Retail and Consumer Products Law Roundup January 2020

Retail and Consumer Products Law Roundup

Washington Legislature Resumes Consideration of the Washington Privacy Act

By Scott T. Lashway, Partner, Privacy and Data Security | Matthew M.K. Stein, Special Counsel, Privacy and Data Security 

On January 14, a new version of the proposed Washington Privacy Act, Senate Bill 6281, was introduced in the state Senate. Similar to last year’s proposed act, which Manatt covered at the time (read more here), the new bill combines key features of both the California Consumer Privacy Act (CCPA) and the General Data Protection Regulation (GDPR).

Under the bill, companies would be required to provide consumers with a “reasonably accessible, clear, and meaningful privacy notice” that contains elements similar to a notice provided under the CCPA.

Consumers would, as under the GDPR, have rights to access their personal data, to correct or delete it, to move it, and to object to automated decision making, as well as to opt out of the sale of their personal data, as under the CCPA. Moreover, consumers would be able to opt out of the processing of their personal data for targeted advertising. Companies receiving a request would need to convey that request to others who, in the past year, received the consumer’s personal data, and they would need to set up internal processes to handle appeals if they deny any requests.

As with last year’s version of the act, companies would need to sign contracts with their service providers; under the new bill, however, the terms of those contracts would increasingly resemble GDPR Article 28 processor terms for contracts between controllers and processors.

Importantly, companies would need to secure consumers’ consent before processing sensitive data, e.g., racial, religious, health, biometric and geolocation data, or any data from “a known child.” The level of consent required is similar to the heightened consent the GDPR requires: “a clear affirmative act signifying a freely given, specific, informed, and unambiguous indication of a consumer’s agreement.”

The bill does not create a private right of action for violations. Instead, the state’s attorney general would have the right to bring an action in the name of affected residents and to levy a $7,500 civil penalty per violation. Unlike the CCPA and last year’s bill, the new bill does not contain a period to cure violations before the state attorney general could bring an action.

If approved, the law would take effect on July 31, 2021.

To read Senate Bill 6281, click here.

To read a comparison of Senate Bill 6281 against last year’s version of the Washington Privacy Act, click here.

Why it matters: If the legislature moves Senate Bill 6281 forward, Washington could join California and Nevada in the regulation of consumer privacy, giving rise to three state privacy laws that contain different requirements and different exemptions. These three laws could spur other states to quickly pass their own privacy laws with their own unique requirements and exemptions, resulting in an increasing patchwork of state privacy regulation and an increasingly difficult environment for federal lawmakers to agree on a common baseline for a nationwide law with preemptive effect. Put differently, it appears that companies should anticipate having to comply with different privacy requirements in the different states in which they operate.

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Looking Ahead: The 5 Biggest Employment Law Trends for 2020


As 2019 winds down, employers should keep an eye on the five biggest employment law trends for 2020.

  • Sexual orientation discrimination: legal or not? At the top of the list, employers should be ready for the forthcoming decision from the U.S. Supreme Court on whether Title VII’s ban on sex-based discrimination prohibits discrimination based on sexual orientation and whether the statute prohibits discrimination against transgender employees based on their status as transgender or based on sex stereotyping.

    The justices heard oral argument in a trio of cases in October, reviewing opinions from the U.S. Court of Appeals for the Second Circuit, which ruled that sexual orientation discrimination does fall under the umbrella of Title VII in a case involving a New York skydiver who revealed his sexual orientation to a customer, and the Eleventh Circuit, which reached the opposite conclusion when considering the claims of a Georgia hospital security officer who claimed she was constructively discharged because she did not conduct herself in a traditional female manner and consistent with gender stereotypes.

    As for the question of protection for transgender employees, the Court considered a case brought by the Equal Employment Opportunity Commission (EEOC) against a funeral home company in Michigan that terminated an employee after she announced her plans to transition from male to female. There, the Sixth Circuit rejected the employer’s argument that the Religious Freedom Restoration Act shielded it from liability.

    The justices appeared divided at oral argument, making predictions about the outcome difficult. Whatever the Court decides, the opinion will have a significant impact on employers.
  • California’s new law kicks in. Employers should also brace themselves for new legislation set to take effect in the Golden State. Assembly Bill 51 outlaws the use of mandatory arbitration agreements in employment claims related to the Fair Employment and Housing Act (FEHA) or violations of the state’s Labor Code.

    The new law also invalidates all agreements requiring the waiver of any right to forum or procedure if entered into as a condition of employment, continued employment or the receipt of any employment-related benefit. AB 51 does provide some delineated exemptions, such as those for Financial Industry Regulatory Authority-registered brokers or others required to be registered with a self-regulatory organization under the Securities Exchange Act.

    While employers certainly need to have the law’s requirements on their radar, AB 51 will likely face legal challenges and could be preempted based on Supreme Court precedent that states that the Federal Arbitration Act preempts state laws that prohibit arbitration of particular types of claims. Since the new law specifically bans arbitration of employment discrimination and labor code claims, it faces an unlikely future.
  • Gig economy uncertainty. Developments in the gig economy will make headlines in the coming year as employers continue to struggle with the classification of workers as employees or independent contractors.

    In California, the issue will be front and center based on a combination of case law and legislation that established a presumption that workers are employees, and not independent contractors.

    To classify a worker as an independent contractor, employers must now satisfy all three prongs of the ABC test: (A) that the worker is free from the control and direction of the hirer in connection with the performance of the work, both under the contract for the performance of the work and in fact; (B) that the worker performs work that is outside the usual course of the hiring entity’s business; and (C) that the worker is customarily engaged in an independently established trade, occupation or business of the same nature as that involved in the work performed.
  • Keeping things competitive. Cases challenging the legality of noncompete agreements continue to fill the courts, particularly as a favorite claim of state attorneys general. Groups of AGs have sent multiple letters asking the Federal Trade Commission (FTC) to limit the use of noncompete clauses in employment contracts, especially for low-income workers.

    Apparently, the agency was listening. The FTC recently announced a public workshop to examine “whether there is a sufficient legal basis and empirical economic support to promulgate a Commission Rule that would restrict the use of noncompete clauses in employer-employee employment contracts.”

    Employers are encouraged to attend the workshop and/or file a comment with the agency, which could result in an FTC rulemaking—and limitations on employers.
  • Joint effort on joint employers. Employers also need to watch for changes to the joint employer standard, as three federal agencies decided to weigh in on the issue in 2020. The National Labor Relations Board (NLRB) has been working on its review of the standard for more than a year, considering the almost 29,000 comments received in response to its Notice of Proposed Rulemaking (NPRM).

    Pursuant to the board’s NPRM, joint employer liability would be limited only to situations where the employer possesses—and actually exercises—“substantial direct and immediate control” over the employees’ essential terms and conditions of employment in a manner that is not “limited and routine.”

