Alston & Bird Consumer Finance Blog

#California

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.

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.

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.

Alston & Bird Details 21 Potentially Significant Impacts from Draft CCPA Regulations

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Late last week, the California Attorney General published much-anticipated proposed Regulations under the California Consumer Privacy Act (“CCPA”). The Regulations are extensive and contain a number of potentially material business impacts.

To help companies work through the Regulations, Alston & Bird’s Privacy & Data Security team published a client advisory outlining “21 Potentially Significant Business Impacts” from the proposed CCPA Regulations. View the full advisory here.

This advisory tackles a number of issues likely of interest to companies attempting to get ready for CCPA, including:

  • Why posting a CCPA privacy policy on your website may not be enough to satisfy your CCPA notice obligations – instead you may need additional “just in time” notices at every specific point where you collect data (or lose the right to collect it);
  • Why you may hear discussions about a potential return of Do Not Track in the online context, this time as a “Do Not Sell My Info” request;
  • Why brick-and-mortar interactions with consumers may require companies to facilitate “offline” CCPA rights requests; and
  • Why companies that take a position as vendor or service provider may need to examine any aspect of their business that involves pooling customer data for regulatory risk.

Alston & Bird is closely following the development of the CCPA and its Regulations. For more information, contact Jim Harvey, David Keating, Amy Mushahwar, Karen Sanzaro, or Daniel Felz.

California Releases Proposed CCPA Regulations

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California Attorney General Xavier Becerra released yesterday a Notice of Proposed Rulemaking Action and Proposed Regulations for the California Consumer Privacy Act. The Attorney General will hold four public hearings to address these regulations on December 2, 3, 4, and 5, 2019. The written comment period will then end on December 6, 2019. These regulations are intended to operationalize the CCPA and provide clarity to assist in the implementation of the law. The CCPA requires the Attorney General to adopt initial regulations on or before July 1, 2020.

The proposed regulations provide specific guidance regarding various CCPA provisions, including: (1) notices businesses must provide to consumers under the CCPA; (2) practices for handling consumer requests made pursuant to the CCPA; (3) practices for verifying the identity of the consumer making those requests; (4) practices regarding the personal information of minors; and (5) practices for the offering of financial incentives.

We will follow up with a more detailed discussion of the draft regulations in a separate blog post.