California Moves to Outdo the Consumer Financial Protection Bureau

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The new California law discussed in this Legislative Alert does not have the earth-shattering significance of Trump versus Biden, or even Godzilla versus Mothra, but tremors have originated on the Pacific coast and are likely to be felt near the Potomac and in all lands in between.

Late last month, California Governor Gavin Newsom signed into law California Assembly Bill 1864, creating a state agency that is analogous to the federal Consumer Financial Protection Bureau ("CFPB"), an agency that has been under close scrutiny since its establishment under the Dodd-Frank Act of 2010. The new California law, which goes into effect on January 1, 2021, will have a significant impact on the way that consumer financial service companies do business in California. Below, we preview of some of the changes established by Assembly Bill 1864. In the next “Legislative Alert,” we will examine certain statutory exemptions, as well as their limitations.

Assembly Bill 1864 provides for the creation of a new law called the California Consumer Financial Protection Law ("CCFPL"), to be codified in Division 24, commencing with Section 90000 of the state's Financial Code. The measure renames today’s Department of Business Oversight (the "DBO”)—formerly known as the Department of Corporations—as the Department of Financial Protection and Innovation (the "Department” or the "DFPI"). The DBO "houses" both the Residential Mortgage Lenders Act (the “RMLA”), which licenses and regulates those who make or service residential mortgage loans, and the California Financing Law (“CFL”), which licenses and regulates those who make or broker certain real estate-secured loans, including commercial mortgage loans, and non-real estate-secured commercial or business purpose loans. Assembly Bill 1864 does not repeal the RMLA or the CFL, amend the loans regulated under those two licensing laws, or change the names of those two laws, but come January 1st, the RMLA and the CFL will be administered by the DFPI.

Although the CCFPL does not expressly change the manner in which existing licensees under the RMLA or the CFL will be licensed, it is clear that a new registration regimen will be instituted by the DFPI. The CCFPL permits the DFPI to impose registration requirements by rule. Specifically, Section 90009(a)(1) of the CCFPL provides that the DFPI "may prescribe rules regarding registration requirements applicable to a covered person engaged in the business of offering or providing a consumer financial product or service, including requiring a filing be made under oath, and requiring the payment of registration fees." Moreover, the DFPI “may require registration through the Nationwide Multistate Licensing System and Registry ("NMLSR").” Despite the former provision simply authorizing the DFPI to prescribe registration requirements applicable to covered persons, Section 90009.5 of the CCFPL dismisses this provision, as it provides that "notwithstanding paragraph (1) of subdivision (a) of Section 90009, the department shall promulgate rules regarding registration requirements applicable to a covered person no later than three years following the initiation of its second action to enforce a violation of this division by persons providing the same or substantially similar consumer financial product or service as the covered person.” Although the new law does not make clear whether existing licensees under the CFL or the RMLA will need to be re-licensed or registered once the CCFPL takes effect, many activities and business not yet licensed or registered in California will need to take action to comply with the new state law. Rules will need to be promulgated before the DFPI can move to require registration of such “covered persons.”

By now, you likely are wondering whether you are a "covered person" subject to these new provisions. Section 90005(f) of the CCFPL provides that "to the extent not preempted by federal law," a "covered person" means "any of the following:

  1. Any person1 that engages in offering or providing a consumer financial product or service to a resident of this state.
  2. Any affiliate of a person described in this subdivision if the affiliate acts as a service provider to the person.
  3. Any service provider to the extent that the person engages in the offering or provision of its own consumer financial product or service.

The definition of a “covered person” is broader than immediately appears, as it includes not only the person offering or providing the consumer financial product or service, but also a “service provider.” “Servicer provider”, in turn, reaches “any person that provides a material service to a covered person in connection with the offering or provision by that covered person of a consumer financial product or service, including a person that either:

(A) Participates in designing, operating, or maintaining the consumer financial product or service.
(B) Processes transactions relating to the consumer financial product or service, other than unknowingly or incidentally transmitting or processing financial data,” under certain conditions.

An additional change from the CFL to the CCFPL relates to the licensing of persons who make or broker commercial mortgage loans, or non-real estate-secured commercial or business purpose loans. While the CFL regulates such loans, the CCFPL generally does not apply to commercial mortgage loans or non-real estate-secured commercial purpose or business loans.

