California begins registration of financial service providers

LOS ANGELES — California is getting the word out that four segments of the financial services industry — debt settlement firms, earned wage access providers, private secondary education financing and student debt relief services — are required to register with the state by February 15, 2025.

The state’s Department of Financial Protection and Innovation is implementing new regulatory powers that allows the agency to establish mandatory registration that is also temporary, lasting just four years.

Suzanne Martindale, DFPI’s senior deputy commissioner in the consumer financial protection division, said registration of the exact number of companies that fall under the new registration requirements is not yet known.

“Because these industries have been operating outside of our formal supervision, it’s a little bit of an unknown universe until people start to come to us and register,” Martindale said. “People are launching new companies every day.”

Registration authority is unique to California. The Democratic-controlled legislature passed the California Consumer Financial Protection Law in 2020 that requires companies offering certain financial products and services to register with and submit data to the agency. The law gives DFPI the authority to prohibit unlawful, unfair, deceptive, or abusive acts and practices. Since the law went into effect in 2021, the agency has charged companies with more than 300 violations, Martindale said.

Scott Pearson, a partner at Manatt, said that California’s registration regime “is barely  distinguishable from licensing” because it requires companies to complete forms in the Conference of State Bank Supervisors Nationwide Mortgage Licensing System. The forms are used to apply for and maintain a license with disclosures on directors and principal officers. 

Debt settlement companies likely are the largest sector under the new registration regime, but California has seen a proliferation of student loan relief and document prep companies, and earned wage access products are growing dramatically.

Earned wage access and various models on wage advances are included in the registration process. DFPI has clarified that income-based advances are “loans,” and voluntary or optional payments are considered “charges” under that law. [Buy now/pay later companies already are licensed under California’s Financing Law.]

The agency will collect information on transaction volumes, business models and charges to consumers and will prepare a report at the end of the four-year period. Then the legislature will review the report and determine whether to continue with the supervisory oversight going forward.

“We are the first and only state to have this kind of authority but the legislature does have a check on what we do with registration,” she said. “It’s temporary because it’s meant to be an incubator for emerging industries, [for us] to learn and get some valuable insight into these newer markets so that we can determine the long-term path forward.”

Martindale was a key architect of California’s Consumer Financial Protection Law, which gave the department expanded oversight and enforcement authority over previously unregulated industries including debt collectors, fintech firms and credit reporting agencies. Before joining DFPI in 2021, Martindale served as senior policy counsel at Consumer Reports and was a lecturer at the University of California, Berkeley School of Law. 

“It is a great mechanism for balancing consumer protection and responsible innovation, which is the whole mission of the department,” she said.

The Consumer Financial Protection Bureau’s authority extends only to large banks and credit unions with more than $10 billion in assets, as well as to large nonbank participants in specific industries including consumer reporting, consumer debt collection, student loan servicing, international money transfers and automobile financing. By contrast, DFPI has the authority — albeit temporary — to register all companies large and small. 

“We’re letting companies do their thing, but with oversight — and that should ideally foster a race to the top for fair competition,” she said. “The transparency gives companies time to operate legally and grow their business models, before the legislature comes in and says, ‘Here are the minimum standards for your industry segment.'”