Financial technology (fintech) regulation and enforcement remains a focus for California’s consumer finance regulator, the Department of Financial Protection and Innovation (DFPI), as it enters its second year of operation. This alert provides a brief overview of the origins of the DFPI, a comparison of the DFPI’s stated priorities with its regulatory activities in its inception year, and an analysis of recent enforcement actions relevant to fintech.
In August 2020, the California Legislature passed Assembly Act 1864, which incorporated the California Consumer Financial Protection Law (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 entry In Jenner & Block’s Consumer Law Round-Up, the CCFPL accuses the DFPI of “regulating the provision of various consumer financial products and services” and exercising “non-exclusive supervisory and enforcement powers under California and federal (to the extent permitted) consumer finance laws.” ”
For his “double mission to protect consumers and encourage responsible innovation,” the CCFPL expanded the scope of the DFPI’s regulator’s powers to include companies and products not previously regulated by the DBO, although it exempted large financial institutions from its reach. The DFPI now oversees non-bank lenders to small business and fintech companies, as well as debt relief companies, consumer credit reporting agencies, among others, and can investigate and sanction unlawful, unfair, fraudulent or abusive acts or practices by anyone offering or providing consumer finance products or services in the state. That CCFPL the DFPI also grants “the authority to bring administrative and civil actions, issue subpoenas, make regulations, hold hearings, issue publications, conduct investigations, and conduct public relations and educational programs.”
A comparison of the DFPI’s stated priorities with its activities for 2021
In his first monthly sheet Following the implementation of the CCFPL, the DFPI announced three notable areas of interest. More than a year later, in March 2022, the DFPI published a report Summary of its activities for 2021. A comparison of the two shows areas of progress and sustained focus.
First, the DFPI pledged to “review and investigate consumer complaints against previously unregulated financial products and services, including collection agencies, credit repair and consumer credit reporting agencies, debt relief companies, hiring to own contractors, private school financing and more.” In its annual report, DFPI reported that it collected “nearly $1 million in consumer redress from enforcement actions” and reviewed 30% more complaints in 2021 than in 2020. In particular, “[t]he top categories of [consumer] Complaints included debt collection, cryptocurrency, and “neo-banking” (fintech companies that work with banks to offer deposit account services).”
Second, the DFPI prepared to open the Office of Financial Technology Innovation to “proactively engage with entrepreneurs and create a regulatory framework for responsible, emerging financial products.” Almost immediately, the DFPI signaled its interest in regulating Earned Wage Access (EWA), or allowing workers to access their wages before their scheduled payday. Not long after the publication of its monthly bulletin, the DFPI declarations of intent received (MOU) with five EWA companies. The companies have agreed to provide quarterly reports beginning April 2021 “on a number of metrics reflecting the [DFPI] with a better understanding of the products and services offered and the risks and benefits for California consumers.” The DFPI later signed six additional letters of intent with EWA companies and stated in its annual report that the quarterly reports required by the letter of intent “will feed into future oversight efforts will”. The DFPI also indicated that potential regulations regarding wage-related advances, including registration of insured persons, record keeping and reporting, could be forthcoming.
Third, the DFPI said it would create the Consumer Financial Protection Division, which would “include a market surveillance and research arm to keep up with emerging financial products.” According to its report, in September 2021, DFPI assembled a research team that “is in the process of evaluating DFPI consumer complaints data to identify broader market trends that may pose risks to consumers.”
Key areas of DFPI enforcement related to fintech
The fintech industry has been a focus of DFPI enforcement activities since its inception. For example, in an early action, the DFPI stepped in refrain and refrain from ordering against a fintech platform for allegedly selling securities, including cryptocurrency, without a broker-dealer certificate; misleading consumers when selling the securities; and engaging in unlicensed securities transactions.
In recent months, the DFPI has continued to provide guidance to the industry in a variety of areas through interpretative opinions and enforcement actions. Businesses that offer similar financial products and services in California should take note.
