California Dreamin': The Golden State Launches New Mini-CFPB

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Highlights

  • California Gov. Gavin Newsom recently signed into law the California Consumer Financial Protection Law (CCFPL), which creates the Department of Financial Protection and Innovation (DFPI), a new agency with powers that, by design, are intended to resemble those of the federal Consumer Financial Protection Bureau (CFPB).
  • The CCFPL will bring broader jurisdiction and sweeping enforcement powers to California's financial services regulator. The CCFPL authorizes the DFPI to enforce California laws against "persons offering or providing consumer financial products or services in [the] state."
  • The statute also designates the DFPI as the authorized California regulatory agency for purposes of enforcing the Dodd-Frank Act's reservation of certain consumer financial protection and enforcement powers in state regulators.
  • Notably excluded from the full force of the CCFPL are federal and state-chartered banks.

Amid wildfires and viral plague, a new consumer protection agency rises in the West: The California Department of Financial Protection and Innovation (DFPI). Holland & Knight recently noted that a bill was pending on California Gov. Gavin Newsom's desk that would bring substantial changes to the regulatory environment for California financial services companies. (See Holland & Knight's previous alert, "California Legislative Roundup 2020: Financial Services," Sept. 24, 2020.) Last week, Gov. Newsom signed that bill into law – the California Consumer Financial Protection Law (CCFPL) – which creates the DFPI, a new agency with powers that, by design, are intended to resemble those of the federal Consumer Financial Protection Bureau (CFPB).1 The CCFPL will bring broader jurisdiction and sweeping enforcement powers to California's financial services regulator. While these should make many financial services providers concerned, there is at least one notable group that appear to have dodged the regulatory wave that had swept over California – banks.

The CCFPL authorizes the DFPI to enforce California laws against "persons offering or providing consumer financial products or services in [the] state."2 The statute also designates the DFPI as the authorized California regulatory agency for purposes of enforcing the Dodd-Frank Act's reservation of certain consumer financial protection and enforcement powers in state regulators.3

Broad Consumer Protection Mandate

The statute's legislative findings provide amble fodder for consumer advocates and jurists who want to focus on the legislature's intent. According to the statute:

The purpose of the California Consumer Financial Protection Law shall be to promote consumer welfare, fair competition, and wealth creation in this state by doing all of the following:

(1) Promoting nondiscriminatory access to responsible, affordable credit on terms that reasonably reflect consumers' ability to repay.

(2) Promoting nondiscriminatory access to consumer financial products and services that are understandable and not unfair, deceptive, or abusive.

(3) Protecting consumers from discrimination and unfair, deceptive, and abusive acts and practices in connection with financial practices and services.

(4) Promoting nondiscriminatory consumer-protective innovation in consumer financial products and services.4

Who's In and Who's Out?

Similar to Title X of the Dodd-Frank Act, which created the CFPB, the CCFPL broadly defines "Covered Persons" under the statute to include:

(1) Any person that engages in offering or providing a consumer financial product or service to a resident of this state.

(2) Any affiliate of a person described in this subdivision if the affiliate acts as a service provider to the person.

(3) Any service provider to the extent that the person engages in the offering or provision of its own consumer financial product or service.5

Notwithstanding this seemingly expansive scope of possible targets of the reborn California financial regulator, the statute excludes certain notable potential targets. Among the types of entities that are expressly excluded from the statute's coverage are finance lenders, broker-dealers, residential mortgage lenders, mortgage servicers, mortgage originators, check sellers and "a bank, bank holding company, trust company, savings and loan association, savings and loan holding company, credit union, or an organization subject to oversight of the Farm Credit Administration, when acting under the authority of a license, certificate, or charter under federal law or the laws of another state."6

The notable exclusion of banks, including federally chartered banks and banks chartered by other states, is the result of intense lobbying by the California Bankers Association. 7 A spokesperson for the California Bankers Association remarked after the pro-bank amendments were incorporated: "The changes we were advocating for — that the intent of the legislation be to cover current entities that are unregulated and that there be no new enforcement authority over existing licensees — are now affirmed in these recent amendments . . . allowing us to be neutral on the bill."8

While banks may enjoy some relief from the statute, FinTech firms will likely fall squarely within the scope of the new regulator. This could impact vendors and joint venture partners to banks, thereby affecting the types of products that they offer and the ways that they are offered and serviced.

