California Legislative Roundup 2020: Financial Services

Notwithstanding a pandemic-induced winnowing of legislative priorities this year, California has passed a handful of new bills to regulate discrete areas of the financial services industry, including student loan servicing, debt collection and housing. The state also took a major step toward consolidating oversight authority over consumer financial products and services in the potentially renamed Department of Financial Protection and Innovation (DFPI). Unless otherwise noted, all bills are awaiting the signature or veto from Gov. Gavin Newsom, which must happen by Sept. 30, 2020.

California Consumer Financial Protection Law Would Expand Oversight Authority

Enactment of the CCFPL

On Aug. 31, 2020, the California legislature passed Assembly Bill (AB) 1864. The bill would enact the California Consumer Financial Protection Law (CCFPL) and expand the ability of the agency to "improve accountability and transparency in the California financial system and promote nondiscriminatory access to responsible, affordable credit, among other purposes." The CCFPL would give the Department of Business Oversight (DBO) oversight authority over parties that are not currently subject to licensure or supervision, by making it unlawful for "covered persons" or service providers to "engage in unlawful, unfair, deceptive, or abusive acts or practices with respect to consumer financial products or services, or offer to provide a consumer a financial product or service that is not in conformity with any consumer financial law." Notably, the definition of "covered persons" set forth in section 90005(f) would expand the authority of the DBO to encompass: 1) persons engaging in offering or providing a consumer financial product or service to a resident of California; 2) any affiliate who acts as a service provider; or 3) any service provider to the extent that person engages in the offering or provision of its own consumer financial product or service. There would be several exemptions to the authority under the CCFPL, notably including (but not limited to) DBO licensees, escrow agents licensed under the state Financial Code, payday lenders and national banks. If not exempt on the basis of the type of entity, the scope of "financial product or service" subject to the authority of the agency is expansive.

Expansion of Authority

Additional authority and rights granted to the DFPI under the bill would include the power to investigate (including issuance of subpoenas) and bring civil or administrative proceedings and authority to promulgate registration and licensing requirements. The Act would also establish a "Financial Technology Innovation Office" within the DFPI to emphasize utilization of technology.

Bottom Line

Unless vetoed by the Governor this month, the CCFPL will take effect on Jan. 1, 2021. Given the expansion of oversight over financial services and products in the state of California that will be effected by the CCFPL, servicers should carefully study its provisions and any new compliance requirements promulgated by the DFPI after it goes into effect.

Department of Business Oversight Rebranded as the Department of Financial Protection and Innovation

AB 1864 would also amend the CCFPL and add Division 24 to the Financial Code for the purpose of promoting consumer welfare.  It would reorganize and rename the DBO and clarify its authority while also expanding its jurisdiction. If it becomes law, the DBO would be renamed the Department of Financial Protection and Innovation (DFPI), with the newly minted DFPI retaining all powers, duties and functions of the DBO, in addition to overseeing various other laws related to providing financial services and products in the state of California. At the head of the agency, the former Commissioner of Business Oversight will be rebranded the Commissioner of Financial Protection and Innovation.

Student Loan Servicing Act Gets Beefed Up

Following the example of several other states,¹ the California legislature has passed AB 376 (SLSA Amendments) to amend the existing California Student Loan Servicing Act (SLSA). The SLSA Amendments would 1) place new requirements upon student loan servicers, including requirements regarding payment posting and crediting, handling of overpayments and partial payments, and the training of customer service personnel, 2) give consumers a private right of action for violations of its provisions, 3) create the new position of Student Loan Ombudsman and 4) expand the supervisory authority of the DBO² over servicers.

The stated purposes of the SLSA Amendments are to promote meaningful access to affordable repayment and loan forgiveness benefits for California student loan borrowers, to ensure that borrowers can rely on information about student loans and loan repayment options provided by servicers, to build upon the SLSA to set effective minimum student loan servicing standards and ensure that California borrowers are protected from predatory student loan industry practices, and to protect the public interest. Below is a brief summary of the most significant provisions of the SLSA Amendments.

New Requirements Placed on Servicers

To fulfill its purposes, the SLSA Amendments require servicers, among other things, to:

• post, process and credit borrower payments within specified timeframes
• apply overpayments consistent with the "best financial interest" of the borrower
  (Servicers can meet this requirement, for example, by allocating the overpayment to the loan with the highest interest rate on the borrower's account, unless he/she specifies otherwise.)
• apply partial payments to minimize late fees and negative credit reporting
• maintain records, timely process paperwork and diligently oversee service providers
• provide specialized training for customer service personnel who advise military borrowers, borrowers in public service, borrowers with disabilities, and older borrowers
• not engage in unfair, deceptive or abusive acts or practices (UDAAP) in connection with the servicing of a student loan, a laundry list of examples of which are included in the SLSA Amendments

Private Right of Action for Consumers

The SLSA Amendments also would give consumers who suffer damages as a result of a person's failure to comply with the SLSA (and/or applicable federal laws relating to student loan servicing) a private right of action for actual and punitive damages, injunctive relief, restitution, attorney's fees and other relief, including treble damages in certain circumstances. Before filing such an action against a person, however, a consumer must notify the person of the consumer's intent to do so, using a prescribed form. The person would then have a specified opportunity to cure the alleged violation. Per the SLSA Amendments, any attempt by the person to cure the alleged violation would be inadmissible in court against the person but admissible by the person.

