Certain Exemptions of the New California Consumer Financial Protection Law Need To Be Clarified

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In our Legislative Alert of October 13, 2020, we reported on the California legislation enacted in late September, Assembly Bill 1864, that created the new California Consumer Financial Protection Law (“CCFPL”),1 and we set out certain of the activities that trigger a registration obligation. As we last reported, the CCFPL, when it takes effect on January 1, 2021, will be administered by the Department of Financial Protection and Innovation (the “DFPI”). The DFPI is the new name of the California Department of Business Oversight (the “DBO”) (formerly the Department of Corporations or “DOC”).

In this Legislative Alert, we discuss certain of the exemptions, or specific activities that are not subject to registration (herein, the “exemptions”), under this new law and some of the ambiguities inherent in these exemptions. Before doing so, we want to make clear that Assembly Bill 1864 did not repeal existing California licensing laws, such as the California Financing Law (the “CFL”) or the California Residential Mortgage Lending Act (the “CRMLA”). Assembly Bill 1864 changed the name of the DBO and created a new division under the DFPI, Division 24, commencing with Section 90000, that provided for the CCFPL. As the newly named DFPI is a continuation of the DBO, the opinions of the DBO remain in effect, unless there was an expiration date for the opinion, the opinion was formally withdrawn, or the statutory provision on which the opinion was based was amended by the newly enacted CCFPL. Assembly Bill 1864 provides as much, as Section 321 states that “[a]ll agreements entered into with, and orders and regulations issued by, the Commissioner of Business Oversight or the Department of Business Oversight, or a predecessor commissioner or department, shall continue in effect as agreements, orders, and regulations of the Commissioner of Financial Protection and Innovations or the [DFPI].”

As for the exemptions from the CCFPL, we note the following exemptions and the issues that require clarification.

A) CLARIFICATION IS NEEDED AS TO WHEN CERTAIN DEPOSITORY INSTITUTIONS, AND OTHER INSTITUTIONS GOVERNED BY CALIFORNIA, ARE EXEMPT FROM REGISTRATION UNDER THE CCFPL

Subsection (b) of Section 90002 of the CCFPL sets out certain exemptions and provides that “[t]his division shall not apply to a person or employee of that person to the extent that person or employee is acting under the authority of one of the following licenses, certificates, or charters issued by the [DFPI].” Chapter 3 of the CCFPL, to be codified as Section 90002(b) (emphasis added). As worded, the entities set out in this Subsection (b) are exempt from the entire CCFPL when acting under the authority granted to them by the DFPI. Consistent with this introductory clause, Subsection (b)(7) provides an exemption for any “person doing business under a license, charter, or certificate” issued under certain Divisions of the state’s Financial Institutions Law, including Divisions: 1.1, 1.2, 1.6 , 2, 5, 7, and 15. These enumerated Divisions apply to California-chartered banks, savings associations, and credit unions, among other depository institutions, or their holding companies.2 These institutions are exempt from the CCFPL without needing to make a filing with the DFPI. Subsidiaries and commonly owned affiliates of such California-chartered depository institutions are not expressly exempt from the CCFPL, unless licensed under some other California law specifically referenced in the CCFPL.3

Subsection (b) of Section 90002 also provides an exemption from the entire CCFPL for certain other licensed entities. Among others that would be so exempt from the CCFPL are:

(2) any person licensed as a finance lender, broker, program administrator, or mortgage loan originator under Division 9 (commencing with section 22000) of the Financial Code. . .
(4) any person licensed as a residential mortgage lender, a mortgage servicer, or a mortgage loan originator under Division 20 (commencing with Section 50000) of the Financial Code.4

Sections 90002(b)(2) & (4). Division 9 is the CFL, and Division 20 is the CRMLA.

The reach and meaning of the exemptions under Sections 90002(b)(2) and (4) is unclear. On the one hand, the CCFPL provides that it does not apply to a person or employee to the extent that the person or employee is acting under the authority of the license issued by the DFPI; but on the other hand, the CCFPL provides that it does not apply to a person licensed as a mortgage loan originator under the CFL or the CRMLA. As the introductory clause of this provision is worded, it would appear to be sufficient for the individual to be an employee of an entity licensed under certain laws administered by the DFPI for the employee to be exempt from the CCFPL. On the other hand, because a person licensed as a mortgage loan originator is exempt from the CCFPL, the individual employee would appear to need a license under a law administered by the DFPI that licenses mortgage loan originators to be exempt from the CCFPL. Clarification by the DFPI as to the manner in which Sections 90002(b)(2) and (4) will be administered is warranted.