    Not to be outdone, the EEOC signaled plans to clarify its interpretation of when an entity is a covered joint employer under the federal equal employment opportunity laws. The agency aims to issue an NPRM—characterizing its rule as a “proposed amendment” to laws such as Title VII, the Americans with Disabilities Act and the Age Discrimination in Employment Act—before the end of 2019, with a comment period lasting until February 2020.

    As for the Department of Labor (DOL), the agency has also been working on its rules, which involve a four-part balancing test to determine whether multiple companies are joint employers, evaluating whether the potential joint employer hires or fires the employee, supervises and controls the employee’s work schedule or conditions of employment, determines the employee’s rate and method of payment, and maintains the employee’s employment records.

    The DOL’s comment period on its proposal closed in June 2019, but the agency has not released a final draft of its standard for the Office of Management and Budget to review, pushing delivery of the final rule into 2020.

Why it matters: Before the ball has dropped on 2019, employers should be on the lookout for major employment issues in 2020, from a decision on whether legal protection exists for sexual orientation discrimination to the possibility of three new—and different—standards on joint employer liability.

Join our upcoming webinar, which will touch on recent developments in California employment law and offer practical guidance to help prepare for 2020. Register here. Manatt will continue to report on the developments throughout the coming year.

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New False Ad Suit: Chocolates Have Less THC, CBD Than Advertised

By Adrianne Marshack, Partner, Class Actions

A new false advertising lawsuit filed in California federal court accuses Bhang Corporation of duping consumers as its “Medicinal Chocolates” actually contain less cannabis than promised in its advertising.

California resident Charles Ballard alleges that he purchased Bhang’s Medicinal Chocolates—including CBD Caramel Dark Chocolate and Full Spectrum CBD Milk Chocolate—based on the claims on the products’ packaging about the amount of tetrahydrocannabinol (THC) and cannabidiol (CBD) in the chocolates.

Ballard alleges, however, that the chocolates contained less THC and CBD than promised, that the defendant knew or should have known this, and that the defendant deliberately, or at least negligently, tricked consumers into paying a premium for the products by claiming higher amounts of cannabinoid content than were actually present. 

The THC and CBD content, Ballard alleges, is the very reason consumers buy the defendant’s products: “The amounts and/or levels of THC and/or CBD are not only material, but the primary reason consumers purchase THC and/or CBD products such as Bhang Products.”

Ballard’s complaint alleges six causes of action: violations of the state’s Consumers Legal Remedies Act, False Advertising Law and Unfair Competition Law; breach of express warranty; breach of the implied warranty of merchantability; and fraud and negligent misrepresentation.

Seeking to certify both a nationwide and a California class of purchasers of the defendant’s products dating back four years from December 31, 2018, Ballard seeks injunctive relief, monetary damages, labeling changes to the products and a corrective advertising campaign.

To read the complaint in Ballard v. Bhang Corporation, click here.

Why it matters: As the growing number of states with legalized marijuana yields a burgeoning industry of cannabis products, false advertising lawsuits will inevitably follow, as demonstrated by Ballard’s complaint. Advertisers should ensure that their claims about THC and/or CBD content are accurate, or they may face a similar action.

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CFPB 2019 Year in Review and What to Expect in 2020

By Richard E. Gottlieb, Partner, Manatt Financial Services | Charles E. Washburn, Jr., Partner, Manatt Financial Services

Renewed Vitality but Self-Inflicted Wounds on Constitutionality

The Consumer Financial Protection Bureau (CFPB or Bureau) had an active 2019, and we review the most significant stories here. Likewise, we discuss the likely major developments expected in 2020, leading with the upcoming Supreme Court battle over CFPB constitutionality.

Lead Story: CFPB Constitutionality

Is the CFPB constitutionally structured? We may very well receive a definitive answer in 2020.

Back in 2018, the “en banc” U.S. Court of Appeals for the District of Columbia Circuit issued a divided ruling in PHH Corp. v. CFPB, holding that the structure of the Bureau is indeed constitutional because it reflects the legislative goal of creating a truly independent agency. The opinion reversed an earlier panel decision finding the CFPB unconstitutional. But neither PHH nor the CFPB sought Supreme Court review, and thus the case did not further serve as a vehicle for resolving the Bureau’s structure on a constitutional basis.

In 2019, three separate cases worked their way through other federal appeals courts: CFPB v. Seila Law LLC in the Ninth Circuit; RD Legal Funding in the Second Circuit (a New York federal judge found the Bureau unconstitutional in a June 2018 decision); and CFPB v. All American Check Cashing, before the Fifth Circuit. In May 2019, in Seila Law, a unanimous panel of the Ninth Circuit declared that the structure of the CFPB is constitutional, relying heavily on the D.C. Circuit’s opinion in PHH Corp.

Seila Law is the case of all of the foregoing that made it to the Supreme Court. In October 2019, the Supreme Court granted certiorari. The justices agreed to address two questions: “[w]hether the vesting of substantial executive authority in the [CFPB], an independent agency led by a single director, violates the separation of powers” and “whether, if the [CFPB] is found unconstitutional on the basis of the separation of powers, [the provision creating the ‘for cause’ removal of the director] can be severed from the Dodd-Frank Act.”

In a significant ruling regarding another, similar statute also raised the ante in late 2019, with broad repercussions for the financial services industry. The U.S. Court of Appeals for the Fifth Circuit, sitting “en banc,” ruled in Collins v. Mnuchin that the Federal Housing Finance Agency (FHFA), the conservator for both Fannie Mae and Freddie Mac, is unconstitutionally structured because its director may be removed solely for cause. The court therefore severed that provision from the law. Because this provision is substantially similar to the statutory structure for the CFPB, we argued in a post that it was now highly probable that the same court would likewise find the CFPB structure unconstitutional.

In a twist, CFPB Director Kathy Kraninger surprised many when she informed her staff, and likewise sent letters to the leaders of the Senate and House of Representatives asserting, that the for-cause director removal provision of the Consumer Financial Protection Act (CFPA) is, in fact, unconstitutional.

The CFPB did not stop there. It formally took the position with the Supreme Court in Seila Law that the Bureau’s structure is indeed unconstitutional. But in the event the Supreme Court declares the CFPB’s structure unconstitutional, the decision will not impact or otherwise call into question the CFPB’s prior enforcement actions, the CFPB argued in its brief submitted in November.

“My determination that the for-cause removal provision is unconstitutional does not affect my commitment to fulfilling the Bureau’s statutory responsibilities,” Kraninger told Congress. “I will continue to carry out the Bureau’s duties under the CFPA and to defend the Bureau’s actions. Further, a Supreme Court decision holding that the for-cause removal provision is unconstitutional should not affect the Bureau’s ability to carry out its important mission.”

At the same time, counsel for All American Check Cashing filed their petition for writ of certiorari to the Supreme Court, arguing their case should be heard alongside Seila Law. Encouraging the justices to deny the writ, the CFPB argued not only that review was unwarranted but also that All American’s argument that the unconstitutional structure compelled dismissal of the CFPB enforcement action was “not an appropriate remedy.”