- True lenders and interest rate caps
- In December 2021, the DFPI entered consent order with a California company that had marketed consumer loans to California borrowers at interest rates in excess of the maximum rate set by California law. In the consent order, the company agreed not to market or service any loan less than $10,000 with interest rates higher than those set forth in the California Fair Access to Credit Act. Receipt of the consent order shows that although the company did not fund the loans and its banking partner, a Utah bank, which is exempt from California’s usury laws, the DFPI considered the California company to be the true lender under the California Funding Act and the CCFPL.
- In response to the above order, a fintech platform and non-custodian operating a similar banking partnership program lawsuit filed against the DFPI in March 2022 and requested a statement that California’s interest rate caps do not apply to their lending program because their banking partner in Utah originates and funds the loans. In April 2022, the DFPI submitted an application counter-complaint, who has accused the fintech platform of fraudulent and illegal business practices by participating in a “Rent-a-Bank” partnership program that allows it to bypass California interest rate caps and encourage predatory lending practices. The counterclaim alleges that the fintech platform is the “true lender” of the loans as it has the overriding economic interest in the transaction as it collects almost all loan profits after purchasing the loan receivables within days of their funding. protect his banking partner from any credit risk. The DFPI also claims that the fintech platform performs traditional lender roles in marketing, underwriting and managing the loans. The DFPI is asking for penalties of at least $100 million in addition to reimbursement to affected borrowers.
- Wage-Based Advances and Lender Licensing
- In a February 2022 interpretive opinionThe DFPI concluded that certain employer-backed advances for which an EWA provider contracts with an employer to provide its employees with early access to wages do not qualify as loans under the California Consumer Credit Funding Act or the California Funding Act Deferred Deposit Transaction was law that governs payday loans. In reaching its conclusion, the DFPI found that the source of the funding (the employer), the cap on the amount of funding (to the amount an employee earns), and the nominal fees associated with the advance were against the application of California’s credit laws. Therefore, the requesting EWA provider and its employer partner did not have to obtain rental licenses.
- In contrast, in two recent enforcement actions, the DFPI claimed that a Merchant Cash Agreement (Providing funding in exchange for a percentage of a company’s future earnings) and to Income Sharing Agreement (providing college tuition in exchange for a percentage of the student’s post-graduation income) are considered loans and such providers must be licensed under applicable California law.
- Trading cryptocurrencies and digital assets
- In a March 2022 interpretive opinionThe DFPI addressed the question of whether the California Money Transmission Act (MTA), which prohibits unlicensed involvement in the state’s money transmission business, applies to software that provides retail and institutional investors with the ability to buy, sell cryptocurrency and save. Note that the MTA defines “money transfer” to include the sale or issue of “stored assets”; sale or issue of payment instruments; and receiving money for transmission. The DFPI concluded that closed-loop transactions, where the company does not facilitate the exchange of cryptocurrency transactions with third parties and the customer can only redeem the monetary value stored in the account for cryptocurrency sold by the company, do not meet the definition of “money transfer.” .” However, the DFPI stated that it has not determined whether a “wallet that stores cryptocurrency” is a form of “stored value” under the MTA. Accordingly, the DFPI did not require the requesting platform to be licensed in order to provide customers with fiat and digital wallets to store and exchange cryptocurrency directly on the platform. However, the DFPI pointed out that the admission requirements can still change.
- A month earlier, the DFPI had concluded in February 2022 consent order that the sale of a cryptocurrency retail credit product qualifies as collateral under California law. Specifically, the company in question offered and sold interest-bearing digital asset accounts “through which investors could lend digital assets [the company] and receive interest in return, paid in cryptocurrency. The DFPI concluded that these accounts are securities and that the company was unlawfully involved in unregistered securities transactions. The DFPI’s decision came shortly after the federal one Securities and Exchange Commission charged the company with a similar one violation of federal securities laws and found that the accounts were both “promissory notes” and “investment contracts” as the investors’ digital assets were pooled and packaged as loan products that generated returns for the company and provided variable monthly interest payments depending on the company’s stake and asset management.
As this overview illustrates, fintech remains a top priority for DFPI’s regulatory and enforcement work in 2022. Jenner & Block will continue to monitor the DFPI and report on the dynamic regulatory landscape affecting fintechs.