Others so exempt under Section 90002(b) include (i) any person licensed as a Division 6 escrow agent under the Financial Code; (ii) any person licensed as a Division 1 broker dealer or investment adviser under Title 4 of the Corporations Code; (iii) any person licensed as a Division 3 check seller, bill payer, or prorater under the Financial Code; or (iv) any person licensed as a Division 3 capital access company under Title 4 the Corporations Code. Although each of the exemptions under Subsection (b) is not expressly limited to the activities conducted under the license held, the introductory clause to Subsection (b) provides that for a person or employee to be so exempt under one of these licenses, the person or employee must be acting under the authority of the license, certificate or charter issued by the DFPI. Consequently, to the extent the new CCFPL regulates an activity governed by one of these other aforementioned California laws, the person so licensed and its employees would not also be subject to the CCFPL when conducting the activities authorized under the license held. If a license held does not authorize activities subject to licensing under the CCFPL, then a license under the CCFPL may be needed. DFPI regulators should clarify which activities are governed by the CCFPL, and the other existing and referenced state laws, so as to clearly delineate whether the CCFPL or an existing California law should be followed.

B) CERTAIN PERSONS ARE EXEMPT FROM REGISTRATION OF THE CCFPL, BUT NOT THE ENTIRE CCFPL

Section 90009(a)(1) provides the DFPI with the authority to prescribe rules regarding registration under the CCFPL. Section 90009(a)(2) provides that, notwithstanding section 90009(a)(1), the DFPI shall not require the registration or the payment of a fee by certain “covered persons,” including:

(A) a covered person who is licensed by the [DFPI] under another law and who is providing a financial product or service within the scope of that license;
(B) a covered person who is licensed or registered by another agency unless the covered person is offering or providing a financial product or service that is not regulated by the agency licensing or registering the covered person;
(C) a covered person who is licensed by the department or a federal agency who engages in deposit-taking activity unless the covered person is offering or providing a financial product or service that is not regulated by the agency licensing the covered person.

As set forth immediately above, under Section 90009(a)(2), a “covered person” otherwise licensed by the DFPI is merely exempt from the registration obligation of the CCFPL. However, under Subsection (b) of Section 90002, set out in section A of this Legislative Alert, certain entities licensed by the DFPI are exempt from the entire CCFPL. The DFPI should confirm that all of the institutions set out in Section 90002(b) are exempt from the entire CCFPL and not simply the registration obligation of the CCFPL.

C) CALIFORNIA LICENSED REAL ESTATE BROKERS ARE NOT EXPRESSLY EXEMPT FROM THE CCFPL OR THE REGISTRATION OBLIGATION OF THE CCFPL

We find it unusual that a person or entity licensed as a real estate broker under the California Real Estate Law is not expressly exempt from the CCFPL or its registration obligation. It has long been the practice, codified into law, that a California licensed real estate broker is exempt from the licensing obligations of the CFL and the CRMLA when engaged in mortgage finance activities subject to licensing under the California Real Estate Law. Cal. Fin. Code section 22057 with respect to the CFL; and Cal. Fin. Code section 50002(c)(9) with respect to the CRMLA. Moreover, any person licensed as a finance lender under the CFL when acting under the authority of that license, or any person licensed as a residential mortgage lender or servicer under the CRMLA when acting under the authority of that license, is exempt from the mortgage finance licensing provision of the state’s Real Estate Law. Cal. Bus. & Prof. Code Sections 10133.1(a)(6) & (10), respectively. Regulators, however, are authorized 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…” See Section 90009 of Assembly Bill 1864, to be codified in section 90009(a)(1) of the CCFPL. Unless such an exemption for California-licensed real estate brokers is adopted in the regulatory process associated with the CCFPL, then the prospect of needing to hold two licenses in California to engage in residential real estate lending or brokering activities in the state may become a reality.

D) DEPOSITORY INSTITUTIONS CHARTERED UNDER FEDERAL LAW OR THE LAWS OF OTHER STATES ARE EXEMPT FROM THE ENTIRE CCFPL

A conditional exemption from the entire CCFPL is provided for certain depository institutions, regardless of whether it is (i) a bank, savings association, credit union, or certain other related institutions; or (ii) federally chartered or chartered by another state. Specifically, Subsection (c) of Chapter 3, to be codified in Section 90002(c), provides that the CCFPL “shall not apply to a bank, bank holding company, trust company, savings and loan association, savings and loan holding company, credit union, or an organization subject to oversight of the Farm Credit administration, when acting under the authority of a license, certificate or charter under federal law or the laws of another state.” (Emphasis added.) The aforementioned exempt institutions do not need to make a filing to secure the exemption, as this exemption is self-executing based on the plain language of the CCFPL. Subsidiaries and affiliates of federally chartered or other state-chartered (non-California-chartered) depository institutions are not exempt from the CCFPL.
The exemption for federally chartered and other state-chartered depository institutions is not surprising. California regulators are very cognizant of the law that they cannot seek to license federally chartered depository institutions, given federal preemption. Indeed, Section 90019(c) of the CCFPL expressly provides that “to the extent that any provision of [the CCFPL] is preempted by federal law, the provision shall not apply and shall not be enforced solely as to the extent of the preemption and not as to other circumstances, persons, or applications.” Depository institutions chartered by states other than California also have long been exempt from the CFL and the CRMLA. Cal. Fin. Code Sections 22050 and 50002(c)(1)), respectively.