Robust Rulemaking and Enforcement Powers

Similar to the CFPB, California's mini-CFPB will have the power to curtail "unfair, deceptive, or abusive" acts or practices affecting California consumers.9 Among the enforcement powers available to the new agency are rescission of abusive contracts, restitution, disgorgement, civil money penalties (fines), public notification regarding the violation and "limits on the activities or functions of the [covered person]."10 These enforcement powers are comparable to those of the CFPB under Title X of the Dodd-Frank Act, and of the federal prudential bank regulatory agencies under Section 8 of the Federal Deposit Insurance Act.

The CCFPL also empowers the new agency with the authority to "prescribe rules to facilitate oversight of covered persons and assessment and detection of risks to consumers."11 Additionally, the agency may "prescribe rules regarding registration requirements applicable to a covered person engaged in the business of offering or providing a consumer financial product or service, including requiring a filing be made under oath, and requiring the payment of registration fees."12 This is designed to expand state supervision to entities that had previously gone unregulated.

Positioning as an Independent Agency

One notable aspect of the newly created agency is its placement as an independent department of state government. In some states, such as Pennsylvania, the state's mini-CFPB is housed within the attorney general's office, where they certainly have a prosecutorial flare coupled with substantial political influences, but may lack the experience of seasoned financial services examiners and regulators. Rather, the new California regulator is independent, like its cousin on the other coast, the New York State Department of Financial Services (NYSDFS). The NYSDFS, since its founding in 2011 as a result of the consolidation of the state's banking and insurance regulators, has grown to become widely regarded as one of the nation's most experienced state banking regulators, and certainly the most aggressive in terms of enforcement activities. As an agency that has generally been led by former prosecutors, the revamped NYSDFS gained a reputation for zealous consumer advocacy. The new DFPI may assume a comparably prominent role on the West Coast.

Where Do We Go From Here?

Even though banks have been spared the weight of the CCFPL reforms, the revamped and rejuvenated agency will undoubtedly take aim at a broad cross-section of financial services providers. This regulatory restructuring may also have a ripple effect, influencing other states to strengthen and expand their enforcement activities, even creating their own mini-CFPBs. Finally, one cannot help but acknowledge that the new agency was born out of the state's perception that the CFPB's momentum had waned somewhat under the Trump Administration. However, regardless of the origins for the heightened role that state financial services regulators and attorneys general have assumed for themselves in the consumer financial protection space, such a role is here to stay. The CCFPL becomes effective Jan. 1, 2021.


Notes

1 As of this writing, the companion bill that officially changes the name of the California Department of Business Oversight to the DFPI, AB-107, has been presented to the governor but has yet to be signed. His signature is expected in the coming days.

2 AB-1864, Sec. 1, proposed to be codified at Cal. Fin. Code § 300(a).

3 See AB-1864, Sec. 4, citing 12 U.S.C. § 5552, proposed to be codified at Cal. Fin. Code § 326(b).

4 AB-1864, Sec. 7, proposed to be codified at Cal. Fin. Code § 90000(b).

5 AB-1864, Sec. 5, proposed to be codified at Cal. Fin. Code § 90005(f).

6 AB-1864, Sec. 7, proposed to be codified at Cal. Fin. Code § 90002(b) and (c).

7 "Banks, consumer groups both got what they wanted in 'mini-CFPB' bill," American Banker, 2020 WLNR 24530646 (Sept. 1, 2020).

9 AB-1864, proposed to be codified at Cal. Fin. Code § 90012.

10 AB-1864, proposed to be codified at Cal. Fin. Code § 90012(b).

11 AB-1864, proposed to be codified at Cal. Fin. Code § 90009(b)(1).

12 AB-1864, Sec. 7, proposed to be codified at Cal. Fin. Code § 90009(a)(1).

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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