As 2019 neared its close, the Supreme Court announced that oral argument in Seila Law would be heard on March 3, 2020, and denied certiorari in All American Check Cashing.


Roles continued to change at the CFPB, but not quite with the drama witnessed at the top.

The changes started early. In January, Chris D’Angelo, the CFPB’s associate director of supervision, enforcement and fair lending, announced his jump to the New York attorney general’s office to become the chief deputy attorney general for financial justice.

In May 2019, CFPB Policy Director Eric Blankenstein, a Trump appointee who had blogged on politically and racially sensitive issues, resigned from the Bureau. Less than a week after Blankenstein’s resignation, Kristen Donoghue left the CFPB after openly criticizing Blankenstein’s tenure. Cara Petersen replaced her on an acting basis. Like her predecessor, Petersen has been at the CFPB since early 2011, joining from the Federal Trade Commission (FTC), where she handled consumer protection investigations for the FTC’s Division of Financial Practices.

In August, the CFPB appointed a new private education loan ombudsman. Robert G. Cameron, a colonel and staff judge advocate for the Pennsylvania Army National Guard, joined the CFPB from the Pennsylvania Higher Education Assistance Agency, where he was responsible for litigation, compliance and risk mitigation efforts. Cameron also spent time in Pennsylvania’s Treasury Department and in the Governor’s Office of General Counsel.

Director Kraninger’s Imprint on the CFPB

The year began with a bang. Former acting director Mick Mulvaney had left in December 2018. But as Kraninger began her term as the new director of the CFPB, speculation ran rampant about the direction in which she might take the Bureau: What role would CFPB supervisory guidance play in the Kraninger era? Would she carry the mantle of both Congress and Mulvaney by dismantling much of such guidance completely? In what ways would she hold regulated entities accountable?

In an internal staff memo dated January 2, 2019, sent to employees of the CFPB, Kraninger wrote, “We must do our work with an open mind and without presumptions of guilt, and to always carefully weigh the costs and benefits to consumers of our enforcement activities and regulatory rulemakings.” The email, obtained by American Banker, continues: “On my watch as [d]irector, the CFPB will vigorously enforce the law. I also want the Bureau to respect the rights of all we serve and interact with, to safeguard their personal information and to be transparent in its operations.”

Director Kraninger spoke April 17, 2019, to a Washington, D.C., think tank. Of particular note, Kraninger largely defended the meaningful role the CFPB plays, stating that the Bureau’s “mission and the agency itself” are “critical to our economy and are not going away.” She also agreed that, because bad actors “harm consumers and undermine the integrity of markets,” they should be “held accountable.” But, she continued, “[w]here Congress directs the CFPB to promulgate rules or address specific issues through rulemaking, we will comply with the law. Where the Bureau has discretion, we will focus on preventing consumer harm by maximizing informed consumer choice, and prohibiting acts or practices which undermine the ability of consumers to choose the products and services that are best for them.”

CFPB Reports

In January 2019, the Bureau released a report on the Ability to Repay and Qualified Mortgage Rule. The rule, which took effect in January 2014, mandates that lenders make a reasonable and good faith determination that a borrower has the ability to repay his or her loan. Taking a look back at five years of the rule, the Bureau found it was “not generally associated” with an improvement in loan performance, as measured by the percentage of loans becoming 60 or more days delinquent within two years after the obligation was incurred.

Also in January, the CFPB’s Office of Servicemember Affairs (OSA) released its annual report discussing complaints filed by service members, veterans and their families. Between April 1, 2017, and August 31, 2018, the OSA received 48,800 complaints, with the largest number falling in the category of credit reporting (with 37 percent of the total complaints). The list of most popular complaints also included debt collection, mortgage debt, credit cards, auto lending, student lending and payday loans.

In the annual joint report with the FTC on Fair Debt Collection Practices Act (FDCPA) enforcement, the CFPB disclosed that it handled roughly 81,500 debt collection complaints, with attempts to collect a debt the consumer claimed was not owed as the most common complaint, followed by written notifications about the debt and communication tactics. Six public enforcement actions arising from alleged FDCPA violations were initiated by the CFPB in 2018. One resulted in an $800,000 civil penalty; another resulted in a judgment in favor of the defendant. The four other cases remain in active litigation. The CFPB also filed two amicus briefs in cases raising FDCPA issues (one in the Supreme Court and the other in a federal court of appeals), identified one or more violations of the statute through its supervisory examinations, and conducted “a number” of nonpublic investigations of companies to determine whether they engaged in collection practices that ran afoul of the FDCPA.

In June 2019, the CFPB released its annual fair lending report to Congress. During the Cordray era, the report was often replete with significant supervision, examination and enforcement activity. Not in 2019. In 2018, notes the report, the CFPB “opened and continued a number of fair-lending-related investigations” but did not bring a single fair lending-related enforcement action. Instead, the new CFPB focus was on other “tools.” Or, as Director Kraninger put it in her cover note, “[T]he best application of these tools is to focus on prevention of harm to consumers and that includes protecting consumers from unfair, deceptive and abusive acts or practices as well as from discrimination.”

In late 2019, the CFPB released a report from the private education loan ombudsman documenting the two-year period from September 1, 2017, through August 31, 2019. During the relevant time period, the CFPB handled roughly 20,600 complaints related to private or federal student loans (6,700 related to private loans and 13,900 to federal student loans), a decrease from the number of complaints filed in previous years. The report documents a 50 percent drop in complaints about private student loan companies from 2017 to 2018, with another 25 percent decrease from 2018 to 2019. Federal student loan complaints also decreased, albeit at a slightly lower rate, dropping 44 percent from 2017 to 2018 and then another 8 percent from 2018 to 2019.


CFPB supervision received particular scrutiny for the Bureau’s “hands off” approach to compliance with the federal Military Lending Act.

In light of bipartisan protests about the CFPB’s move to drop MLA exams, Director Kraninger responded with a legislative proposal asking Congress to grant the Bureau “clear authority” to supervise for compliance with the statute. “The Bureau is committed to the financial well-being of America’s service members,” Kraninger said in a statement. “That’s why I have asked Congress to explicitly grant the Bureau authority to conduct examinations specifically intended to review compliance with the MLA. The requested authority would complement the work the Bureau currently does to enforce the MLA.” Kraninger’s draft proposal would add language to the CFPA to the effect that “[n]otwithstanding any other provision of law, the Bureau shall have nonexclusive authority to require reports and conduct examinations on a periodic basis … for purposes of” assessing compliance with the MLA, obtaining information about the activities and compliance systems or procedures of the entity, and detecting and assessing risks to consumers and to markets for consumer financial products and services.

In early January 2019, a coalition of 23 Democrats sent the new director a letter urging the Bureau to resume Military Lending Act (MLA) examinations of supervised entities regarding compliance with the MLA, a practice suspended by Mulvaney. The examinations had been suspended by then-acting director Mulvaney in 2018. “We believe servicemembers and their families deserve to have their rights under federal law fully upheld through strong supervision and enforcement by federal regulators, including the Consumer Bureau,” the members of the House Financial Services Committee wrote.

