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September 9, 2020

Stroock Special Bulletin

By: Quyen T. Truong, Julia B. Strickland

The California Legislature last week passed the California Consumer Financial Protection Law (CCFPL) to create a state-level version of the federal Consumer Financial Protection Bureau (CFPB). The CCFPL, which expands the authority of the Department of Business Oversight (DBO) and renames it the Department of Financial Protection and Innovation (DFPI), has two primary purposes: (1) to grant the agency jurisdiction over previously unlicensed consumer financial services providers and technological innovation, and (2) to empower it with new authority and resources to pursue discriminatory conduct and unfair, deceptive and abusive acts and practices (UDAAPs). The DFPI’s expanded powers and resources present major regulatory burdens and risks for entities newly brought under its authority, and also may have a significant enforcement impact on banks and other institutions that already are under DBO jurisdiction and are exempt from the CCFPL.

The CCFPL grants the DFPI licensing, rulemaking, supervisory and enforcement authority over technological innovation and “covered persons,” defined to include hitherto unlicensed providers of consumer financial services such as debt collectors, credit reporting agencies and FinTech entities, as well as their affiliates and service providers. Notably, the DFPI’s expanded regulatory and enforcement jurisdiction also covers providers of financial products and services to small businesses, family farms and nonprofits.

California now has positioned itself as the leading regulator for FinTech entities (and their bank partnerships). Based on its stated mission, the Financial Technology Innovation Office to be established within the DFPI has the potential to promote innovation and provide a more stable regulatory framework and license to undergird FinTech companies’ nationwide operations. Concerns expressed by the California Assembly and governor, as well as the DBO’s historically aggressive regulatory approach, place primary emphasis on ensuring that FinTech companies adequately protect the public, however. Cryptocurrencies and money laundering are likely to become early targets of scrutiny. 

Last minute amendments to the CCFPL exempt banks, auto lenders and other state-chartered and state-licensed entities, with the exception of payday lenders and student loan servicers. Banks and other institutions already subject to DBO regulation benefit from the CCFPL’s leveling of the playing field. Nevertheless, the DFPI’s reorganization and expansion may lead to more demanding regulation, supervision and enforcement for all institutions under its jurisdiction.

The financial industry as a whole likely will experience the greatest impact in the area of enforcement. The DBO historically has favored regulation by enforcement. The expanded agency is unlikely to change direction significantly, and it now has gained additional personnel, funding and tools in its arsenal. The CCFPL authorizes the DFPI to investigate and issue subpoenas, bring both civil actions and administrative proceedings, and issue desist and refrain orders based on violation of the statute, rules, final orders and written conditions. The new DFPI authorities do not cover institutions exempt from the CCFPL. But the DFPI also can use its expanded resources and powers in the areas of data collection, market monitoring, consumer complaints and supervision generally to feed its entire enforcement engine.

In regards to UDAAP in particular, the DFPI has rulemaking and enforcement authority over covered persons under the CCFPL, and it also can pursue action against any institutions under its jurisdiction pursuant to the Dodd-Frank Act Title X provisions authorizing the states to enforce Title X and any regulations promulgated by the CFPB thereunder. While the DBO historically has argued that it is not bound by any statute of limitations, the CCFPL sets a four-year statute of limitations for civil actions, which is one more year than the equivalent Dodd-Frank Act provisions. The Dodd-Frank Act requires states to notify the CFPB when bringing actions under Title X, but the CFPB cannot control states’ enforcement actions. And the DFPI of course can act without notifying the CFPB when it proceeds against covered persons under the CCFPL. Like the CFPB, the DFPI may seek broad relief, including injunctive relief, rescission or reformation of contracts, refunds, restitution, disgorgement or compensation for unjust enrichment, damages and civil money penalties, although not exemplary or punitive damages.

The CCFPL requires the DFPI to interpret the terms “unfair” and “deceptive” consistently with the California Unfair Competition Law (UCL) and the term “abusive” consistently with Title X. Although the UCL and Title X both borrow from the Federal Trade Commission Act, separate caselaw has developed on the term “unfair” under the UCL (defined to include, among other things, “any unlawful, unfair or fraudulent business act or practice and unfair, deceptive, untrue or misleading advertising”), such that its ambiguous boundaries have been argued to encompass virtually any allegedly misleading or wrongful conduct. The long definition of “abusive” under Title X also leaves significant ambiguities which have not been addressed substantially by either caselaw or rulemaking by the CFPB. Against this backdrop, the DFPI has the potential to seek to expand its UDAAP interpretations and enforcement activities extensively. Companies brought under its authority by the CCFPL will bear the brunt of its actions. Yet all institutions under its jurisdiction should prepare for the impact when the agency ultimately applies its framework more broadly, utilizing its Title X, UCL and other authorities which continue to grow with new state enactments.   

The 2020-21 budget signed by Governor Newsom in June provides $10.2 million in 2020-21 growing to $19.3 million in 2022-23 to fund the DFPI’s reorganization, expansion and initial implementation of the CCFPL. The DFPI thereafter will be funded by registration fees from new licensees and from civil penalties, providing an incentive for the agency to expand its reach and civil penalties and an ample funding source to pursue its aggressive agenda.


For more information:

Quyen T. Truong

Julia B. Strickland

This Stroock publication offers general information and should not be taken or used as legal advice for specific situations, which depend on the evaluation of precise factual circumstances. Please note that Stroock does not undertake to update its publications after their publication date to reflect subsequent developments. This Stroock publication may contain attorney advertising. Prior results do not guarantee a similar outcome.