The California DBO has been aggressively enforcing the CFL without clarifying lead provider ambiguities in the law. Lead providers are no longer an emerging industry, they constitute core marketing in this digital age, yet the California Financing Law (“CFL”) is an analog statute with relevant provisions passed by the California legislature before IBM introduced the personal computer.

Under the Department of Business Oversight's (“DBO”) interpretation of the CFL revealed in the Consent Order in the matter of the Commissioner of Business Oversight v. Advance America, Cash Advance Centers of California, LLC (the "AA Order" published in March 2018), lead providers are deemed to be brokering CFL loans and subject to licensing if the leads contain any "Confidential Data" as defined therein and discussed below. CFL licensees cannot pay unlicensed brokers, so they cannot purchase leads with Confidential Data unless the lead provider obtains a license. Once licensed, the lead providers, as CFL brokers, are prohibited from receiving payment with respect to a lead unless a loan closes.

Regulation by Enforcement

By policy only communicated through enforcement actions, the DBO is prohibiting CFL licensee acquisition of Confidential Data from any source other than a licensed CFL broker. However, rather than promulgate regulations to put all licensees and lead providers on notice, the DBO appears to be attempting to derail the lead provider train through enforcement actions that focus on one licensee or provider at a time. If you hold a CFL license or generate leads for consumer or mortgage lenders in California, hopefully the article will shed some light on the subject when you are still outside the tunnel.

The following assessment does not evaluate the conduct of the respondent in the AA Order, the existence of the consent order indicates a settlement, not a fully adjudicated holding of a court or the Commissioner. However, the DBO's position is forefront. Accordingly, we do not opine on the conduct of Advance America, but on the apparent interpretations and enforcement stance of the DBO. Lead providers should pay close attention to these DBO enforcement actions. As they have become more frequent in 2018 than in the past. The legislature has also considered reformation of the CFL in two recent bills discussed further below. The committee summaries of both bills provide powerful statements that the CFL is currently either silent or confusing on the issue of whether online lead providers require a license as a CFL broker.

Confidential Data as defined by AA Order

The AA Order prohibits the respondent from "paying compensation to a person or company not licensed as a broker under the CFL or otherwise exempt for a referral or lead, if the referral or lead includes or is accompanied by Confidential Data." AA Order paragraph 8(f), p 6. Under the Order:

"Confidential Data is information about a borrower, prospective borrower or applicant (Applicant) that is nonpublic and sensitive. Confidential Data includes, without limitation, the following:

• bank account numbers or routing numbers;
• bank statements, creditor debit card account number;
• self-reported or official FICO score;
• full or partial social security number;
• self-reported or verified income information;
• driver’s license number or government-issued identification number;
• passport number;
• employment data or history;
• date of birth, mother’s maiden name;
• medical information;
• health insurance information;
• insurance policy number; or
• taxpayer or employer identification number.

Confidential Data does not include:

• name;
• physical address;
• phone number;
• email address;
• desired loan or financing amount; or
• stated purpose for loan or financing." Id.

Because the list of confidential data is non-exclusive, the respondent and other CFL licensees have some guidance as to what data is prohibited, but the DBO can add other similar data elements at will. The only part the respondent and thus the industry can rely on is what is not confidential data. That includes: name, address, and phone number, the analog equivalent of telephone book data, two pieces of information that barely reveal the consumer is interested in a loan, and the consumer's digital age address, their email.

Date of birth is prohibited and age is not listed, but likely to be lumped with confidential data or deemed a fair lending risk, so we suggest a simple question of whether the consumer is a minor or emancipated to determine whether the consumer is able to enter a binding contract and to be prepared for the California Consumer Privacy Acts requirements with respect to minors.

Ultimately, the problem with the AA Order is that it isn't the law, it is just an agreement between the DBO and the respondent that sheds light on the DBO's interpretation without imposing the specific restrictions on all participants. That said, it should not be ignored. The DBO has entered many more consent orders and stipulations and has more in the works.

Clarity Required

The industry needs clear guidance on what conduct constitutes brokering a CFL loan. That can only come from DBO rulemaking in accordance with the Administrative Procedures Act or a fully adjudicated enforcement action. Unfortunately, the DBO does not seem interested in rulemaking. So here is what the industry as a whole needs to think about as each lender or lead provider settles their case rather than pursing a fully adjudicated outcome that creates case law for all.

What constitutes Brokering?

Does enforcement provide clear guidance on what conduct constitutes brokering a CFL loan, this includes a definition of what constitutes: a) negotiating a loan, and b) a loan application. Is selling consumer provided lead information the same as taking a loan application? If the consumer knows the data is being used to find a lender, does the consumer even think they are making application for a loan.

A key element in the CFL definition of broker is negotiating. In correspondence with one license applicant, the DBO cited what it called the primary case on the “finder” exemption under California securities law's definition of broker, Lyons v. Stevenson, 65 Cal. App.3d 595 (1977). The case distinguishes mere finders from brokers based on whether they negotiate the transaction. In the referenced correspondence, the DBO cited favorable discussion related to negotiating but failed to acknowledge substantive elements leading to the court's holding that the party was a finder and not a broker because there was no further involvement after the introduction of the parties. Under Lyons, today's CFL lead providers are arguably much more like finders than brokers.