Requests for Information (RFIs) Continue

Continuing a process promoted by then-acting director Mulvaney, the CFPB announced a number of requests for information concerning various aspects of the consumer credit market.

First, it issued a new RFI in satisfaction of its biennial obligation under the Credit Card Accountability Responsibility and Disclosure Act (the CARD Act) to review the consumer credit card market. For the CARD Act RFI, the CFPB suggested several topics on which interested parties were to provide feedback, including the terms of credit card agreements and the practices of credit card issuers; the effectiveness of disclosures of terms, fees and other expenses of credit card plans; the adequacy of protections against unfair or deceptive acts or practices relating to credit card plans; and the cost and availability of consumer credit cards.

The Bureau also issued a new RFI in satisfaction of its biennial obligation under the Credit Card Accountability Responsibility and Disclosure Act to review the consumer credit card market. The CFPB suggested several topics for interested parties to provide feedback on, including the terms of credit card agreements and the practices of credit card issuers; the effectiveness of disclosures of terms, fees and other expenses of credit card plans; the adequacy of protections against unfair or deceptive acts or practices relating to credit card plans; and the cost and availability of consumer credit cards.

The Remittance Rule, added to the Electronic Fund Transfer Act (EFTA) by virtue of the Dodd-Frank Act. In an RFI issued April 2019, the CFPB asked for public comment on two aspects of the Remittance Rule, which requires companies that send international money transfers—or remittance transfers—on behalf of consumers to provide various disclosures, including the exact exchange rate, the amount of certain fees and the amount expected to be delivered to the recipient. First, the CFPB sought input on issues surrounding the July 2020 expiration of a temporary exception in the rule, under which insured financial institutions are permitted to estimate the amount of currency that will be available to the recipient if they are unable to know the amount and the sender holds an account with the bank. Second, the Bureau asked about the number of remittance transfers a provider must make to be considered a provider “in the normal course of business” and the possibility of incorporating a small financial institution exception into the rule.


Perhaps the lead story in rulemaking is the proposed rules on debt collection. Although enacted in 1977, the FDCPA had never had a detailed set of rules to illuminate how best to comply. CFPB Director Kraninger echoed this idea in recent remarks, noting that when the FDCPA was enacted in 1977, phone booths remained on almost every corner and cellphones were unimaginable. “And though there have been many advances in communications technologies since 1977, the FDCPA has not been updated to reflect our use of such technologies,” she said.

That all changed on May 7 when the CFPB issued its long-awaited, proposed amendments to Regulation F containing detailed, substantive regulations under the FDCPA—rules that will have a major impact on the industry. The proposed rules “clarify” the application of the four-decades-old FDCPA to modern forms of communication such as text messages. One highlight: safe harbor rules for a whole host of communications and “limited content” messages that will not constitute prohibited communications.

Director Kraninger likewise made good on plans to reconsider the Payday, Vehicle Title and Certain High-Cost Installment Loans Rule (the Payday Rule) with publication of two Notices of Proposed Rulemaking (NPRMs). In the first, published February 6, 2019, the CFPB declared its plans to rescind the rule’s ability to repay (ATR) provisions in their entirety. Rescinding the requirements, claimed the CFPB, “would increase consumer access to credit.” The NPRM requested input on the Bureau’s decision to rescind, with comments accepted until May 15. In a second NPRM, published the same date, the CFPB proposed to delay the compliance date for the mandatory underwriting provisions until November 19, 2020.

In June 2019 the CFPB formally delayed the compliance deadline for the mandatory underwriting provisions of the Payday Rule to November 19, 2020. The final rule did not extend the mandatory compliance date for the “payments” provisions of the rule, which nominally remained August 19, 2019. That said, the entire rule, including the payments provisions, was stayed by a Texas federal court under an order issued in March 2019. When August 19 approached, the order was extended yet again.

The CFPB also gave renewed attention to the Home Mortgage Disclosure Act (HMDA). In an NPRM issued in April 2019, the CFPB proposed to raise the coverage thresholds for collecting and reporting data about closed-end mortgage loans and open-end lines of credit under the HMDA rules. The proposal would provide relief to smaller lenders from HMDA’s reporting requirements, the Bureau explained, and would clarify partial exemptions from certain HMDA requirements that were added as part of the Economic Growth, Regulatory Relief and Consumer Protection Act (EGRRCPA). The NPRM proposed two alternatives for closed-end mortgage loans, with both alternatives permanently increasing the coverage threshold from 25 to either 50 or 100 closed-end mortgage loans. For open-end lines of credit, the proposal would extend the current temporary coverage threshold of 500 open-end lines of credit for two more years. Once the temporary extension expires, the NPRM would permanently establish the open-end threshold at 200 open-end lines of credit.

In addition, the Bureau released an advance notice of proposed rulemaking (ANPR) seeking input on the costs and benefits of collecting and reporting the data points the 2015 HMDA Rule added to Regulation C and certain pre-existing data points that the 2015 HMDA Rule revised. Interested parties were encouraged to weigh in on the costs and benefits of requiring that institutions report certain commercial-purpose loans made to a non-natural person and secured by a multifamily dwelling.

Later in the year, the Bureau finalized its proposed HMDA rulemaking, extending for two years the temporary threshold for collecting and reporting data about open-end lines of credit under the statute. The CFPB proposed the HMDA rule change in May as an effort to provide relief to smaller lenders from the HMDA’s reporting requirements and to clarify partial exemptions from certain statutory requirements that were added as part of EGRRCPA.

Pursuant to the final rule, financial institutions that originated fewer than 500 open-end lines of credit in either of the two preceding calendar years will not need to collect and report data with respect to open-end lines of credit for data collection years 2020 and 2021. The exemption will end on January 1, 2022.

In June 2019, the CFPB engaged in joint rulemaking with the Federal Reserve Board of Governors (FRB) to publish a final rule amending Regulation CC that implemented requirements under the Expedited Funds Availability Act (EFA Act). Unlike most regulations promulgated by the CFPB, Regulation CC comes with a twist: The FRB maintains sole rulemaking authority on Regulation CC’s liability provisions, and the FRB approved those provisions back in September 2018. The most recent joint rulemaking establishes an inflation adjustment amount that depository institutions must make available to their customers for purposes such as next-business-day withdrawal of certain check deposits and setting the threshold amount for determining whether an account has been repeatedly withdrawn.

In July 2019, the CFPB addressed the so-called GSE Patch that expands the qualified mortgage (QM) definition to include certain mortgage loans eligible for purchase or guarantee by Fannie and Freddie, and in most cases these loans are granted a safe harbor from legal liability in connection with the ATR requirements. These temporary GSE QM loans generally qualify for that safe harbor from legal liability even if the consumer’s debt-to-income ratio exceeds the general 43 percent threshold. Under the July 2019 ANPR, the Bureau advised of its plans to allow the GSE Patch to expire in January 2021 or after a short extension, if necessary, to facilitate a smooth and orderly transition away from the GSE Patch, but sought comment from stakeholders on that course of action.

