In March 2023, the California Department of Financial Protection & Innovation proposed to adopt numerous regulations to "implement, interpret, and make specific registration requirements for covered persons under the California Consumer Financial Protection Law; requirements for exemption from registration for licensees under the California Financing Law, California Deferred Deposit Transaction Law, and Student Loan Servicing Act; and the regulation of certain advances under the California Financing Law". The proposed rules garnered extensive comments and the DFPI responded to those comments with two rounds of modified text. In March of this year, the DFPI completed its rulemaking procedures and submitted its Final Statement of Reasons and the Final Text of its proposed regulations to the Office of Administrative Law. On April 26, 2024, the OAL notified the DFPI that the OAL disapproved the proposed action pursuant to the Administrative Procedure Act.

Under California's APA, the OAL reviews regulations proposed by state agencies for compliance with the APA's procedural requirements and for compliance with the six standards for administrative regulations in Government Code section 11349.1: necessity, authority, clarity, consistency, reference, and nonduplication. Importantly, the OAL does not make policy decisions about the substance of proposed regulations. 

In this case, the OAL found that the DFPI's proposed rules failed to meet the clarity standard. Under the APA, "clarity" is defined as "written or displayed so that the meaning of the regulations will be easily understood by those persons directly affected by them." Cal. Gov't. Code § 11349(c). The OAL has adopted a regulation, 1 CCR § 16, which further defines "clarity".

"A man of genius makes no mistakes. His errors are volitional and are the portals of discovery."*

The DFPI has expended considerable effort in developing these regulations and I expect that it will not abandon the effort. The DFPI may resubmit revised regulations within 120 days of its receipt of the OAL's opinion without complying with the notice and public hearing requirements of the APA unless the substantive provisions of the regulation have been significantly changed. In that case or if the revised text is not submitted within 120 days of receipt of the OAL's written opinion, the DFPI must comply with the APA's notice and comment requirements and readopt the regulation. The OAL director may, upon a showing of good cause, grant an extension to the 120-day time period. Cal. Gov't. Code § 11349.4. 

The OAL's opinion is available here. 

_________________________________

*James Joyce, Ulysses, Ch. 9 (Scylla & Charybdis).