California’s New Mini-CFPB Law Largely Parallels Its Federal Cousin

By Brian Casey and Jon Gillum | February 5, 2021

California recently adopted significant amendments to its financial code, resulting in what is now known as the California Consumer Financial Protection Law (CFPL), or colloquially as the California “mini-CFPB” Act. The California CFPL substantially mimics the federal Consumer Financial Protection Act, which was a key part of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act).

The federal Dodd-Frank Act, through its Consumer Financial Protection Act (CFPA), established the Consumer Financial Protection Bureau (CFPB) as the primary federal regulator of consumer financial products and services that are not overseen by another federal functional regulator. The California CFPL has renamed the state’s Department of Business Oversight as the Department of Financial Protection and Innovation (DFPI). While exemptions for the insurance industry from the purview of the CFPB and the DFPI are very similar, there are some nuanced differences. Questions have arisen about the potential for regulatory creep by the CFPB and DFPI into insurance-related businesses that usually involve quasi-insurance products sold to consumers. These include extended warranties (otherwise known as service contracts), various types of auto protection products, and certain types of insurance-related businesses that, while regulated by state insurance departments, either do not require state insurance licensing per se or do not constitute the “business of insurance” under the federal McCarran-Ferguson Act.

Consumer Financial Products and Services Regulated by CFPA and CFPL

Both the federal CFPA and the California CFPL enumerate a list of consumer financial products and services over which the CFPB and DFPI, respectively, have regulatory authority. The chart below compares the lists of the ten CFPA and eleven CFPL regulated consumer financial products and services (subject to exceptions not discussed in this article). Providers of these consumer financial products and services are known as a “covered entity”.

Type of Product/Service Federal CFPA California CFPL
Extending Credit

X

X

Extending/Brokering personal or real estate leases that are purchase agreement functional equivalents

X

X

Real estate settlement services

X

X

Deposit-taking and custody

X

X

Selling/issuing stored value or payment instruments

X

X

Check cashing, guaranty or collection

X

X

Financial advisory services not regulated by SEC or state securities commission

X

X

Debt collection

X

X

Payments or other financial data processing

X

X

Consumer reports

X

X

Brokering franchises

X

Because California mini-CFPB Act (unlike the CFPA) applies to brokering of franchises, the California mini-CFPB Act may apply to sales of insurance agent or broker businesses conducted on a franchise business model in California.

In addition, both the CFPB and DPFI have rule making authority to add additional regulated consumer financial products and services if they determine that (i) the product or service has the purpose of evading any consumer financial law or (ii) are permissible for a bank or financial holding company to provide under federal law or a regulation and have, or are likely to have, a material impact on consumers.

Service Providers Treated as Covered Entities

Both the federal CFPA and the California CFPL treat a “service provider” to a covered entity as also effectively being a covered entity. A service provider is any person that provides a material service to a covered person in connection with a consumer financial product or service, including (i) participating in designing, operating, or maintaining the consumer financial product or service or (ii) processing transactions relating to the consumer financial product or service, other than unknowingly or incidentally transmitting or processing financial data in a manner that the data is undifferentiated from other types of data of the same form as the person transmits or processes. However, service providers do not include a person solely because it provides to a covered person (a) a support service of a type provided to businesses generally or a similar ministerial service or (b) advertisement space or time for a consumer financial product or service through print, newspaper, or electronic media.

Insurance Industry Exemptions

Both the federal CFPA and the California CFPL provide insurance industry exemptions in a twofold, prophylactic manner. Specifically, the two acts exempt (1) persons regulated by a state insurance department (DOI) (Insurance Regulated Person Exemption) and (2) products or services that are the business of insurance (Insurance Product Exemption). Each of these exemptions is discussed separately below. However, neither the CFPA nor the CFPL expressly reference the McCarran-Ferguson Act, which reverse preempts any federal statute that invalidates, impairs or supersedes any state law enacted for the purpose of regulating the business of insurance, unless such federal statute specifically relates to the business of insurance. Under the McCarran-Ferguson Act’s judicial precedents, there is a tripartite test for determining what is the “business of insurance”: (1) whether the business at issue has the effect of transferring or spreading the putative policyholder’s risk, (2) whether the business at issue is an integral part of the relationship between the putative insurer and insured and (3) whether the business at issue is limited to entities within the insurance industry.

Federal CFPA Insurance Industry Exemptions

First, the CFPA excludes persons subject to regulation by a state insurance department, except to the extent such a person offers a consumer financial product or service under the purview of the CFPB:

(f) Exclusion for Persons Regulated by a State Insurance Regulator.

