critic of big tech companies and advocated for increased restitution for consumers. He previously served as the CFPB’s private education loan ombudsman under former CFPB Director Richard Cordray. Prior to that, he had worked closely with Sen. Elizabeth Warren on the CFPB’s establishment. Consistent with his past practices, Chopra’s CFPB has now ordered six Big Tech companies to turn over information regarding their payment platforms.

Expectations for Chopra’s CFPB

President-elect Biden announced Chopra as his choice to lead the CFPB before Inauguration Day, and the Biden Administration subsequently referred his nomination to the Senate in February. Chopra succeeds Kathy Kraninger, who became Director in December 2018 after having served as a senior official at the Office of Management and Budget. She led the CFPB for two years before the incoming Biden Administration demanded her resignation on January 20. It is expected that Chopra will aggressively lead the CFPB and unleash an industry crack down. The October 21, 2021 order issued to Big Tech regarding payment products appears to be the first step in that plan. Additionally, credit reporting companies, small-dollar lenders, debt collectors, fintech companies, the student loan industry, and mortgage servicers are among the financial institutions expected to face scrutiny from Chopra’s CFPB. Prior to the Big Tech inquiry, the CFPB, under interim leadership, had already taken initial steps to implement pandemic-era regulations and to advance the Biden administration’s priorities. It is also expected that the enforcement practices under former-Director Cordray will be revived under a Chopra-led CFPB.

After his confirmation, Chopra stated an intent to focus on safeguarding household financial stability, echoing prior statements regarding his commitment to ensuring those under foreclosure or eviction protections during the pandemic are able to regain housing security. He has also declared an intent to closely scrutinize the ways that banks use online advertising, as well as take a hard look at data-collection practices at banks. In his remarks related to the market-monitoring order issued to Big Tech, Chopra was critical of the way companies may collect data and his concern that it may be used to “profit from behavioral targeting, particularly around advertising and e-commerce.”

Just one week later, Chopra delivered remarks in his first congressional hearing as Consumer Financial Protection Bureau director. In his prepared statements before both the House Committee on Financial Services and the Senate Committee on Banking, Housing, and Urban Affairs, he cited mortgage and rent payments, small business continuity, auto debt, and upcoming CARES Act forbearance expirations as problems he plans to address. He also stated an intent to closely monitor the mortgage market and scrutinize foreclosure activity. And, echoing his action from a week earlier, Chopra reiterated an intent to closely look at Big Tech and emerging payment processing trends. Chopra also noted a lack of competition in the mortgage refinance market and stated an intent to promote competition within the market.

Although appointed to a five year term, the CFPB director serves at the pleasure of the president after a landmark decision last year from the Supreme Court.

Takeaway

Industry participants, including credit reporting companies, small-dollar lenders, debt collectors, fintech companies, the student loan industry, and mortgage lenders and servicers can anticipate additional scrutiny in the coming months and years from the CFPB. As Chopra gets settled into his new role, we will be keenly watching where he turns his attention to next.

California, New York Create Disclosure Requirements for Commercial Financing Transactions

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A&B ABstract:

As a general matter, state regulation of commercial lending is relatively light, and few states impose licensing requirement on commercial loan origination.  In two noteworthy state developments, however, California and New York will require loan “providers” to furnish certain consumer-like disclosures to prior to the consummation of commercial financing transactions.

The California requirements will not take effect until the effective date of final implementing regulations promulgated by the California Department of Financial Protection and Innovation (DFPI), which has not yet occurred.  The New York requirements take effect on January 1, 2022.  Notably, both laws exempt commercial financing secured by real property, but it is unclear whether mezzanine lending is included in such exemptions.

The New York Law

The New York law requires “providers” of commercial credit to provide Truth-in-Lending Act-like disclosures to applicants at the time it extends a specific offer of the commercial financing in amounts of $2,500,000 or less.  “Providers” include both lenders and brokers.  The NY law applies to closed end financing, open-end financing, sales- based financing, including merchant cash advances and factoring transactions.

