California’s Mini-CFPB: National Impact and Enforcement Threat
On January 10, 2020, California Governor Gavin Newsom officially introduced his plan for the creation of a State-level version of the Federal Consumer Financial Protection Bureau (“CFPB”). The proposal, a part of his 2020-2021 proposed budget, contemplates passage of a new California Consumer Financial Protection Law (“CCFPL”), the text of which has not yet been released, and expansion of the California Department of Business Oversight (“DBO”) into a powerful Department of Financial Protection and Innovation (“DFPI”). The proposed DFPI, modeled closely on the CFPB, would have expanded enforcement authority to pursue “unfair, deceptive and abusive practices” (“UDAAP”) and jurisdiction to cover debt collectors, credit reporting agencies, FinTech companies and other financial services players previously unlicensed and unregulated by the agency. This bulletin discusses: (1) the national impact of this proposed mini-CFPB, part of California’s major push to dominate the consumer protection landscape; and (2) the key aspects of the proposed agency expansion, particularly the top enforcement threats facing the industry.
This year sees the national impact of California’s drive to dominate the landscape in consumer protection, particularly in the area of financial products and services. Companies continue to scramble to comply with the California Consumer Privacy Act (“CCPA”), which became effective on January 1 and poses a major compliance and liability threat for any business that interacts substantially with California residents. In October 2019, Governor Newsom also signed into law a variety of consumer financial protection measures including, for example, AB 539 to cap interest rates at approximately 38% on consumer loans between $2,500 and $10,000, and SB 616 to require debt collectors to leave sufficient funds in debtors’ bank accounts to support a family of four for a month.
Creation of California’s mini-CFPB requires action from the legislature, which must pass the Governor’s proposed budget by June 15, 2020. Including the DFPI within the budget proposal and structuring it as a revamping of the DBO, rather than creation of a new agency, maximizes its chance for passage. With Democrats holding super-majorities in both legislative chambers, failure is unlikely, although substantial tinkering still could occur.
Despite being a State effort, if passed, the CCFPL and DFPI would have major national impact, for many of the same reasons that the CCPA does. The size of California’s market as well as the operational impracticability of establishing a separate compliance and business framework for California residents have led most companies to apply the CCPA framework nationwide. Businesses will face the same dilemma in regard to the CCFPL and DFPI. Moreover, just as the CCPA has sown the seeds for new privacy legislation and regulation nationwide at both the State and Federal levels, California’s mini-CFPB is likely to lead more aggressive activity nationwide.
Many States have looked to increase their consumer financial protection activities in reaction to changes at the CFPB and other Federal agencies under the Trump administration, but have faced significant resource constraints. Companies have only begun to feel the impact from certain States that have directed substantial new resources to this effort, like New York, which established the Consumer Protection and Financial Enforcement Division within its Department of Financial Services in 2018. Slated to add roughly $30 million over the next two years to the DBO’s current $120 million budget and 90 new positions over the next three years to its 700 person staff, Governor Newsom’s proposal would inject powerful fuel to State regulatory efforts. Historically, State consumer financial regulatory initiatives (e.g., enforcement activities following the residential mortgage crisis) have been led by key States such as California and New York. As one witness at a March 27, 2019, hearing before the California Assembly’s Committee on Banking and Finance put it, California’s mini-CFPB would be a “force-multiplier” by virtue of its resources and leadership nationwide.
Regulatory Model & Enforcement Threat
Governor Newsom emphasized that this California mini-CFPB is intended to fill the gap created by the Federal agency “pulling away” from enforcement activities under the Trump administration. It thus is closely modeled on the CFPB and designed to perform much the same enforcement role that the CFPB had under the Obama administration, including in its national leadership. Richard Cordray, the CFPB’s founding Director, was among key contributors to the proposed bill, DBO head Manny Alvarez is a CFPB Enforcement veteran, and many other CFPB alumni will be active in California’s mini-CFPB.
A key aspect of the proposal is to expand the DBO’s jurisdiction, in much the same way that the CFPB was created to consolidate consumer protection functions and to cover previously largely unregulated players in the consumer financial industry. (The DBO currently regulates state-chartered banks and credit unions, residential mortgage lenders, auto lenders, payday lenders, money transmitters, as well as securities brokers and dealers among others.) Questions will arise as to whether the California mini-CFPB could reach national banks. While these institutions will have significant preemption arguments, California undoubtedly will point out that the National Bank Act leaves significant areas of activity still open to State regulation and the Dodd-Frank Act generally allows more expansive State consumer protection requirements.
FinTech entities would receive particular focus by a Financial Technology Innovation Office within the DFPI. The inclusion of “innovation” within the agency’s and the office’s name, as well as California’s touted role as the birthplace of the online revolution, should not be read to indicate that the primary goal will be to promote FinTech efforts (although the agency also should not be presumed to stamp out innovation). The Governor’s statement in connection with his budget proposal suggests concern with whether FinTech companies are adequately protecting the public. Moreover, the Assembly already has held hearings on cryptocurrency and similar technology. And California Attorney General Xavier Becerra had been a key member of the 22 State Attorney General group that opposed the CFPB’s FinTech sandbox on the ground that it would protect companies unduly in their experimentation with new financial products, services and technology. In addition, other areas for close scrutiny by the DFPI would include payday lenders and debt collectors generally, as well as key consumer groups such as the elderly, students, veterans and recent immigrants.
All financial industry participants would face more exposure and uncertainty before the new California mini-CFPB. In particular, the DFPI would have expanded authority to pursue “unfair, deceptive and abusive” practices, mirroring the authority granted by the Dodd-Frank Act to the CFPB. Virtually since its inception, the CFPB’s authority to pursue “abusive” practices has created enforcement havoc for the industry, in part because it is largely undefined and can be applied to cover a broad and uncertain swath of activities. Add to this the historical tendency of California’s DBO to be expansive in its interpretation of statutory and regulatory terms as it conducts its oversight and enforcement functions, and the result is a recipe for heightened uncertainty and exposure for industry players. Further, California’s wide array of other consumer protection laws, including many newly added, will provide additional tools for both regulators and private litigants in this space.
We are closely following developments as advocacy continues and details are added to CCFPL legislation and the framework for California’s DFPI. On January 23, 2020, we will conduct a webinar to discuss the creation of the Department of Financial Protection and Innovation, as well as the impact of the CCPA and enforcement trends under the Unfair Competition Law, in the context of California’s charge to dominate the national consumer protection landscape.
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