(1) In general. No provision of this title shall be construed as altering, amending, or affecting the authority of any State insurance regulator to adopt rules, initiate enforcement proceedings, or take any other action with respect to a person regulated by a State insurance regulator. Except as provided in paragraph (2), the Bureau shall have no authority to exercise any power to enforce this title with respect to a person regulated by a State insurance regulator.

(2) Description of activities. Paragraph (1) does not apply to any person described in such paragraph to the extent that such person is engaged in the offering or provision of any consumer financial product or service or is otherwise subject to any enumerated consumer law or any law for which authorities are transferred under subtitle F or H.

(3) State insurance authority under Gramm-Leach-Bliley. Notwithstanding paragraph (2), the Bureau shall not exercise any authorities that are granted a State insurance authority under section 505(a)(6) of the Gramm-Leach-Bliley Act with respect to a person regulated by a State insurance authority.

(22) Person regulated by a state insurance regulator. The term “person regulated by a State insurance regulator” means any person that is engaged in the business of insurance and subject to regulation by any State insurance regulator, but only to the extent that such person acts in such capacity.

Note, however, by referring to “consumer financial products” regulated by the CFPB, the Insurance Regulated Person Exemption is somewhat interwined with the Insurance Product Exemption and thus may not be truly a standalone exemption. Moreover, not all persons regulated by a DOI are necessarily engaged in the “business of insurance” within the meaning of the McCarran-Ferguson Act, even if the person must be licensed by a state insurance department, such as insurance premium finance lenders and third party administrators (at least to the extent performing services for self-insured ERISA plans) .

Second, the CFPA provides that the term “financial product or service” does not include the business of insurance. For purposes of the CFPA, the “business of insurance” means:

(3) Business of insurance. The term “business of insurance” means the writing of insurance or the reinsuring of risks by an insurer, including all acts necessary to such writing or reinsuring and the activities relating to the writing of insurance or the reinsuring of risks conducted by persons who act as, or are, officers, directors, agents, or employees of insurers or who are other persons authorized to act on behalf of such persons.

California CFPL Insurance Industry Exemptions

The California mini-CFPB Act embraces a similar approach towards the insurance industry. Its definition of financial product or service excludes: “Insurance, as defined in Section 22 of the [California] Insurance Code, regulated by the Department of Insurance.” In addition, the California mini-CFPB Act does not apply to any licensee (or employee of a licensee) of any California state governmental agency other that the Department of Financial Protection and Innovation acting under the authority of such other state governmental agency license.

Certain Insurance Exemption Similarities and Differences between CFPA and CA CFPL

Putting these frameworks together, there are multiple nuanced applications of these two statutory frameworks, for example:

Insurance Premium Finance Lenders

Even before the adoption of the California mini-CFPB Act, the California Department of Business Oversight (DFPI’s predecessor name) regulated insurance premium finance agencies and the insurance premium finance business. Thus, these lenders should be subject to the DFI’s oversight to the extent their insurance premium finance loans are made to consumers. Under the CFPA, consumer insurance premium finance lenders are likely subject to the CFPB’s jurisdiction because they are engaged in making consumer loans, a covered product, and such lending is arguably not the “business of insurance”, even though these loans finance payments of insurance premiums. Therefore, concurrent CFPB and DFPI jurisdiction likely exists for consumer insurance premium finance loans such as for personal auto and life insurance policies.

Extended Warranties/Service Contracts

Under state insurance statutes, extended warranties or service contracts are essentially contracts which, but for their treatment under state service contract laws, would be insurance contracts where the obligor under the extended warranty or service contract is a third party – meaning not the manufacturer or a seller (wholesaler or retailer) of the underlying product in its supply and distribution chain. Therefore, most state service contract laws deregulate extended warranties or service contracts from being classified as insurance contracts, but they are still regulated in most states within their state insurance codes by insurance departments. Importantly, the vast majority of the state service contract acts wholesale exempt extended warranties or service contracts as being insurance, while a few of the other state service contract acts provide that extended warranties or service contracts are not subject to the insurance code (except for certain retained provisions of applicability, such as the unfair claims settlements or unfair trade practices acts within state insurance codes), thereby making these products insurance contracts at least in part for purposes of such retained provisions of an insurance code. Nevertheless, some cases have held that service contracts are insurance, while cases others have found that these products are not insurance, for state insurance law purposes.
Automobile dealers, many of which also sell motor vehicle service contracts and other types of vehicle protection products like tire and wheel and paintless dent removal products, have their own specific exemption under the CFPA. The CFPB is prohibited from exercising its authorities over a motor vehicle dealer that is predominantly engaged in selling or leasing and servicing motor vehicles, except to the extent that a motor vehicle dealer is involved in extending retail credit or retail leases for motor vehicles directly with consumers and the credit or lease agreements are not routinely sold in secondary market transactions. Motor vehicles include not only private passenger automobiles but also boats, motorcycles and motor homes. A motor vehicle dealer is a person who is licensed under state law to sell motor vehicles and owns or take physical possession of them.

