California’s DBO: New Leader, New Enforcement, New Bureau?

Financial Services Law

The California Department of Business Oversight (DBO) will likely have a new commissioner in the coming months, with Affirm General Counsel and Chief Compliance Officer Manuel “Manny” Alvarez tapped to take the helm. But will he have competition in California? Read on.

The regulator also filed a new accusation against an auto title lender that allegedly engaged in “numerous and repeated” violations of the state’s lending laws, from illegally including charges in the loan principal to false and misleading advertising to failing to consider borrowers’ ability to repay. 

What happened

A New DBO Leader—In late March, Gov. Gavin Newsom announced the appointment of Alvarez to take over for current DBO Commissioner Jan Lynn Owen.

Although he now practices in-house at Affirm, Inc., where he serves as the top legal officer of the well-known San Francisco-based financial technology company, Alvarez is no stranger to government work. He was one of the original members of the Consumer Financial Protection Bureau (CFPB or Bureau) and was the lead attorney in the Bureau’s first enforcement action of the Mortgage Loan Originator Compensation Rule.

And, closer to home, Alvarez previously worked in the Consumer Law Section of the California attorney general’s office.

If his appointment is confirmed by the state Senate (as we expect), he will become only the second commissioner in the history of the DBO. Owen was appointed on July 1, 2013, by Gov. Edmund G. Brown on the day the agency was created in a merger of the Departments of Corporations and Financial Institutions.

Will the DBO Be Supplanted by a State CFPB?—Joined by former CFPB Director Richard Cordray, California Assemblywoman Monique Limon (D-Santa Barbara) told a press gathering that she planned to introduce legislation to create a state-level version of the CFPB, either by raising the budget of the DBO or through the creation of a new state agency. “We are working to really rethink what a state CFPB would do,” Limon said. “We see the presence of predatory lending products in auto loans, payday loans, cash advance and small business loans.” Will this happen? Place us on the skeptics’ side of that fence, although this attention from a legislator could lead to more action by the DBO.

Latest DBO Enforcement—Still under Jan Owen’s leadership, the DBO filed a new lawsuit against a Long Beach-based lender that allegedly engaged in a host of violations of the California Financing Law (CFL).

During a 2013 regulatory examination of one of the lender’s locations, the DBO discovered that the lender required borrowers to pay off any outstanding fees owed to the state Department of Motor Vehicles (DMV) as a condition of receiving a loan. If fees on borrowers’ vehicles were owed to the DMV, the lender paid off those fees out of the borrowers’ loan proceeds—leaving some borrowers with less than $2,500 from the lender.

The DMV fees constituted a “charge” under the CFL, the DBO said, and it instructed the lender to exclude the fees from the calculation of a loan’s bona fide principal amount in accordance with state law. But two years later, in a second statewide exam of the lender, the regulator found that it was still charging borrowers for DMV fees in 30 percent of the loans sampled.

In the course of the 2013 exam, the DBO also learned that the lender required borrowers to provide a duplicate key to the vehicles securing their loans, manufacturing a duplicate key on-site if necessary. The lender—which required the duplicate key in order to make repossessions of borrowers’ cars easier and cheaper, according to the regulator—charged $20 for the duplicate key and turned a profit from the fees.

The key fees also violated the CFL, the DBO said, as the lender did not have permission from the agency to conduct a key-making service from its CFL-licensed locations, never disclosed the income it earned and failed to treat the fees as “charges” in its loans.

In addition, the DBO alleged the lender failed to properly consider borrowers’ ability to repay; the lender even used its lack of underwriting as a feature in its marketing. The lender’s ads also contained false and misleading claims, such as “[The lender] will loan up to 100% of the value of your vehicle” and “CASH IN 15 MINUTES,” according to the DBO’s accusation.

Operating out of unlicensed locations and failing to maintain required records that would document its illegal activity rounded out the remaining allegations. In conjunction with the accusation, the DBO announced it had launched an investigation to determine whether the interest rates charged by the lender—typically more than 100 percent—might be unconscionable.

The DBO action seeks to void all loan contracts on which the lender received interest rates and fees prohibited by state law, to require the company to forfeit any interest and fees owed on loans that violated state law, and to revoke the lender’s CFL licenses.

To read the DBO’s accusation, click here.

Why it matters

If confirmed by the Senate, Alvarez would assume leadership of the DBO later in 2019. In the meantime, the agency continues with its busy enforcement activities, another indicator that there is little need for California to create a state version of the CFPB. With an active DBO and many structural impediments to providing a new state agency with authority—and with a strong leader coming on board—it seems unlikely that California will move forward with a state-level CFPB.