Get Ready for the New California Consumer Financial Protection Bureau
Walter Mix and David Abshier
The state’s answer to the CFPB will have sweeping jurisdiction and power—but also could help spark fintech innovation.
More than 2,300 miles from Washington, DC, lawmakers are preparing perhaps the most significant changes in the regulation of financial services since passage of the Dodd-Frank Act a decade ago. In the coming months, the California State Legislature is likely to approve the creation of a new state agency, loosely modeled after the US Consumer Financial Protection Bureau (CFPB), with sweeping regulatory authority and enforcement powers that will reach far beyond California state lines.
“This is a major, major initiative that will make a big difference not only in California—certainly in California—but also nationally,” said Richard Cordray, the former director of the CFPB and an architect of the California plan, in a recent interview with Yahoo Finance.
The draft California Consumer Financial Protection Law (CCFPL), which was rolled into Gov. Gavin Newsom’s 2020–2021 state budget, would give the new Department of Financial Protection and Innovation (DFPI) a larger oversight mandate and far greater resources than its predecessor, the Department of Business Oversight (DBO). The DFPI would have enforcement authority over 51 state consumer finance laws and 21 federal consumer laws.
Newsom says the new agency is needed both to better protect consumers after the Trump administration defanged the CFPB and to foster innovation in financial services in California. “The federal government’s rollback of the CFPB leaves Californians vulnerable to predatory businesses and leaves companies without the clarity they need to innovate,” reads the 2020-2021 Governor’s Budget Summary.
The emphasis on innovation could open interesting opportunities in the financial sector, bring more regulatory clarity to fintech’s gray areas and further solidify California’s position as the preferred crossroads of technology and banking. This new agency could proactively encourage California’s world-leading tech sector to stimulate new financial entities, creating jobs and business opportunities within the state—and blunting efforts by other states to seize the edge in licensing new nonbank banks.
“The emphasis on innovation could open interesting opportunities in the financial sector [and] bring more regulatory clarity to fintech’s gray areas... ”
From traditional banking and consumer lending to such currently unlicensed activities as debt collection and trading in virtual currencies, if your business is providing almost any financial service in California, now is the time to get ready. Here are six things financial-services leaders should know.
Six things to know about the proposal
The DFPI will be powerful. The department will be empowered to bring civil suits independent of the attorney general. It could seek big fines: up to $50,000 for first violations and up to $100,000 for additional violations. It will be supported by a big budget—$10.2 million in its first year would be earmarked solely for consumer financial protection, rising to $19.2 million in year three—and a big staff—launching with 44 new positions and doubling to 90 in fiscal year 2022–2023. The DFPI’s overall budget would total $121.3 million with 646 employees initially. Come July 1, a new sheriff will be in town.
It will have broad jurisdiction. The DFPI would continue to supervise businesses regulated by the DBO, including state-chartered banks, securities firms and mortgage lenders, as well as payday and consumer lenders. Added to the list will be financial service providers that are unlicensed or, in the words of DFPI’s sponsors, “under-regulated,” such as debt collectors, credit reporting agencies and fintech companies. All “covered persons” will be subject to registration and reporting requirements.
The DFPI could impact banks. Though banks and credit unions already are heavily supervised by state and federal regulators, the new agency will have a new mandate. Sponsors expect no increases in supervision or examination fees, but because the DFPI is intended to be self-funded, fees could rise later to support operations. Penalties and fines could help to fund the agency too, along with licensing fees on nonbanks. But the DFPI could also benefit traditional banks by bringing clarity to regulation of nonbanks in the market—something they’ve long clamored for.
It will provide strong consumer protection. The DFPI will be empowered to analyze patterns to detect whatever staff finds to be “unfair, deceptive and abusive” business practices and to inform enforcement efforts. It will seek to increase outreach to the public, especially populations vulnerable to unethical or illegal dealings, such as the elderly, students, members of the military and recent immigrants. Combine the governor’s consumer-protection rhetoric with the DFPI’s power to bring civil actions and levy fines, and it’s safe to expect an aggressive agency that financial institutions won’t want to cross.
It could stimulate fintech innovation. Newsom’s budget outline envisions granting fintech companies state charters, in some cases subject to FDIC approval, under the supervision of the DFPI. (Before long, SoFi, which provides student loan refinancing and home and personal loans through its app, might have some more real competitors.) The DFPI also could encourage the formation of blockchain businesses by establishing a regulatory framework for the largely lawless virtual currency marketplace. And it could use its surveillance capability to spot innovative new players that are going unlicensed, unregulated and unnoticed, so that it can both bring them under its supervision and help keep the state’s regulatory regime up to speed.
It will affect financial regulation across the US. Just a few months after the California Consumer Privacy Act took effect, businesses all over the country are moving to comply—a sign of how quickly the state’s policies can change business beyond its jurisdiction. It’s likely the CCFPL will have financial-sector players in all 50 states adjusting their compliance practices in hopes of avoiding the cost and confusion of having multiple procedures and practices—one for California and others for the rest of the US. California might even change banking beyond the US., since most foreign banks operating in the country are state regulated, and many of those are chartered in California.
Up next: Passage in California, other states likely to follow
The California State Legislature must approve a budget by June. And while interest groups can be expected to lobby for full or partial exemptions from the act or to diminish the DFPI’s authority or scope, the measure is almost certain to pass and take effect July 1 as scheduled.
If the legislature creates California’s own CFPB, Cordray may see his dream come true as more states follow with theirs. Pennsylvania, New York and New Jersey already have versions of a CFPB. In Illinois, meanwhile, the director of the state’s Bureau of Consumer Financial Protection recently reiterated the bureau’s mission to enforce the Dodd-Frank Act’s prohibitions against “abusive” actions or practices. Already, other states are reviewing Newsom’s proposal with an eye toward modeling mini-CFPBs of their own after California’s.
At the federal level, the pendulum may have swung away from regulation of the financial sector. At the state level, it seems to be swinging faster and farther toward more stringent oversight.