In November, the CFPB eased the requirements for mortgage loan originators with temporary authority. Generally, if a mortgage loan originator organization employs an individual originator who is not licensed and is not required to be licensed, Regulation Z mandates that the organization perform specific screening of the individual before he or she can act as a loan originator (as well as provide certain ongoing training). But Regulation Z is ambiguous as to whether these requirements apply to loan originator organizations employing individual loan originators who have temporary authority to originate loans pursuant to the EGRRCPA amendments to the Secure and Fair Enforcement for Mortgage Licensing (SAFE) Act. The “interpretive rule concludes that a loan originator organization is not required to comply with certain screening and training requirements under Regulation Z if the individual loan originator employee is authorized to act as a loan originator pursuant to the temporary authority described in the SAFE Act,” as stated by the CFPB.

Compliance Guides and FAQs

On February 20, 2019, the CFPB issued a “Payday, Vehicle Title and High-Cost Installment Lending Rule: Payment-Related Provisions” compliance guide, a plain-language summary of the current rule provisions, designed for use by smaller entities. Most interesting here, the CFPB also advised such companies that the guide would likely be amended if and when the ATR provisions are modified, as the Bureau intends.

Likewise in February, the Bureau released a new update to the Prepaid Small Entity Compliance Guide in an effort to provide guidance for prepaid account issuers with regard to their compliance requirements under the Prepaid Rule. Beginning May 1, issuers were required to submit prepaid account agreements and other information to the CFPB on a rolling basis (as updates are issued to existing agreements, for example, as well as new prepaid account agreements as they are issued and notices when prior agreements are withdrawn).

The CFPB also provided important guidance on TRID compliance, issuing its initial TRID FAQs in January. In April 2019, the CFPB issued a TRID fact sheet specifically addressing whether a Loan Estimate and a Closing Disclosure are required in connection with the assumption of a residential mortgage loan. Once it is determined that the transaction is within the TRID Rule’s general scope of coverage (if it is a closed-end consumer credit transaction secured by real property or a cooperative unit and is not a reverse mortgage), then an analysis of whether the transaction is an “assumption” can begin. As a general rule, to satisfy the Regulation Z, 12 CFR 1026.20(b) definition of “assumption,” three elements must be satisfied, the CFPB said: include the creditor’s express acceptance of the new consumer as a primary obligor, include the creditor’s express acceptance in a written agreement, and be a “residential mortgage transaction” to the new consumer.

The CFPB provided additional TRID FAQs in May and July. The last update provided answers to five questions regarding timing for the provision of loan estimates, and whether and what kind of additional information can be sought by a creditor before issuing a loan estimate. The FAQs confirmed that, under the TRID Rule, a creditor must provide a loan estimate within three business days of the consumer submitting the following six pieces of information:

  • The consumer’s name;
  • The consumer’s income;
  • The consumer’s Social Security number (to obtain a credit report);
  • The property address;
  • An estimate of the value of the property; and
  • The mortgage loan amount sought.

In late 2019, the CFPB published two further guides addressing construction and construction-permanent loans under the same TRID Rule. One guide focuses on disclosing construction and construction-permanent loans with a separate Loan Estimate and Closing Disclosure for each phase of the transaction. The second guide concerns disclosing a combined Loan Estimate and a combined Closing Disclosure for both phases of a construction-permanent transaction.

MOUs: Coming and Going

The Dodd-Frank Act requires the CFPB to coordinate its supervisory activities with prudential regulators and others, and several agencies have entered into memoranda of understanding to accomplish this purpose.

In February 2019, the Bureau reauthorized its formal relationship with the FTC in an updated Memorandum of Understanding (MOU), first executed in 2012 and then renewed in 2015. “The agreement reflects the ongoing coordination between the two agencies under the terms of the CFPA, and is designed to coordinate efforts to protect consumers and avoid duplication of federal law enforcement and regulatory efforts,” the CFPB and FTC said in a joint statement. Unlike the first two MOUs (each of which was effective for three years), this version has an indefinite term.

The Department of Education (DOE) MOU is different story. As required by Dodd-Frank, the two agencies (CFPB and DOE) are required to work in conjunction to “resolve complaints related to [borrowers’] private education or federal student loans,” with specific instructions to enter into an MOU. Although the CFPB and DOE did have an agreement in place, the DOE terminated it in August 2017. The DOE stated that it terminated the MOU because the Bureau stopped sending complaints related to federal student loans within ten days of receipt. But the CFPB disputed that it ever ceased sharing borrower complaints, with former director Richard Cordray explaining that the Bureau made the complaints available to the DOE electronically, in near-real time.


In 2019, the CFPB finalized three new policies aimed at promoting innovation and facilitating compliance: an enhanced No-Action Letter (NAL) policy, the Trial Disclosure Program (TDP) policy and the Compliance Assistance Sandbox (CAS) policy. As compared with its predecessor, the new NAL policy offers a more streamlined review process focusing on the consumer benefits and risks of the product or service in question, the CFPB said, and recipients are provided reassurance that the CFPB will not bring a supervisory or enforcement action against the company under the covered facts and circumstances.

Requests for a NAL will be granted or denied within 60 days, and the letters will be posted on the CFPB’s website. Some denials may also be made public, along with an explanation of the reasons for the denial. The CFPB indicated that approvals under the new policy would provide protection from liability under federal statutes such as TILA, EFTA and the ECOA. Whether industry will find the enhanced NAL process more useful than its predecessor remains to be seen.

In October, the CFPB, together with the attorneys general of Alabama, Arizona, Georgia, Indiana, South Carolina, Tennessee and Utah, as well as the Florida Office of Financial Regulation (all Republican-led jurisdictions), announced the launch of the American Consumer Financial Innovation Network (ACFIN). Aimed at facilitating financial innovation through “greater competition, consumer access or financial inclusion in markets for consumer products and services,” the network agreed to engage in cross-jurisdictional coordination and information sharing, and to work to ensure that market innovations are free from fraud, discrimination and deceptive practices.

The CFPB likewise published a Federal Register notice requesting comment on the use of so-called Tech Sprints as a model for collaborative innovation. Tech Sprints “gather regulators, technologists, financial institutions and subject matter experts from key stakeholders for several days to work together to develop innovative solutions to clearly-identified challenges,” the Bureau explained. The innovation model is used by the United Kingdom’s financial regulator as well as the U.S. Census Bureau and the U.S. Department of Health and Human Services, and the CFPB hopes Tech Sprints can help advance regulatory innovation and compliance.

Congressional Hearings

With the Democrats in control of the House of Representatives, the CFPB was repeatedly called to testify on the many changes that have occurred since the departure of the original director, Richard Cordray.

