A “State-Level” CFPB and Other State Innovations

by Manatt, Phelps & Phillips, LLP
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As the Feds retreat, will states fill the void? New Jersey promises a “state-level” Consumer Financial Protection Bureau (CFPB), and Arizona creates an innovation “sandbox.”

What happened

New Jersey—New Jersey Governor Phil Murphy has nominated Paul R. Rodriguez as the new director of the New Jersey Division of Consumer Affairs, a selection intended “to fill the void left by the Trump Administration’s pullback of the CFPB” and create a “state-level CFPB” in New Jersey.

“As the federal government abandons its responsibility to protect consumers from financial fraudsters, it is more important than ever that New Jersey picks up the mantle to protect its own residents,” New Jersey Attorney General Gurbir Grewal said in a statement.

The director position is charged with protecting consumers’ rights, regulating the securities industry and overseeing 47 professional boards in the state.

A similar sentiment was expressed by several other state attorneys general—including those in California, Connecticut, Hawaii, Illinois, Iowa, Maine, Maryland, Massachusetts, Minnesota, New Mexico, North Carolina, Oregon, Vermont, Virginia and Washington—in a December 2017 letter to President Donald J. Trump.

“Regardless of the future direction or leadership of the CFPB, we as state attorneys general will vigorously enforce state and federal laws to ensure fairness and deter fraud,” the AGs wrote. “If incoming CFPB leadership prevents the agency’s professional staff from aggressively pursuing consumer abuse and financial misconduct, we will redouble our efforts at the state level to root out such misconduct and hold those responsible to account.”

Arizona—Plenty of sand in Arizona? Last month, the Arizona legislature enacted House Bill 2434, ordering creation of a “regulatory sandbox program.” Signed into law by Governor Doug Ducey, the new statute aims to enable “access to the market in this state to test innovative financial products or services without obtaining a license or other authorization that would otherwise apply.”

Pursuant to the new law, an “innovative financial product or service” is defined as “a financial product or service that includes an innovation,” with “financial product or service” defined to mean a “product or service that requires licensure under [Arizona law] or a product or service that includes a business model, delivery mechanism or element that may otherwise require a license or other authorization to act as a financial institution or enterprise or other entity that is regulated by [Arizona law].”

The statute broadly defined “innovation” to mean “the use or incorporation of new or emerging technology or the reimagination of uses for existing technology to address a problem, provide a benefit or otherwise offer a product, service, business model, or delivery mechanism that is not known by the attorney general to have a comparable widespread offering in this state.”

To apply for the sandbox, applicants—including companies already licensed under state law that want to try out a new product or service—need to provide specific information about their proposal, including the plan to monitor and test the product and an explanation of the benefits and risks to consumers. Other requirements include a location (which could be physical or virtual) that is accessible to the attorney general and will maintain all records, documents and data.

Once approved, participants will have 24 months to test the innovative financial product or service. Certain limitations apply: Consumer loans may be issued for an amount up to $15,000, but the participant may not issue more than $50,000 in aggregate loans per consumer; for participants testing money transmitter products or services, transactions with consumers are capped at $500 and limited to no more than $2,500 in aggregate transactions per consumer.

Without the sandbox, participants may not enter into transactions with more than 10,000 consumers; but, with adequate capitalization, risk management process and management oversight, the AG can permit participants to enter into transactions with up to 17,500 consumers or, in the case of money transmitters, up to $15,000 in a single transaction and $50,000 in aggregate transactions per consumer.

Participants must comply with both Arizona law (including consumer fraud provisions) and federal law, although the new law provides some protection as a participant “is deemed to possess an appropriate license under the laws of this state for purposes of any provision of federal law requiring state licensure or authorization.”

Sandbox participants may be permitted to operate in other jurisdictions if the Arizona attorney general enters into agreements with other state or foreign regulators. The program will open for applications in July and will continue until July 2, 2028.

To read Arizona’s House Bill 2434, click here.

To read the New Jersey announcement, click here.

To read the letter from state AGs to President Trump, click here.

Why it matters

As the federal government retreats from regulation, innovation is happening on the state level. State regulators are stepping in on the consumer protection front, as evidenced by the recent announcement in New Jersey, leaving financial institutions facing the potential of increased enforcement actions at the state level. As for regulatory sandboxes, they are already a hot trend outside the United States, with iterations in countries including Australia, Canada and the United Kingdom. Arizona has taken the lead in the U.S., but the Illinois legislature is currently considering a bill that would create a similar fintech sandbox program. That program would be administered by the Department of Financial and Professional Regulation. Stay tuned.

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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