September 25, 2020 was a momentous day for the regulation of consumer finance in California—Governor Newsom signed into law three important bills: the California Consumer Financial Protection Law, the Debt Collection Licensing Act and the Student Borrower Bill of Rights.
In doing so, the Department of Business Oversight once again has a new name. Formerly the Department of Corporations, the Department of Business Oversight will now be renamed the Department of Financial Protection and Innovation (the DFPI). Some are calling it a "mini-CFPB"—meaning a California version of the federal Consumer Financial Protection Bureau (CFPB). The new name and the establishment of a new Financial Technology Innovation Office signals California's renewed focus on financial innovation in the state and commitment to regulatory enforcement.
California Consumer Financial Protection Law
By enacting the California Consumer Financial Protection Law (the CCFPL), California seeks to further protect Californians from financial abuses in the consumer financial product and service marketplace. The stated purpose of the CCFPL is to "promote consumer welfare, fair competition, and wealth creation" in California. The CCFPL also authorizes the Commissioner of the DFPI to develop and implement initiatives to promote innovation, competition and consumer access within financial services. Seeking to reach underserved consumers and communities, the CCFPL authorizes the Commissioner to develop and implement programs to serve those consumers.
Importantly, the CCFPL allows California to enforce federal consumer financial protection regulations issued by the CFPB, which may be an attempt to fill the void left by a notable reduction in federal consumer protection enforcement actions.
The CCFPL regulates "covered persons" and "service providers." Covered persons means any of the following (only to the extent not preempted by federal law):
- any person that engages in offering or providing a consumer financial product or service to a California resident;
- any affiliate that acts as a service provider to the person described in the bullet above; or
- any service provider that engages in the offering or provision of its own consumer financial product or service.
A "service provider" is any person that provides a material service to a covered person in connection with a consumer financial product or service. A service provider includes a person who designs, operates or maintains the consumer financial product or service, processes transactions relating to the consumer financial product or service. Simply providing support services if they are the type that is provided to businesses in general would not make a person a "service provider." Nor would providing time or space for an advertisement of a consumer financial product or service make a person a "service provider."
"Consumer financial product or service" includes a financial product or service that is primarily for personal, family or household purpose or brokering the offer or sale of a franchise in California on behalf of another person. The CCFPL covers debt collection, debt settlement, credit repair, check cashing, rent-to-own contracts, retail sales financing, consumer credit reporting, and lead generation.
The CCFPL does not apply to most traditional lenders. For example, regulated banks, credit unions and savings and loans, licensed California finance lenders, broker-dealers, and residential mortgage lenders are exempt from the CCFPL. But it would apply to licensed deferred deposit originators (otherwise known as payday lenders) and student loan servicers.
The CCFPL prohibits a covered person or service provider from doing any of the following:
- any unlawful, unfair, deceptive, or abusive act or practice with respect to consumer financial products or services;
- offering or providing any financial product or service not in conformity with any consumer financial law or otherwise commit any act or omission in violation of a consumer financial law; or
- Failing or refusing to establish and maintain records, grant access and provide reports and other information to DFPI.
The penalties for violating the CCFPL include rescission of the contract, reformation of the contract, restitution, and penalties.
Debt Collection Licensing Act
Before enacting the Debt Collection Licensing Act (the DCLA), California was one of 16 states that did not license debt collectors. The state has now joined the majority of states with the passage of the DCLA. The DCLA requires that any person who engages in the business of debt collection in California be licensed in the State of California.
The DCLA exempts licensed finance lenders, depository institutions chartered under state or federal law, California Residential Mortgage Lending Act licensees, persons acting under the Karnette Rental-Purchase Act (rent-to-own companies), and real estate licensees. These exempt entities may still be subject to desist and refrain orders if they violate the Rosenthal Act or the Fair Debt Buying Practices Act and may be ordered to pay ancillary relief in connection with those violations.
In order to apply, a person must pay an application fee, submit an application, and provide a sample initial letter that would be used in correspondence with California consumers.
Licensees will be required to file reports, submit to periodic examination, and maintain a surety bond and pay annual fees.
Student Borrower Bill of Rights
In response to the student debt crisis, California enacted the "Student Borrower Bill of Rights" (the SBBR).
The SBBR prohibits any person from engaging in abusive acts or practices when servicing loans in California. Abusive acts under the SBBR include materially interfering with the ability of a borrower to understand a term or condition of a student loan or taking unreasonable advantage of a borrower.
Student loan servicers face additional regulation and are prohibited from:
- employing a scheme to defraud or mislead a borrower;
- engaging in unfair or deceptive practices toward a borrower or misrepresenting or omitting material information;
- misapplying payments made by a borrower;
- failing to accurately report a borrower's payment performance to consumer reporting agencies;
- refusing to communicate with a borrower's authorized representative; and
- making a false statement or omission of a material fact in connection with reporting to other governmental agencies.
Military borrowers, borrowers working in public service, older borrowers and cosigners and, borrowers with a disability have additional protections from student loan servicers engaging in unfair or deceptive practices and omitting material facts.
Starting July 1, 2021, Student loan borrowers may make complaints to a newly designated "Student Loan Ombudsman" who will refer it to the appropriate unit in the department. The Student Loan Ombudsman will confer with the California Department of Justice regarding complaints and will regularly report to the governmental agencies and legislatures.
The SBBR establishes "Rules of the Road", which require that a student loan servicer do the following:
- timely post and process student loan payments;
- prohibit any negative consequences in connection with any change to the mailing address, office or payment procedure for a 60-day period;
- inquire how to apply overpayments;
- comply with borrower direction as to how to allocate partial prepayments;
- require that any past due fees must be reasonable and proportionate;
- diligently oversee its service providers;
- timely process paperwork;
- maintain borrower records for 3-years after payment in full;
- treat telephone requests as written requests;
- maintain policies that permit borrowers to escalate dissatisfaction;
- rrotect borrowers from negative consequences from certain requests;
- protect borrowers from negative consequences as a result of the sale, assignment, transfer or system conversion;
- notify borrowers 15 days before a payment date of a change in identity of the person to whom the borrower sends payment;
- ensure all necessary information accompanies a loan when it is transferred to a new loan service provider;
- provide specialized customer service training to personnel advising military borrowers, borrowers working in public service, older borrowers and borrowers with disabilities;
- require response to communications from the newly designated Student Loan Ombudsman within 10 business days; and
- acknowledge receipt of a borrower's written request within 10 business days and responding within 30 business days.
Failure to comply with SBBR could result in claims for damages, restitution, punitive damages, attorneys fees and an order enjoining the methods, acts and practices.
By signing into law these consumer finance laws in the midst of a pandemic and wildfires, California has shown that the state is looking at the bigger picture and taking steps to provide greater consumer finance protection in difficult times that may be putting additional financial pressures on consumers. As former Consumer Financial Protection Bureau director Richard Cordray stated, the CCFPL "does put California at the forefront of consumer financial protection across the country."
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