In March 2019, at the “Putting Consumers First? A Semi-Annual Review of the [CFPB]” hearing before the House Financial Services committee, Director Kraninger faced Democratic criticism for the changes made at the Bureau. Democrats expressed particular displeasure at the overall decline in enforcement efforts; the CFPB’s efforts to gut the ATR provisions of the Payday Rule; the move to halt Military Lending Act compliance examinations; the closure of the Office of Students and Young Consumers; and the CFPB’s move of the Office of Fair Lending from the Supervision, Enforcement and Fair Lending Division to the Office of the Director.

The Republican-led Senate also held hearings. After facing criticism during her appearance before the House Financial Services Committee, Kraninger returned to the Senate Banking Committee. Again, Democrat lawmakers took the opportunity to criticize the CFPB under her leadership, from the discontinuation of MLA compliance examinations to the proposal to rescind the ATR provisions of the controversial payday lending rule. Sen. Elizabeth Warren (D-Mass.) took issue with the lack of fair lending and student lending enforcement actions since Cordray’s departure.

In August, requesting that the Bureau implement the payment provisions of the Payday Rule, Sen. Sherrod Brown (D.-Ohio) sent a letter to Director Kraninger, arguing that the provisions would provide “substantial and much-needed protections to consumers from predatory payday lenders.” Wrote Brown, “The Bureau’s refusal to request to lift the stay of the compliance date for the payment provisions makes no sense and exposes consumers to continued withdrawal requests, resulting in unnecessary fees.”

In late October, Director Kraninger appeared as the sole witness at a meeting of the House Financial Services Committee. The hearing quickly turned personal after one member of the committee regrettably called Kraninger “absolutely worthless.” A repeated criticism from multiple committee members focused on the number of CFPB settlements that have not included either civil penalties or redress for consumers.

Other areas where the Bureau (and Kraninger’s leadership) came under fire: the high number of borrowers seeking loan forgiveness who have been rejected by the DOE and the proposed changes to the Payday, Vehicle Title and Certain High-Cost Installment Loans Rule. With regard to the DOE, Director Kraninger indicated that the CFPB will now move forward with an MOU between the agencies and continues to examine private education loans. A number of consumer advocates had questioned why this MOU had not been renewed.


Addressing an item of critical importance to regulated entities, the CFPB finally took action to improve its disclosures on Civil Investigative Demands (CIDs). In April, the CFPB announced changes to policies regarding CIDs to ensure they provide more information about the potentially wrongful conduct under investigation. Consistent with the updated policy, CIDs will now provide more information about the potentially applicable provisions of law that may have been violated. Moreover, CIDs will typically specify the business activities subject to the Bureau’s authority. In the interest of further transparency, in investigations in which determining the extent of the Bureau’s authority over the relevant activity is one of the significant purposes of the investigation, staff may now specifically include that issue in the CID.

With the CID policy in place, Kraninger then largely rejected challenges to six CIDs involving products ranging from military pensions to tax debt relief products. For example, in one original CID enforced by Kraninger, the notification of purpose stated that it had been issued “to determine whether small-dollar lenders or other persons (1) in connection with the advertising, marketing, offering, provision, servicing, documentation or collection of loan applications or loans have engaged in unfair, deceptive or abusive practices in violation of [the CFPA] or have violated the Equal Credit Opportunity Act or the Fair Credit Reporting Act (FCRA), or (2) in connection with maintaining records or providing information for a Bureau investigation have violated [the CFPA].”

The CID recipient objected. But Kraninger enforced the demand, writing that the CID was “subject to multiple levels of review within the Bureau … that have ensured they were issued for a proper purpose and in accordance with all applicable regulations.” The CFPB did modify the CID, however, providing more specifics in its notification, consistent with the policy change. In other orders, Kraninger refused to set aside challenged CIDs based on an argument that the CFPB is unconstitutional. The “Bureau has consistently maintained that its statutory structure is constitutional under controlling Supreme Court precedents,” she wrote.

Enforcement activity also saw an uptick. In January 2019, the CFPB announced a joint settlement with the New York attorney general after a “parallel investigation” concluded that a major Ohio-based jewelry store operator violated the CFPA by allegedly (1) opening store credit card accounts without customer consent, (2) enrolling customers in payment-protection insurance without their consent and (3) misrepresenting to consumers the financing terms associated with the credit card accounts. The CFPB further found that the company violated the Truth in Lending Act by signing customers up for credit card accounts without having received an oral or written request or application from them.

Also in January, the CFPB settled with a Chicago-based online lender that extends unsecured payday and installment loans as well as lines of credit. According to the Bureau, the online lender engaged in unfair acts or practices in violation of the CFPA by debiting consumers’ bank accounts without effective authorizations. Although consumers authorized the online lender to deduct payments from certain accounts, the company allegedly debited different accounts for which it did not have authorization.

In February, the Bureau announced a settlement with a short-term retail lender that allegedly violated the CFPA by failing to take adequate steps to prevent unauthorized charges; neglecting to promptly monitor, identify, correct and refund overpayments by consumers; and making collection calls to third parties named as references on borrowers’ loan applications—including to borrowers’ places of employment and to third parties—that disclosed or risked disclosing the borrowers’ debts.

In July 2019, the CFPB reached proposed settlements with two individuals and three corporate entities the regulators said ran afoul of the CFPA, the FDCPA and New York State law. Two corporate entities and one individual defendant were required to pay a total of $60 million: $40 million in redress, with $10 million civil money penalties owed to both the CFPB and the New York attorney general.

In August, the CFPB entered into a stipulated final judgment with a for-profit educational institute, likewise for $60 million, over allegedly unfair and abusive practices in connection with its private loan program. The Bureau filed suit against the institute in 2014, alleging that it engaged in predatory lending by pushing students into high-cost student loans the school knew were likely to end in default. The college chain filed for Chapter 7 bankruptcy protection in 2016, and the parties reached an agreement on the asserted violations of the CFPA. Because the defendant was not operating its business and is proceeding with a liquidation, the Bureau agreed not to seek certain injunction, compliance and reporting requirements. Pursuant to the deal, the defendants agreed to permanently cease enforcing, collecting, or receiving any payment on the institute’s loans and are prohibited from offering or providing private educational loans to consumers, as well as from offering or providing financial advisory services to consumers related to private educational loans.

Also in August, the CFPB settled with an Illinois-based debt collection company that allegedly violated the FDCPA as well as the CFPA. The debt collector allegedly “regularly and falsely” threatened consumers with arrest, lawsuits, liens on their homes, and garnishment of their bank accounts or wages, and represented that non-attorney company employees were attorneys and that consumers’ credit reports would be negatively affected if they did not pay, even though the debt collector did not report consumer debts to credit reporting agencies. Without admitting or denying any of the charges, the debt collector agreed to a consent order with the CFPB that included payment of restitution of at least $36,800 and a $200,000 civil penalty.

