CA DFPI Approves Third Set of Proposed Regulations for the Registration of Debt Settlement Companies and Other Providers

On October 11, 2024, the California Department of Financial Protection and Innovation (DFPI) approved regulations submitted to the California Office of Administrative Law (OAL) under its authority granted by the California Consumer Financial Protection Law (CCFPL). The CCFPL, established in September 2020 under Governor Newsom, augmented DFPI’s authoritative ability by increasing the scope of business activity that the entity regulates, including debt settlement companies, debt relief companies, credit repair and consumer credit reporting companies, debt collectors, private student loan servicers, payment processors, and others. Under its new authority, DFPI maintains the ability to regulate these new covered persons by requiring registration subject to proposed rulemaking. The OAL reviews these rulemakings to ensure compliance with the Administrative Procedure Act (APA).

The OAL disapproved the DFPI’s second set of proposed regulations in April 2024 for “fail[ing] to comply with the clarity standard of the APA.” Almost six months following the disapproval, OAL has now approved the third set of DFPI’s revised proposed regulations, establishing registration requirements for persons engaged in the business of offering to provide or providing consumer financial products or services covered under Financial Code section 90009 of the CCFPL, including debt settlement, student debt relief, education financing, and income-based advances. The regulations will also provide exemptions to the registration requirements and further set forth annual reporting requirements, procedures for revoking a registration, and procedures for surrendering a registration. These approved regulations will become effective on February 15, 2025.

Within the approved regulations, with respect to debt settlement services, DFPI revised the definition of “charges” to now exclude the “amounts contracted for or received by payment processors in connection with a person’s provision of debt settlement services” and has removed the definitions of “payment processor” and “payment processing services” from the regulatory language. The annual reporting requirements of registered debt settlement companies have also been revised, clarifying the figures to be reported. Annual reports to be submitted by registered debt settlement services providers are to include the following:

1. The number of California residents who had an existing contract for debt settlement services in effect at any time during the prior calendar year;
2. For the residents identified in (a), the total number of debts residents contracted for debt settlement services with the registrant;
3. For the residents and debts identified in (a) and (b), respectively, the total dollar amount of debt of all residents who contracted for services with the registrant based on the total debt balances upon execution of the contracts with the registrant;
4. For the residents identified in (a), the total dollar amount of charges paid by all residents during their contract terms;
5. For the residents identified in (a), the total number of debts for all residents who contracted for services with the registrant in which the resident, over the contract term, has accepted a settlement with a creditor and made at least one payment pursuant to that settlement;
6. For the debts for which a resident identified in (a) has accepted a settlement at any time with a creditor and made at least one payment pursuant to that settlement, the average amount owed upon execution of the contract with the registrant for the settled debts, and the average settlement amount based upon the total of all payments due for the settled debts under the settlement agreements; and
7. For the debts for which a resident identified in (a) has accepted a settlement with a creditor and made at least one payment pursuant to that settlement over the contract term, the average amount of time between execution of the contract and the first payment under each settlement.

All registration applications, amendments, notices, related filings, supporting documents, renewals, authorizations, assessments, and fees will be filed electronically and transmitted through the Nationwide Mortgage Licensing System (NMLS). The application fee is $350.00 per applicant, with an annual renewal fee of $100.00. Application requirements include providing company identifying information, contact employees, books and records information, legal status, affiliates/subsidiaries, disclosure questions, direct owner(s), executive officer(s), and indirect owner(s) information – these individuals will also be required to complete individual forms where they will need to provide additional information and answer disclosure questions, management chart, and a description of the business. Additionally, as part of the registration application, debt settlement service providers must submit directly to DFPI copies of sample periodic accounts or activity statements the applicant uses to provide debt settlement services to California residents if the applicant provides statements to California residents.

We will continue to monitor developments regarding these regulations and update you as more information is released on California's registration and reporting process.