The CCFPL introduces certain new terms and their definitions, including the term "consumer financial product or service". Section 90005(f) defines the term as either:

  1. A financial product or service that is delivered, offered, or provided for use by consumers primarily for personal, family, or household purposes. [or]
  2. A financial product or service as described in paragraph (11) of subdivision (k).

The term "financial product or service" is defined very broadly to include a wide array of consumer financial products or services, such as:

  1. extending credit2 and servicing extensions of credit, including acquiring, purchasing, selling, brokering extensions of credit, other than solely extending commercial credit to a person who originates consumer credit transactions;
  2. providing real estate settlement services;
  3. engaging in deposit-taking activities, transmitting or exchanging funds, or otherwise acting as a custodian of funds or other financial instrument for use by or on behalf of a consumer;
  4. selling, providing, or issuing stored value or payment instruments" under certain conditions;
  5. providing check cashing, check collection, or check guaranty services;
  6. providing credit counseling to any consumer;
  7. collecting, analyzing, maintaining, or providing consumer report information or other account information, including information relating to the credit history of consumers under certain conditions;
  8. collecting debt3 related to any consumer financial product or service.

These are just a few of the consumer financial services and products regulated under the new CCFPL. In one fell swoop, certain consumer financial services or products that had not been regulated in California will now be regulated, and the providers of those services will be subject to registration in California.

The new law provides that certain terms and their definitions are to be construed consistent with the federal Dodd-Frank Wall Street Reform and Consumer Protection Act, 12 U.S.C. § 5481, et seq., which sets out the definitions that apply to the federal CFPB. While the CFFPL’s reference to federal law seemingly would limit how the new statutory terms might be defined and applied, many of the terms in the CCFPL are different than those in the Federal Act, have not been defined under existing California law, and ultimately may diverge from the federal definitions. For example, under the CFL and the RMLA, a “mortgage loan originator” is essentially defined as an individual who takes a residential mortgage loan, or offers or negotiates the terms of a residential mortgage loan for compensation or gain. Under the CFFPL, however, the term “covered person” is defined broadly to reach “anyone who offers or provides a consumer financial product or service." Thus, an individual who simply refers a borrower to a lender, could be subject to regulation as a “covered person” under the CCFPL, but not as a “mortgage loan originator” under existing California law.

Interested persons should review the CCFPL to understand the full scope of the newly regulated activities and the new registration requirements that the statute presents. When the DFPI announces its rulemaking, industries and businesses affected by the new law should be prepared to voice their comments and concerns.

This is the first of two Legislative Alerts we will issue on the new California Consumer Financial Protection Law. In part two, we will address some of the exemptions set out in the CCFPL, and the impact of some exemptions for companies and individuals not yet licensed in California.

If you have any questions or require guidance about the CCFPL, the upcoming rulemaking process, the new registration requirements, or the existing licensing obligations, we welcome the opportunity to help.

1 Section 90005(m) broadly defines the term person to mean an individual or any other form of legal organization.

2 Section 9000(g) defines the term "credit" to means "the right granted by a person to another person to defer payment of a debt, incur debt and defer its payment, or purchase property or services and defer payment for those purchases."

3 The term "debt" under section 90005(h) means "any obligation of a person to pay another person money regardless of whether the obligation is absolute or contingent, has been reduced to judgment, is fixed, contingent, matured, unmatured, disputed, undisputed, secured, or unsecured and includes any obligation that gives rise to the right of an equitable remedy for breach of performance if the breach gives rise to a right to payment."

Opinions and conclusions in this post are solely those of the author unless otherwise indicated. The information contained in this blog is general in nature and is not offered and cannot be considered as legal advice for any particular situation. The author has provided the links referenced above for information purposes only and by doing so, does not adopt or incorporate the contents. Any federal tax advice provided in this communication is not intended or written by the author to be used, and cannot be used by the recipient, for the purpose of avoiding penalties which may be imposed on the recipient by the IRS. Please contact the author if you would like to receive written advice in a format which complies with IRS rules and may be relied upon to avoid penalties.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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