E) PERSONS SELLING TIME OR PROVIDING SPACE FOR AN ADVERTISEMENT ARE NOT HELD TO VIOLATE THE PROHIBITED ACTS SECTION OF THE CCFPL

The regulatory provisions of the CCFPL apply to both “covered persons” (e.g., those who offer or provide a consumer financial product or service) and “service providers” (e.g., those who provide a material service to a covered person in connection with the offering or providing of a consumer financial product or service). Chapter 4 of the CCFPL, to be codified in Section 90003, sets out certain unlawful and prohibited acts, including engaging in or proposing to engage in any unlawful, unfair, deceptive, or abusive act or practice with respect to a consumer financial product or service. Knowingly or recklessly providing substantial assistance to a covered person or service provider in violation of the unlawful acts or practices is itself a prohibited act under the CCFPL. Section 900003(b) of the CCFPL. However, Section 90003(c) of the CCFPL provides that notwithstanding the provision making such knowing or reckless acts a violation of the CCFPL, “a person shall not be held to have violated [the aforementioned prohibition] solely by virtue of providing or selling time or space to a covered person or service provider placing an advertisement.”

F) CERTAIN CONSUMER-RELATED ACTIVITIES ARE OUTSIDE THE AUTHORITY OF THE DFPI

Section 90006(e)(1) of the CCFPL provides that the DFPI may not exercise regulatory authority under the CCFPL with respect to certain activities, including:

(A) the bona fide extension of credit by a merchant, retailer, or seller of nonfinancial goods and services to a consumer for the acquisition of a nonfinancial good or service, provided all of three of the following conditions are met:

(i) the credit extended does not significantly exceed the fair market value of the nonfinancial good or service provided;
(ii) the merchant, retailer, or seller does not sell or otherwise assign the debt, except as to the sale of delinquent debt for the purpose of collection; and
(iii) the merchant, retailer, or seller of nonfinancial goods and services does not regularly extend credit, as defined under the Federal Truth in Lending Act, and regulations issued thereunder.

(B) the collection or sale of delinquent debt arising from credit described in clause (i).

Section 90006 (e)(2), however, provides that this exclusion does not limit the DFPI’s authority to the “extent the [DFPI] finds the sale of the nonfinancial good or service is done as a subterfuge, so as to evade or circumvent the provisions of the [CFPL].” The next act in the unfolding drama of the CCFPL will be the promulgation and adoption of regulations. Although the CCFPL provides the DFPI with an extended period of time to promulgate rules regarding the registration requirement applicable to covered persons (see section 90009.5(a) of the CCFLP), many of the provision of the CCFPL, including certain enforcement provisions (see Section 90008(e)) cannot be commenced before regulations are adopted. Consequently, we anticipate the proposed regulations will be published for comment early next year. In any event, we will monitor the rulemaking to see when the first set of proposed rules is published. If there is any particular aspect of the CCFPL of importance to you or your company, please let us know, and we will follow the related rulemaking and report to you as to the rules that have been proposed.

1 Throughout Assembly Bill 1864, the CCFPL is referred to as “the division,” or “this division.” Where the term “the division” or ”this division” is used in this Legislative Alert, it will refer to the CCFPL.

2 Division 1 covers Financial Institutions generally; Division 1.1 covers Banks and Banking; Division 1.2 covers the Money Transmission Act; Division 1.6 covers Depository Corporations, Sales, Mergers, and Conversions; Division 2 covers the Savings Association Law; Division 5 covers Credit Unions; Division 7 covers Industrial Loan Companies; and Division 15 covers Business and Industrial Development Corporations.

3 At one time, the DFPI, under its former name as the DOC, had issued certain opinions that provided an exemption from the licensing obligations of the CFL and the CRMLA for subsidiaries of banks or savings and loan associations. In December 2015, the DOC concluded a formal rulemaking, withdrew those opinions, and issued two new rules: 10 CCR § 1422.3 in connection with the CFL; and 10 CCR § 1950.122.4.2 in connection with the CRMLA, that the aforementioned subsidiaries are not exempt from CFL or CRMLA licensure.

4 Under the CFL and the CRMLA, the term “mortgage loan originator” is defined in much the same limited manner. The term “mortgage loan originator” (i) under the CFL is defined as “an individual who takes a residential mortgage loan application or offers or negotiates terms of a residential mortgage loan for compensation or gain,” while (ii) under the CRMLA, the term “mortgage loan originator” is defined as “an individual who, for compensation or gain, or in the expectation of compensation or gain, takes a residential mortgage loan application or offers or negotiates terms of a residential mortgage loan.”

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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