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CUs Exempt from California DFPI Rule: UDAAP for Commercial Loans

On August 2, the California Department of Financial Protection and Innovation (DFPI) released a new rule expanding its authority to regulate unfair, deceptive, and abusive acts and practices (UDAAP).

California credit unions ARE EXEMPT from this rule “to the extent that the licensee or the employee is acting under the authority of the license,” the rule states.

The DFPI’s final regulations, regulatory notice, and statement of reasoning can be found here.

The Rule
According to an analysis by National Law Review, the rule implements Section 90009(e) of the California Consumer Financial Protection Law (CCFPL), which authorizes the DFPI to issue rules defining UDAAPs for commercial financing. This rule strictly defines UDAAP concerning commercial financing and authorizes the DFPI to include in its UDAAP rulemaking requirements for data collection and reporting on the provision of commercial financing or other financial products and services.

On September 25, 2020, California Gov. Gavin Newsom signed into law the CCFPL. The CCFPL transformed California’s Department of Business Oversight into the DFPI, with the stated goal of strengthening consumer protections and promoting access to responsible credit. The CCFPL expands the powers of the DFPI, granting the department broad authority to regulate financial products and services and is modeled after the Dodd Frank Act (DFA).

Under the CCFPL, the DFPI has expanded authority to oversee financial service and product providers it did not previously regulate. These include but are not limited to credit repair and consumer credit reporting companies, debt relief companies, debt collectors, and private, for-profit school funding.

Key Aspects of the Rule
Important aspects:

  • Establishment of UDAAP authority for the DFPI. The rule not only defines and prohibits UDAAP but also grants the DFPI new authority to govern “abusive” acts along with “unfair” or “deceptive” practices, similar to the provisions in the DFA applicable to consumer transactions. It includes the power to define UDAAPs in connection with various commercial financing offerings, such as merchant cash advance, lease financing, factoring, and more, to small business recipients, nonprofits, and family farms.
  • Authorization of enhanced penalties. The DFPI is authorized to impose penalties of $2,500 for “each act or omission” without proving a willful violation. This enhancement over existing enforcement powers also includes increased penalties for “reckless” violations of up to $25,000 per day or $10,000 per violation, and for “knowing” violations the penalty may go up to $1,000,000 per day or 1% of the violator’s net worth (whichever is less), or $25,000 per violation.
  • Exemptions from DFPI’s UDAAP authority. Notably, banks, credit unions, federal savings and loan associations, and similar entities, along with current licensees of the DFPI and licensees of other California agencies, are exempted “to the extent that licensee or employee is acting under the authority of” the license.
  • Registration requirement. The rule creates a registration requirement subject to the DFPI’s implementing regulations, expanding the DFPI’s oversight reach. Entities that might be affected include service providers offering their financial products or services and businesses involved in payment or financial data processing.

Access the ‘Compliance Hotline’
Your League-member benefits include the Compliance Hotline — providing exclusive access to dedicated compliance experts:

Using the above phone number and email address, you can gain access to a knowledgeable team that’s ready to address all your credit union’s compliance inquiries — promptly and efficiently. With the Compliance Hotline, you can proactively respond to impromptu questions and issues by getting clarity and insight on technical topics that normally slow you down. We want to help you unlock the full potential of your League membership by leveraging the resources and support you need to navigate the complex world of compliance effortlessly. We’re ALWAYS just a phone call or email away!

Additionally, other League-member compliance resources include:

  • ViClarity
  • CU PolicyPro
  • ComplySight
  • InfoSight
  • CU Store
  • Record Retention Guide
  • GRC Technology Solutions 

For more information, email Lisa Quaranta.

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