Financial technology (Fintech) regulation and compliance continue to be a focus for California’s consumer finance regulator, the Department of Financial Protection and Innovation (DFPI), as it moves into its second year of operations. This Alert provides a brief overview of DFPI’s origins, a comparison of DFPI’s stated priorities with its regulatory activities in its inaugural year, and a review of recent enforcement actions relevant to Fintech.
In August 2020, the California legislature approved Assembly Bill of 1864, which included the California Consumer Financial Protection Act (CCFPL), one of the most comprehensive consumer protection laws in the country, and replaced the Department of Business Oversight (DBO) with the DFPI. As discussed in a contemporary blog post on Jenner & Block’s Consumer Law Round-Up, the CCFPL charges the DFPI with regulating “the provision of various consumer financial products and services” and exercising “non-exclusive oversight and enforcement authority.” under California and federal (to the extent permissible) consumer financial laws.”
To meet your “dual missionto protect consumers and encourage responsible innovation”, the CCFPL expanded the scope of the powers of the DFPI’s supervisory authority to cover entities and products not previously regulated by DBO, although it exempted major financial institutions from its scope. DFPI now oversees non-bank small business lenders and Fintech companies, along with debt relief companies, consumer credit reporting agencies, and others, can investigate and sanction illegal, unfair, deceptive acts or practices or abusive by any person offering or supplying consumer financial products or services in the state.
CCFPL it also gives the DFPI “the power to bring administrative and civil actions, issue subpoenas, promulgate regulations, hold hearings, issue publications, conduct investigations, and implement outreach and education programs.”
A comparison of DFPI’s stated priorities with its activities for 2021
in his first monthly newsletter Following the implementation of the CCFPL, the DFPI announced three notable areas of concern. More than a year later, in March 2022, the DFPI published a report summarizing their 2021 activities. A comparison of the two reveals areas of progress and sustained focus.
First, the DFPI promised to “review and investigate consumer complaints against previously unregulated financial products and services, including debt collectors, consumer credit reporting and credit repair agencies, debt relief companies, debt, rent-to-own contractors, private school financing, and more. In its annual report, the DFPI reported that it has collected “close to $1 million in restitution for consumers from enforcement actions” and reviewed 30% more complaints in 2021 than in 2020. In particular, “[t]The main categories of [consumer] complaints included debt collection, cryptocurrency, and ‘neobanks’ (fintech companies that partner with banks to offer deposit account services).”
Second, the DFPI prepared the opening of the Office of Financial Technological Innovation, created “to work proactively with entrepreneurs and create a regulatory framework for emerging and responsible financial products.” Almost immediately, the DFPI signaled its interest in regulating earned wage access (EWA), or the ability of employees to access their wages before their scheduled payday. Not long after the publication of its monthly bulletin, the DFPI signed memoranda of understanding (MOU) with five EWA companies. The companies agreed to deliver quarterly reports beginning in April 2021 “on various metrics intended to provide the [DFPI] with a better understanding of the products and services offered and the risk and benefits to California consumers.” efforts.” The DFPI also indicated that potential regulation related to salary-based advances, including the registration of covered persons, record retention and reporting, is possible.
Third, the DFPI stated that it would create the Consumer Financial Protection Division, which would “have a market research and monitoring arm to keep up with emerging financial products.” According to their report, the DFPI created an investigation team in September 2021, which is “in the process of evaluating DFPI consumer complaint data to identify broader market trends that may pose risks to consumers.”
Key application areas of DFPI related to Fintech
The Fintech industry has been a focus of DFPI enforcement activity since its inception. In an early action, for example, the DFPI entered into a order to desist and abstain against a Fintech platform for allegedly selling securities, including cryptocurrencies, without a broker’s certificate; mislead consumers in the sale of securities; and engage in securities transactions without a license.
In recent months, the DFPI has continued to provide guidance to the industry in a variety of areas, through interpretive opinions and enforcement actions. Businesses offering similar financial products and services in California should take note.