Creation of Student Loan Ombudsman

In addition, the SLSA Amendments would require the DBO, beginning on July 1, 2021, to designate a Student Loan Ombudsman within the DBO whose job it would be to: 1) receive and review complaints and refer them to an appropriate unit within the DBO for investigation; 2) refer complaints regarding Servicers not subject to licensing under the SLSA to the U.S. Department of Justice (DOJ); 3) refer complaints regarding private postsecondary educational institutions licensed by the Bureau for Private Postsecondary Education to the Bureau for Private Postsecondary Education's Office of Student Assistance and Relief (OSAR); 4) confer with DOJ and OSAR regarding student loan servicing complaints, the proper referral processes for those complaints and the SLSA's reporting requirements; and 5) report to the appropriate committees of the Legislature, not later than 18 months after the operative date of the SLSA Amendments and yearly thereafter, regarding implementation of the SLSA Amendments, the types of complaints received, and other data and analysis on student loan issues. To enable the Ombudsman to perform these tasks, the SLSA Amendments also authorize him/her to hire additional staff as needed.

Expanded Authority for DBO

Finally, the SLSA Amendments would authorize the DBO to monitor for risks to consumers in the provision of student loan servicing, to gather and compile information from Servicers regarding their organization, business conduct, and activities and develop and publicize metrics based on the data collected, and to require Servicers to file annual or special reports and/or answers in writing to specific questions.

Bottom Line

States are increasingly focusing on problems in the student loan servicing industry and Servicers need to pay close attention to new state initiatives to deal with these problems. The SLSA Amendments represent yet another example of such an initiative, and go further than most, particularly in regard to their grant of a private right of action to aggrieved consumers and their laundry list of UDAAPs. As a result, and assuming the SLSA Amendments are not vetoed by the Governor, Servicers would be well advised to carefully review and analyze the provisions in the SLSA Amendments and develop a plan to achieve compliance.

Debt Collectors Would be Required to Obtain a License Beginning in 2022

Gov. Newsom also is considering Senate Bill (SB) 908, the Debt Collection Licensing Act (DCLA), which would require debt collectors to obtain a license from the DBO to do business in California beginning Jan. 1, 2022. The DCLA is intended to work in tandem with the existing state Rosenthal Fair Debt Collection Practices Act, Cal. Civ. Code §§ 1788-1788.33 (RFDCPA) and Fair Debt Buying Practices Act, Cal. Civ. Code §§ 1788.50-1788.64 (FDBPA), which regulate the conduct and practices, respectively, of "debt collectors" and "debt buyers."

Who Is Covered

The DCLA states that "no person shall engage in the business of debt collection in [California] without first obtaining a [DCLA] license" and indicates that a person engages in the business of debt collection in California if the person is located 1) in California and seeks to collect from a debtor that resides inside or outside of California, or 2) outside of California and seeks to collect from a debtor that resides in California.

The DCLA essentially defines a "debt collector" to include any person who is a "debt collector " as defined in the RFDCPA ("any person who, in the ordinary course of business, regularly, on the person's own behalf or on behalf of others, engages in debt collection," including "any person who composes and sells, or offers to compose and sell, forms, letters and other collection media used or intended to be used for debt collection") and any person who is a "debt buyer" as defined in the FDBPA ("a person or entity that is regularly engaged in the business of purchasing charged-off consumer debt for collection purposes, whether it collects the debt itself, hires a third party for collection, or hires an attorney-at-law for collection litigation"). 

Requirements to Obtain License

Applicants for licensure would be required to submit to a background check and fingerprint processing, pay specified application fees, and provide information requested by the commissioner, including a sample of the applicant's initial form of validation notice required under the federal FDCPA. The DBO would prescribe the exact content of the licensing application and may require applicants to apply through the Nationwide Multistate Licensing System & Registry (NMLS).

DBO Rulemaking Authority and Enforcement

While violations of the RFDCPA and FDBPA are enforceable by consumers through a private right of action, a violation of the licensing law would only be enforced by the DBO. The DCLA provides powers to the commissioner in line with those found in other financial licensing laws administered by the DBO, including rulemaking authority, investigation and examination authority, and limited enforcement authority (including authority to enforce violations of the RFDCPA and the FDBPA). After notice and an opportunity for a hearing, the commissioner would have the power to order a licensee to desist and refrain from further violations or to pay ancillary relief, including restitution or damages. The commissioner may also suspend or revoke a license.

Next Steps

Assuming the DCLA becomes law, debt collectors should monitor the DBO for application details anticipated to be released sometime next year. Given the potential volume of applications, debt collectors would be wise to apply early. Prospective licensees who submit an application prior to Jan. 1, 2022 would be expressly permitted to operate pending approval of the license.