Exemptions:

The NY Law provides a de minimis exemption, “for any person or provider who makes no more than five commercial financing transactions in [New York] in a twelve-month period.” Further, “Financial institutions”, which include banks, and certain other chartered depository institutions authorized to conduct business in New York, are also exempt from the new commercial loan disclosure law, but the subsidiaries or affiliates of such exempt financial institutions are not exempt.     Commercial mortgage financings over $2,500,000 are exempt from the law as are transactions secured by real property.  It is unclear whether mezzanine lending in amounts of $2,500,000 or less would be covered by the new law.

Required disclosures:

The NY law requires providers to furnish the following type of disclosures, depending upon the form of the transaction:

  • The total amount of the commercial financing (or maximum amount of available credit) and, if different, the disbursement amount;
  • The finance charge;
  • The annual percentage rate or APR, calculated largely in accordance with TILA and Regulation Z;
  • The total repayment amount;
  • The term of the financing;
  • The amounts and frequency of payments;
  • A description of all other potential fees and charges;
  • A description of any prepayment charges; and
  • A description of any collateral requirements or security interests.

The California Law

The California law  (SB 1235), which was signed into law on September 18, 2018 but is not effective until the DFPI promulgates final regulations, amends the California Finance Lenders Law (CFL) to require “providers” licensed under the CFL who facilitate “commercial financing” to a “recipient” to disclose to the recipient at the time of extending a specific offer of commercial financing specified information relating to the transaction and to obtain the recipient’s signature on that disclosure before consummating the commercial financing transaction.

Applicability:

The California law otherwise applies to, among other things, commercial loans, certain commercial open-end plans, factoring, merchant cash advances, and commercial asset- based lending.  Unlike the NY law which applies to brokers as well as lenders,  under the California law “provider”  is primarily limited to entities extending credit, such as lender/originators, but also includes a non-bank partner in a market place lending arrangement who facilitates the arrangement of financing through a financial institution.   Further, the California law defines “recipient” as the applicant of commercial credit of $500,000 or less.

Exemptions:

The California law exempts, among others, depository institutions and entities that make no more than one commercial financing in a 12 month period or who make five or fewer commercial financing transactions in California in a 12 month period that are incidental to the business of the entity relaying on the exemption.

Further, the California law does NOT apply to transactions greater than $500,000 or to real estate-secured commercial loans or financings.  It is unclear, however, whether mezzanine lending in amounts of $500,000 or less would be covered by the California law.

Required disclosures:

Once implemented, the California law will require the provider to disclose, among other information:

  •  The total amount of funds provided;
  • The total cost of the financing;
  • The term or estimated term;
  • The method, frequency and amount of payments; and
  • A description of prepayment penalties.
Implementation:

The DFPI has issued several sets of proposed regulations and has solicited public comment on these regulations.  The DFPI issued its most recent version of the regulations for public comment on October 12, 2021, and the comment period ended on October 27, 2021.  It is uncertain when the DFPI intends to promulgate final regulations with a mandated effective date.

The link to the California law is below:

Takeaway:

Up to this point, state regulation of commercial lending has been relatively light.  The California and New York laws are not only burdensome to lenders, they could be harbingers of developments to come in this area.

Upcoming Webinar on Implications of Collins v. Yellen

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On Friday, July 2, Alston & Bird partner Jason Levine will participate in a Federalist Society webinar discussing the Supreme Court’s Collins v. Yellen ruling and its implications.  In Collins v. Yellen, issued on June 23, the Court held that: (1) because the Federal Housing Finance Agency did not exceed its authority under the Housing and Economic Recovery Act of 2008, the anti-injunction provisions of the Recovery Act bar the statutory claim brought by shareholders of Fannie Mae and Freddie Mac; and (2) the Recovery Act’s structure violates the separation of powers.

 

Juneteenth Holiday Raises Tricky TRID Disclosure Issues

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On June 17, 2021, President Biden signed legislation making Juneteenth National Independence Day a federal national holiday. The first observance of the holiday is Friday, June 18, 2021. While the enactment of this new federal holiday is a notable and welcome national event, its first observance has immediate consequences for the timing of certain disclosures provided in connection with residential mortgage transactions.

In a Client Advisory, Steve Ornstein explores what the newly recognized Juneteenth holiday means for the residential mortgage industry.