Earlier this month, California Gov. Gavin Newsom revealed plans to create a state version of the federal Consumer Financial Protection Bureau (CFPB) as part of the state’s proposed 2020-2021 budget. According to the governor’s Budget Summary, “[t]he federal government’s rollback of the CFPB leaves Californians vulnerable to predatory businesses and leaves companies without the clarity they need to innovate.” In an interview with the Los Angeles Times, Gov. Newsom added, “As the Trump administration undermines and weakens the rules that protect consumers from predatory businesses, California is filling the void and stepping up to protect families and consumers.” The 2020-2021 state budget includes $10.2 million for a Financial Protection Fund, ostensibly to provide additional consumer protection against unfair and deceptive practices in the financial services industry.
The most immediate proposed change would overhaul the existing Department of Business and rename it the Department of Financial Protection and Innovation or “DFPI.” According to the Los Angeles Times, the DFPI would add “dozens of new staff” and increase scrutiny of consumer-facing products “to identify patterns of abuse.” Per the Budget Summary, Gov. Newsom envisions granting the DFPI the authority to “pursue unlicensed financial services providers not currently subject to regulatory oversight such as debt collectors, credit reporting agencies, and financial technology (fintech) companies.”
The Budget Summary also defines new activities the DFPI would undertake, including:
- Offering services to empower and educate consumers, especially older Americans, students, military service members, and recent immigrants;
- Licensing and examining new industries that are currently under-regulated;
- Analyzing patterns and developments in the market to inform evidence-based policies and enforcement;
- Protecting consumers through enforcement against unfair, deceptive, and abusive practices;
- Establishing a new Financial Technology Innovation Office that will proactively cultivate the responsible development of new consumer financial products;
- Offering legal support for the administration of the new law; and
- Expanding existing administrative and information technology staff to support the department’s increased regulatory responsibilities.
Prior to the introduction of the proposed “mini-CFPB,” some California lawmakers expressed interest in increased scrutiny of already-regulated financial services entities. For instance, in March 2019, California Assemblywoman Monique Limon (D-Santa Barbara) argued that California needs “to really rethink what a state CFPB would do,” as “[w]e see the presence of predatory lending products in auto loans, payday loans, cash-advance and small-business loans.”
For auto lenders and small-dollar lenders in particular, the creation of a miniCFPB could lead to increased regulatory exposure. One of the new activities outlined in the Budget Summary includes “enforcement against unfair, deceptive, and abusive practices,” an area rife with controversy in the context of CFPB enforcement. It is conceivable the DFPI could use such ill-defined powers to regulate auto lending beyond what the CFPB has attempted, or to ignore recent CFPB rulemakings concerning consumer ability to repay small-dollar loans.
The mini-CFPB is only a proposal at this point. California’s proposed budget must be approved by the state legislature by June 15, 2020, and it is likely we will see significant changes to the proposed DFPI before any changes are implemented. In any event, this development is one the financial services industry should watch closely.