In California, the state insurance department regulates motor vehicle service contracts and home warranties, so their issuers should not be subject to the California CFPL. In contrast, the California Bureau of Household Goods and Services regulates service contracts covering most types of consumer electronics, and therefore, these products are likely regulated under the California Mini-CFPB Act as it is doubtful that they are the business of insurance. Under the CFPA, the CFPB could seek to add service contracts to its list of covered products by regulation because they are not insurance products, which is especially clear in states where insurance codes expressly state that they are not insurance and do not require their issuers to be licensed by a DOI. Nevertheless, under both the CFPA and the California Mini-CFPB Act, where the purchase price of a service contract is financed by a loan, which typically is rolled into the purchase money loan for the underlying product for which the service contact provides coverage, the issuer of the service contract can be a service provider to the lender.

Guaranteed Asset Protection (GAP) Products

Guaranteed asset protection products, which are waivers by lenders of a consumer’s auto loan repayment obligation to the extent the loan balance exceeds auto insurance policy proceeds paid for the theft or total destruction of an auto, are another anomaly in the insurance industry exemption analysis for the CFPA and California mini-CFPB Act. The California DOI regulates GAP product issuers, and thus they are exempt from the California mini-CFPB Act. But, for CFPA purposes, GAP products are a consumer financial product or service, a species of a covered loan product, and not the business of insurance. Moreover, sellers of guaranteed asset protection products, which are typically auto dealers, can be a service provider to the lender.

Secondary Life Insurance Market

The life insurance settlement market, the sales by original life insurance policies to investors, is a highly regulated business under the purview of the California Department of Insurance. Both life settlement providers, the regulated companies that purchase in-force life insurance policies, and life settlement brokers must be licensed by the California Department of Insurance. However, life settlements themselves are not the business of insurance (although investments in life settlements can constitute securities in certain circumstances). Accordingly, life settlement providers and brokers are not subject to the California Mini-CFPB Act. However, because these transactions are not the business of insurance and similar to service contracts, the CFPB could by rulemaking attempt to add them as a covered consumer financial product or service. Nevertheless, presently neither the CFPB nor DFPI has regulatory authority over life settlement providers and brokers.

Additional Classification Issues

The examples above are far from the only ones that raise nuanced classification issues. For example, discount medical cards, identity theft protection products, and road hazard products also require nuanced classification analysis under these regimes. Similarly, the recent California Supreme Court opinion in Heckart v. A-1 Self Storage, Inc., 415 P.3d 286 (Cal. 2018)‎ raises the question of how these statutes classify consumer indemnity products that technically meet the definition of insurance but are not submit to regulation as insurance under the judicially-created “primary purpose” test.

Moreover, the insurance industry exemption under the California mini-CFPB Act may be broader than its cousin under the CFPA. The California mini-CFPB Act exempts all persons that the California Department of Insurance regulates, even those persons that are not insurance companies engaged in the business of insurance as defined under the McCarran-Ferguson Act. These exempt persons include holders of a myriad of types of licenses from the California DOI, such as insurance agents and brokers, third party administrators, insurance claims adjusters, providers of vehicle service contracts and life settlement providers and brokers. On the other hand, the CFPA’s Insurance Regulated Person Exemption is limited to persons engaged in the business of insurance, which effectively means issuing insurance policies, not other insurance or quasi-insurance products and services. The bottom line is that financial products and services offered to consumers by holders of licenses from the California DOI are exempt from the California mini-CFPB Act, even if those financial products and services are not really the business of insurance under the McCarran-Ferguson Act. The same would not be true under the CFPA if the CFPB were to expand its list of consumer financial products and services to include insurance related products and services that are not insurance policies.

Conclusion

The California mini-CFPB Act is an important legal development that raises interesting insurance-related classification issues which may take some time to fully resolve. Yet, while the form of these questions is new, the underlying analysis is familiar. Indeed, these questions are variations of the same dilemmas that courts and legislatures have struggled with for years when trying to distinguish between traditional insurance products and the parties that sell them and new products forms that have some but not all of those traditional characteristics.

About Brian Casey

Brian Casey is a partner and Co-Chair of the Regulatory and Transactions Insurance Practice Group in Locke Lord’s Atlanta office. The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or any of its or their respective affiliates. This article is for general information purposes only and is not intended to be and should not be taken as legal advice.

About Jon Gillum

Jon Gillum is a senior counsel and member of the Regulatory and Transactions Insurance Practice Group in the Austin, Texas office, of Locke Lord LLP. The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or any of its or their respective affiliates. This article is for general information purposes only and is not intended to be and should not be taken as legal advice.

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