Additional light on the definition of broker was provided by the California legislature in the pilot small loan finder program which falls within the CFL. This describes certain activity that does not constitute a finder because it rises to the legislature’s understanding of brokering. The DBO does not appear to have addressed those points in any lead provider enforcement action I have reviewed.

What constitutes a loan application?

Presently, the CFL rules do not define a loan application. Without directly stating it, under the AA Order, the DBO treats a single Confidential Data element as triggering a CFL loan application, which is what allows the prohibition of paying for the lead under the CFL.

In very recent correspondence conditionally offering a CFL broker license to an applicant, the DBO relied heavily on the federal Secure and Fair Enforcement for Mortgage Licensing Act of 2008 (“SAFE Act”) to define what constitutes an application.

However, the SAFE Act refers to licensing individual originators (which the CFL was amended to address). Whereas, the CFL applies to unsecured loans as well as mortgage loans. The particular recipient of this letter had not elected to obtain mortgage broker authority, which requires a separate request on the license application. Additionally, the SAFE Act requires individual mortgage loan originators to be licensed. The CFL licenses both companies and individuals. The only individuals required to be licensed under the CFL are those brokering or making mortgage loans.

Moreover, the SAFE Act was passed in 2008 and the relevant CFL language was in effect in 1981, when prior law was re-codified into the Consumer Finance Lenders Law. The same language was again re-codified into the California Finance Lenders Law in 1995. Thus, the SAFE Act could not possibly have influenced legislators at the time of passage.

Interestingly, there are two types of applications contemplated in the CFL, license applications and loan applications. The DBO has argued that a CFL license application is not complete until all information necessary to make the final decision is in the DBO’s possession, even though the CFL regulations define a license application. This interpretation is diametrically opposed to the DBO’s enforcement actions suggesting a single data field triggers a loan application, even though the CFL regulations do not define a loan application. Apparently, the DBO wants it both ways.

Should payment be restricted to closed loans?

The CFL statute reads: “No licensee shall directly or indirectly charge, contract for, or receive any interest or charge of any nature unless a loan is made.” Cal. Fin. Code § 22300. Clearly this language is broad. Yet, obviously, this language should not prevent a licensee from selling a consumer a bottle of water or a candy bar from a vending machine on its premises. Likewise, it shouldn't prevent a lender from leasing a building from another licensee. But either of these scenarios could conceivably fall within the broad statutory language. When statutory language is at risk of being unconstitutionally over broad, it should be interpreted more narrowly to remain enforceable.

Section 22300 could be more narrowly construed to apply to payments from consumers. Doing so would meet the general intent of consumer protection without preventing licensees from buying modern marketing leads. The consumer would be protected from paying fees for services that did not result in a loan. The intended recipient of the CFL's protection is the consumer, not another licensee. A CFL licensee need not be protected from paying for a lead from another licensee when the consumer does not get a loan, that happens every day (even back in the 1980s) when paying for advertising. But the DBO construes this section to prohibit payments from other CFL licensees when Confidential Data was transferred presumably because it considers that brokering activity. That is a very specific interpretation that would be best promulgated as a regulation under the APA.

The DBO’s interpretation has the effect of restricting the sale of a lead to a CFL lender to information of next to no value, by only allowing payment for closed loans when Confidential Data is included in the data set. If the DBO wants lead providers to obtain CFL licenses, it should allow CFL licensees to acquire leads from other licensees, provided the consumers themselves are not charged by a licensee unless the consumer receives a loan. This interpretation alone keeps lead providers aware of enforcement actions from applying for licenses under the CFL.

Is the industries present advocacy enough?

Over the past two years the California Legislature has introduced two lead provider bills:

AB 3207 would license lead generators, its language is a bit confusing and potentially leaves lead providers subject to Sec. 22300 which prevents payment before a loan closes.

SB 297 would have registered lead generators, this was much better language because lead generators would avoid the Sec. 22300 restriction that applies to "licensees." Unfortunately, SB 297 died.

Does the industry understand the DBO's policy and interpretations? We understand that in 2018 the DBO has obtained at least two internal opinions from its Office of Law and Policy on the topic of lead providers. The internal opinions are not publicly available and appear to be standards adopted by the DBO to implement, interpret or make specific the CFL, effectively constituting a “Regulation.” But, they have not been adopted as a regulation or filed with the Secretary of State pursuant to the Administrative Procedures Act.

Does the DBO policy actually protect consumers?

Public policy may argue for a narrower interpretation of when lead providers can be paid, thus allowing CFL licensees to buy leads that do not rise to brokered applications. The reason is that the alternative to allowing the lead provider industry to operate under license is that unlicensed lead providers will continue selling leads to CFL lenders without supervision or redirect leads (that may have been sold to CFL licensees) to tribal lenders, offshore lenders, and payday lenders, which generally have higher costs to consumers.

Conclusion

Ultimately, regulation by enforcement is insufficient guidance and certainty for an industry to operate effectively. It leaves risk takers free to deny the regulator's actions apply to them and conservative participants penalized by inconsistency in the market. The industry needs the DBO to promulgate a rule or for a model case to be fully adjudicated. Until then, the light the DBO shines on its interpretations through enforcement actions are like a train light in a tunnel, where the light only reveals itself when it is too late to avoid the punishing effects that accompany it.