The same month, the CFPB likewise brought and resolved its first case based on violations of the Remittance Transfer Rule. A remittance service provider allegedly used inaccurate language in the required consumer protections disclosures for approximately 14.5 million remittance transfers from October 2013 until May 2017. Specifically, the remittance service provider allegedly supplied consumers with a disclosure form in both English and Spanish that stated it would not be responsible for errors made by payment agents. (The EFTA and the Remittance Transfer Rule make providers responsible for errors by their agents.) To settle the charges (without admitting to or denying any of them), the remittance service provider will pay a civil money penalty of $500,000 and refrain from future violations of the EFTA, the CFPA and the Remittance Transfer Rule.

In September, the CFPB filed a federal court action in California against a company that sold financial advisory and mortgage assistance relief services, its president/owner, and the company’s sole auditor, claiming they violated the CFPA and Regulation O. The CFPB further alleged that the company and its owner engaged in deceptive and abusive acts and practices by charging unlawful advance fees in connection with the company’s audit services, which it falsely represented as able to “prevent foreclosure,” “a powerful and successful legal means of bringing suit against your mortgage lender,” and tailored to each consumer.

Together with the South Carolina Department of Consumer Affairs, the CFPB filed a lawsuit in October against a company and its owner that purported to make valid purchases of consumers’ future pension or disability payments that the regulators said were in reality illegal high-interest credit offers. The defendants brokered contracts, the majority of which were for veterans with a disability pension from the Department of Veterans Affairs or administered by the Defense Finance and Accounting Service. Although federal law prohibits agreements under which another person acquires the right to receive a veteran’s pension payments—and South Carolina similarly prohibits such contracts—the defendants told consumers the contracts were legal, alleged the CFPB.

In California, the CFPB, joined by the Los Angeles city attorney, the Minnesota Attorney General’s Office and the North Carolina Department of Justice, filed a federal suit against a student loan debt relief operation involving three related corporate entities and three individuals. According to the complaint, the defendants violated the CFPA, the Telemarketing Sales Rule (TSR), and various state laws by misleading thousands of federal student loan borrowers and charging more than $71 million in unlawful advance fees since 2015.

In November, the CFPB settled a concurrently filed enforcement action against a company that performs background screening of job applicants. The proposed stipulated judgment will require the company to pay $6 million in monetary relief to consumers and a civil money penalty and will prohibit the company from engaging in the allegedly illegal conduct again. The settlement also resolved a complaint concurrently filed in the U.S. District Court, Southern District of New York.

One of the CFPB’s biggest late-2019 victories arose out of proceedings commenced in the Cordray era. Also in November, the CFPB notched a $59 million win in Wisconsin federal court, in an action filed jointly with the FTC and 15 state regulators, in suits filed against so-called foreclosure relief companies for violations of Regulation O, formerly known as the Mortgage Assistance Relief Services (MARS) Rule. The district court granted partial summary judgment in favor of the CFPB in 2016 and, following a bench trial, entered judgment against all six defendants, leaving only the issue of relief. In 2019, the court finally issued its verdict on relief, ordering a total of more than $38 million in civil penalties against the defendants, along with upwards of $21 million in restitution, based on the defendants’ net revenues.

In late November, the CFPB settled with a Kentucky-based military travel lender, its principal and the related servicer of the loans. The lender offered and extended financing for airline tickets to military service members and their families. According to the Bureau, however, the lender misrepresented the true cost of the credit in violation of the CFPA by charging a fee to consumers who obtained financing above the fee it charged to consumers who paid in full and, further, by failing to include the fee in the finance charge or the annual percentage rate for those who obtained credit. To settle the charges, the lender and its principal received a suspended judgment of $3,468,224 and must pay a civil money penalty of $1. They were also prohibited from future consumer lending targeted to service members and their families.

Other Litigation

Although our review has already covered a number of important cases outside the general enforcement arena, 2019 also saw a number of other filings of note.

In 2019 PayPal, Inc., filed suit against the CFPB, challenging the Prepaid Rule with respect to rulemaking on prepaid accounts under EFTA and TILA, arguing those rules violated PayPal’s First Amendment rights. In addition, the company alleged that the CFPB lacked the statutory authority to issue the Prepaid Rule as drafted and promulgated the rule via a “fundamentally flawed process.”

Also in late 2019, the Bureau filed an amicus brief in a Maryland appeal, asking the court to affirm an intermediate appeal ruling that rejected a class action settlement because it would impinge on the CFPB’s authority; it would have forced class members to release claims for relief obtained by the Maryland attorney general as well as recoveries that could be paid out of the CFPB’s civil penalty fund. If the deal were approved, wrote the CFPB, “it would pervert the purposes of the [Civil Penalty] Fund by diverting payments Congress intended the Bureau to provide to the victims of unlawful conduct to the very entities whose unlawful conduct caused their victims’ harm. Such a result would prevent the Bureau from compensating [defendant’s] victims as Congress intended, either because the payments would be assigned to [defendant] or because, to avoid giving [defendant] a windfall, the Bureau would exercise its discretion to decline to make them. Assignment of these payments to the entities who caused their victims’ harm would offend fundamental equitable principles.”

Private litigants also took notice of the CFPB’s changing posture on student lending. In a lawsuit filed in late 2019, a consumer group known as Democracy Forward accused the CFPB of abandoning its statutory obligation to supervise larger student loan servicers on behalf of nonprofit organization Student Debt Crisis. The group asked the court to declare that the CFPB’s supervisory authority includes the supervision of larger participants in the student loan servicing market—including large servicers engaged in the servicing of federally held student loans—and to order the CFPB to resume its supervision accordingly.

The 2020 Outlook

Constitutionality is the biggest shadow over the CFPB in 2020. Expect a packed courtroom when the Supreme Court hears Seila Law and an even greater media blast when the Court eventually rules.

2020 should be active on rulemaking. Expect activity on proposed changes to the Remittance Rule, long-awaited debt collection rules amending Regulation F, a final rule rescinding the ability to repay provisions of the Payday, Vehicle Title and Certain High-Cost Installment Loan Rule—estimated to arrive in April 2020—and a final rule coming in March 2020 on the HMDA concerning the permanent thresholds for both open-end credit lines and closed-end mortgage loans. Additional rulemaking on the HMDA will follow, the Bureau said, with the release of a Notice of Proposed Rulemaking on the collection of HMDA data points and the disclosure of such data set for July 2020. 2020 will also bring a final rule on Property Assessed Clean Energy (PACE) financing, which often takes the form of loans to facilitate residential solar energy and other home improvement projects.

Given the current state of politics in Washington, Director Kraninger has done a remarkable job to date, enforcing the consumer financial laws, ensuring that enforcement activity addresses those seeking to victimize consumers and halting the CFPB’s oft-criticized regulation by enforcement. Examples of aggressive activity include the Bureau’s crackdown on pension advance products, while Director Kraninger’s new taskforce could lead to balanced regulatory and oversight initiatives down the road. Director Kraninger is generally striking an independent approach that may very well satisfy no one completely. She is not former director Cordray, nor is she former acting director Mulvaney. And the blend may not be a bad thing for the CFPB in 2020.