- “Real lender” and interest rate caps
- In December 2021, the DFPI entered a consent order with a California company that had marketed consumer loans to California borrowers at interest rates above the maximum established by California law. In the consent order, the business agreed not to market or service loans under $10,000 at interest rates higher than those established by the California Equal Access to Credit Act. The consent order entry reveals that DFPI viewed the California company as the true financial lender under the California Financing Law and the CCFPL, even though the company did not finance the loans and had provided maintenance and maintenance services. marketing to its banking partner, a Utah Bank that is exempt from California usury laws.
- In reaction to the above order, a fintech and non-depositary platform that operates a similar banking partnership program lawsuit filed v. DFPI in March 2022, seeking a finding that California interest rate caps do not apply to its loan program because its Utah banking partner originates and finances the loans. In April 2022, the DFPI filed a cross complaint, accusing the Fintech platform of deceptive and illegal business practices, by participating in a “rent-a-bank” partnership scheme that allows it to evade California interest rate caps and promote predatory lending practices. The cross-claim alleges that the Fintech platform is the “true lender” of the loans because it has the predominant economic interest in the transaction, collecting nearly all of the proceeds from the loan after purchasing the receivables from the loans within a few days. of its financing. protecting your banking partner from any credit risk. The DFPI also alleges that the Fintech platform performs traditional lender functions in the marketing, underwriting, and servicing of loans. The DFPI is seeking at least $100 million in penalties, in addition to restitution to affected borrowers.
- Advances based on salaries and licenses from lenders
- In February 2022 interpretive opinion, the DFPI concluded that certain employer-facilitated advances, for which an EWA provider contracts with an employer to offer its employees early access to wages, were not loans under the California Financing Act, which regulates consumer credit. consumer, or the California Deferred Deposit Transaction Law, which regulates personal loans. In reaching this conclusion, the DFPI found that the source of financing (the employer), the limit on the amount of financing (to the amount an employee earned), and the nominal fees associated with the advance discouraged the application of the loan laws. Of California. . Therefore, the requesting EWA provider and his/her employing partner were not required to obtain lending licenses.
- To the contrary, the DFPI alleged in two recent enforcement actions that a trade cash deal (providing financing in exchange for a percentage of a company’s future revenue) and a revenue sharing agreement (providing funds for college tuition in exchange for a percentage of a student’s income after graduation) qualify as loans, and such providers must be licensed under applicable California law.
- Trading cryptocurrencies and digital assets
- In a March 2022 interpretive opinion, the DFPI addressed whether the California Money Transmission Act (MTA), which prohibits unlicensed participation in the money transmission business in the state, applies to software that provides retail and institutional investors with the ability to buy, sell and store cryptocurrencies. It should be noted that the MTA defines “money transmission” to include the sale or issuance of “stored value”; the sale or issuance of payment instruments; and the receipt of money for the transmission. The DFPI concluded that closed-loop transactions, in which the company does not facilitate the exchange of cryptocurrency transactions with a third party and the customer can only redeem the monetary value stored in the account for cryptocurrencies sold by the company, do not comply with the definition of “money transmission”. However, the DFPI explained that it has not determined whether a “currency that stores cryptocurrency” is a form of “stored value” under the MTA. Consequently, the DFPI did not require the query platform had a license to provide customers with digital and fiat wallets to store and exchange cryptocurrencies directly with the platform.The DFPI noted, however, that the license requirements remain subject to change.
- A month earlier, the DFPI concluded in February 2022 consent order that sales of a cryptocurrency retail lending product qualify as a security under California law. Specifically, the company in question offered and sold interest-bearing digital asset accounts, “through which investors could lend digital assets to [the company] and, in return, receive interest” paid in cryptocurrencies. The DFPI concluded that these accounts are securities and that the company had improperly engaged in unrecorded securities transactions. The DFPI’s decision came shortly after the federal government National Stock Market Commission accused the company of something similar violation of federal securities laws, and found that the accounts were both “notes” and “investment contracts” because investors’ digital assets were pooled and packaged as loan products that generated returns for the company and produced monthly interest payments variables according to the deployment of the company and handling of goods.
As this overview makes clear, fintech remains a top priority for DFPI enforcement and regulatory activity in 2022.
The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought according to your specific circumstances.