Tenant, Homeowner and Small Landlord Relief During the COVID-19 Pandemic

AB 3088, the Tenant, Homeowner, and Small Landlord Relief and Stabilization Act of 2020 (Relief Act), includes numerous provisions to provide relief for tenants, homeowners and small landlords whose ability to fulfill their obligations to pay rent or make mortgage payments has been adversely affected by the COVID-19 emergency. The Relief Act , which was filed with the Secretary of State on Aug. 31, 2020, went into immediate effect and is retroactive to March 1, 2020. Below are summaries of three of its most significant provisions.

Small Landlord Foreclosure Relief

Section 11 of the Relief Act extends until Jan. 1, 2023 the foreclosure protections embodied in the California Homeowner Bill of Rights to any first lien mortgage or deed of trust that is 1) secured by residential real property occupied by a tenant, 2) contains no more than four dwelling units and 3) meets certain criteria, including that a tenant occupying the property is unable to pay rent due to a reduction in income resulting from COVID-19.

Small Landlord and Homeowner Relief

Section 13 of the Relief Act, titled the "COVID-19 Small Landlord and Homeowner Relief Act" (SLHRA), provides certain protections to individual mortgage loan borrowers (or their confirmed successors in interest) and to other mortgagors if the secured property contains no more than four dwelling units and is currently occupied by one or more residential tenants. The SLHRA requires servicers to provide covered borrowers 1) whose mortgages were current as of Feb. 1, 2020; 2) who are experiencing a financial hardship that prevents the borrower from making timely payments on their mortgage obligation due, directly or indirectly, to the COVID-19 emergency; and 3) whose forbearance request is denied, with a written notice setting forth the specific reason or reasons that forbearance was not granted. These protections apply until April 1, 2021.

If the written notice cites any defect in the borrower's request, including an incomplete application or missing information, that is curable, the mortgage servicer must include specific information in the notice, including identification of the defect, that the borrower has 21 days from the mailing date of the notice to cure, and that the servicer will accept receipt of the borrower's revised request for forbearance until that date and will respond to a revised request within 5 business days of receipt of the revised request. The SLHRA also indicates that, whether or not a loan is a "federally backed mortgage loan" as defined in the CARES Act, a servicer that complies with the relevant provisions regarding forbearance in Section 4022 of the CARES Act for federally backed mortgages, and with the guidance to servicers provided by Fannie Mae, Freddie Mac, the FHA, the VA, or the Rural Development division of the Department of Agriculture, regarding borrower options following a COVID-19 related forbearance, will be deemed to be in compliance with the SLHRA.

Tenant Relief

Section 20 of the Relief Act, titled the "COVID-19 Tenant Relief Act of 2020" (Tenant Act), is an extension of an emergency rule enacted by the California Judicial Council prohibiting eviction of residential tenants from April to Aug. 31, 2020 and was signed by Gov. Newsom last month. It protects residential tenants, whether residing in a house, apartment, duplex, accessory dwelling unit or mobile home, by prohibiting their landlords from evicting them for nonpayment of rent or other charges that came due between March 1 and Aug. 31, 2020, and in some cases, through Jan. 31, 2021.

Evidentiary Requirements

To be protected from eviction for nonpayment of rent or other charges coming due between March 1 and Aug. 31, 2020, a resident must provide the landlord with a written declaration (under penalty of perjury) stating that their finances have been negatively impacted by the COVID-19 pandemic. "High-income" residents (i.e. at least $100,000 in income or 130 percent of the area median income) also may be required to provide documentation of their COVID-19 related hardship, provided the landlord follows a specified procedure set forth in the Act.

To receive protection for nonpayment between Sept. 1 and Jan. 31, 2021, a resident must, in addition to providing the required declaration, also pay 25 percent of unpaid rent payments due since September.

Notably, the Act does not forgive unpaid amounts – overdue rent may be sought by the landlord through a small claims action beginning March 1, 2021.

Landlord's Notice

If a tenant has missed any one or more payments due between March 1 and Aug. 31, 2020, landlords are required to give the tenant an informational notice about the new law together with hardship declaration forms, after which the tenant would have 15 days to complete and return the forms to the landlord.

Eviction

Landlords must provide a 15-day notice before seeking to evict a residential tenant for unpaid rent or other charges due between March 1, 2020, and Jan. 31, 2021. AB 3088, however, does not apply to commercial unlawful detainers, and thus commercial tenants are still subject to evictions as of Sept. 2, 2020.

Next Steps

Landlords should ensure compliance with the new notice requirements, and may be subject to civil penalties and fines for noncompliance. Local ordinances may grant additional protections beyond the Act.

Holland & Knight will provide updates on the progress of these measures and any further actions taken by the Governor. For questions about these bills and how they might affect you or your business, please contact the authors.

Notes

¹ See Bob Jaworski, "New Jersey, New York and Pennsylvania Tag-Team Mortgage Servicers with More Regulation," American Bar Association, Banking Law Committee Journal (Spring 2020).

² The DBO will be renamed the DFPI if the CCFPL becomes law.

Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem. Moreover, the laws of each jurisdiction are different and are constantly changing. If you have specific questions regarding a particular fact situation, we urge you to consult competent legal counsel.