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Two Powerful New State CFPBs? California, New York Proposals May Rock the Financial World

By Richard E. Gottlieb, Partner, Manatt Financial Services | Scott M. Pearson, Partner, Manatt Financial Services | Charles E. Washburn, Jr., Partner, Manatt Financial Services | Jan L. Owen, Senior Advisor, Manatt Financial Services 

Joining Pennsylvania, California looks to be the next state to create a state version of the federal Consumer Financial Protection Bureau. And with recent pronouncements from New York that may place greater authority with its prudential regulator, will that state be far behind? We discuss both news stories below.

What happened

Back in July 2017, Pennsylvania Attorney General Josh Shapiro announced the formation of a Consumer Financial Protection Unit within his office, and appointed a former Consumer Financial Protection Bureau (CFPB) enforcement lawyer, Nicholas Smyth, to run the unit. Although this led to speculation that other states would quickly follow with their own mini-CFPB agencies, little meaningful activity followed after the Pennsylvania announcement, and the Pennsylvania unit continues to function within the AG’s office.

That may be changing in 2020. California is looking to expand its oversight of the financial services industry with the creation of a state version of the CFPB. As part of his state budget plans, California Governor Gavin Newsom proposed renaming the current Department of Business Oversight (DBO) as the Department of Financial Protection and Innovation (DFPI), and granting it extensive new authority.

Moreover, New York Governor Andrew Cuomo has separately proposed legislative changes that would likewise grant the state’s prudential regulator, the Department of Financial Services (DFS), additional authority (including over debt collectors) and, among other changes, render any activity within CFPB enforcement authority likewise subject to enforcement in New York. These tasks would assumedly be handled by the Consumer Protection and Financial Enforcement Division at DFS, which was formed back in May 2019.

Why the need for a state-level CFPB?

California’s answer: “The federal government’s rollback of the CFPB leaves Californians vulnerable to predatory businesses and leaves companies without the clarity they need to innovate,” according to the 2020-2021 budget summary.

To alleviate these problems, the state would establish a new California Consumer Financial Protection Law, which would expand the DBO’s current authority “to pursue unlicensed financial service providers not currently subject to regulatory oversight such as debt collectors, credit reporting agencies and financial technology companies, among others.”

The renamed DFPI would be tasked with offering services to “empower and educate” consumers, particularly older Americans, students, military service members and recent immigrants; protecting consumers through enforcement against unfair, deceptive or abusive activities; overseeing the licensing and examining of new industries “that are currently under-regulated”; and analyzing market patterns and developments for evidence-based policies and enforcement.

In addition, the new regulatory body would establish a Financial Technology Innovation Office, focused on promoting “responsible development of new consumer financial products.”

To staff the expanded agency, Gov. Newsom proposed a $10.2 million Financial Protection Fund, with 44 new positions at the DFPI for 2020–2021. Those numbers would jump to $19.3 million and 90 positions in 2022–2023.

Initial costs for the new program would be covered by available settlement proceeds in the State Corporations and Financial Institutions Funds, with future costs covered by fees on the newly covered industries and increased fees on existing licenses.

To read the California proposal, click here.

To read the New York proposal, click here.

Why it matters

We’ll be providing our readers with a supplemental analysis of these important developments, and what they may mean to regulated (and, in turn, newly regulated) entities in both California and New York. CFPB’s analogues in the two largest states, California (through the DFPI) and New York (through an enhanced unit at DFS), would likely have a significant impact on the financial services industry. Details on the proposals have yet to be released. Stay tuned.

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Regulators Ease Oversight of Hemp Businesses

By Craig D. Miller, Partner, Manatt Financial Services | Anita Famili, Partner, Manatt Real Estate

In new guidance, banking regulators eased oversight of financial institutions working with hemp-related businesses.

The joint statement from the Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation (FDIC), Financial Crimes Enforcement Network (FinCEN), Office of the Comptroller of the Currency (OCC) and Conference of State Bank Supervisors (CSBS) clarified that a Suspicious Activity Report (SAR) is not required solely because a customer is engaged in the growth or cultivation of hemp in accordance with applicable laws and regulations.

What happened

In 2018, Congress passed the Agriculture Improvement Act, which removed hemp—defined as cannabis not containing more than 0.3 percent of tetrahydrocannabinol, or THC, on a dry weight basis—from the list of Schedule I controlled substances under the Controlled Substances Act (CSA). The law created a pathway for states to become the “primary regulatory authority” over all hemp production in their jurisdiction and directed the U.S. Department of Agriculture (USDA), together with the Attorney General, to otherwise regulate hemp production.

Following the directive, the USDA issued an interim final rule in October 2019 establishing the domestic hemp production regulatory program to facilitate the legal production of hemp. States and tribal governments may submit plans for monitoring and regulating the production of hemp to the USDA, with a federal licensing plan needed for locations where states and tribal territories do not have their own plans.

Pursuant to the USDA’s interim final rule, hemp may be grown only with a valid USDA-issued license or under a USDA-approved state or tribal plan.

With this program in place, the banking regulators offered guidance for financial institutions working with hemp-related businesses.

“Because hemp is no longer a Schedule I controlled substance under the Controlled Substances Act, banks are not required to file a Suspicious Activity Report on customers solely because they are engaged in the growth or cultivation of hemp in accordance with applicable laws and regulations,” the regulators wrote.

For hemp-related customers, banks are expected to follow standard SAR procedures and file a SAR if indicia of suspicious activity warrant.

“Bank customers engaged in hemp-related business activities are responsible for complying with the requirements set forth in the 2018 Farm Bill and applicable regulations,” the regulators added.

The statement explained that deciding which types of services and accounts to offer remains the responsibility of the financial institution, reminding banks to have a Bank Secrecy Act/anti-money laundering compliance program in place, commensurate with the level of complexity and risks involved.

“When deciding to serve hemp-related businesses, banks must comply with applicable regulatory requirements for customer identification, suspicious activity reporting, currency transaction reporting and risk-based customer due diligence, including the collection of beneficial ownership information for legal entity customers,” the regulators said.

The statement noted that FinCEN will issue additional guidance “after further reviewing and evaluating the USDA interim final rule.”

To read the joint guidance, click here.

Why it matters

The new guidance provides clarity for financial institutions working with hemp-related businesses and mirrors a similar statement from the National Credit Union Administration. However, the Federal Reserve Board, FDIC, FinCEN, OCC and CSBS made sure to remind banks that “marijuana is still a controlled substance under federal law,” as the 2018 Farm Bill amended the definition of marijuana only to exclude hemp from the CSA. While some states, like California, have clarified that they will not bring regulatory actions against state-chartered banks or credit unions for establishing a banking relationship with a licensed cannabis business, federal regulators have not taken such a position. Accordingly, financial institutions must ensure they fully understand the nature of the business they are working with before concluding that it is only “hemp-related” and not broader in scope.

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