California is poised to enact broad new legislation creating an entirely revamped financial protection regimen, including a powerful new Department of Financial Protection and Innovation (DFPI). In this article, we provide you with an overview of the key elements of the new law. This is the first in a series of articles discussing the new law and revamped agency, and what they may mean to entities falling under their scope and coverage.
The largest state in the union, California likewise already has an outsize influence on the regulation and enforcement of laws regulating businesses—particularly, certain types of financial institutions doing business in the state. The current entity, the California Department of Business Oversight (DBO), provides protection to consumers as well as services to businesses engaged in financial transactions. DBO regulates a variety of financial services, products and professionals. It supervises the operations of state-licensed financial institutions, including banks, credit unions, money transmitters, issuers of payment instruments and traveler’s checks, and premium finance companies. It likewise licenses and regulates a variety of financial businesses—including securities brokers and dealers, investment advisers, deferred deposit (commonly known as payday loans), and certain fiduciaries and lenders—and regulates the offer and sale of securities, franchises and off-exchange commodities.
After President Trump took office in January 2017, a number of states began to express concern about the impact of supervision and enforcement by the federal Bureau of Consumer Financial Protection (CFPB).
That concern was exacerbated when Director Richard Cordray suddenly resigned and was replaced on an acting basis by President Trump’s then-head of the Office of Management and Budget, Mick Mulvaney. Mr. Mulvaney proceeded to reduce and, in some cases, dismantle certain operations within the CFPB, much to the consternation of consumer groups and Democratic-run states. One state, Pennsylvania, established a smaller unit within the office of the attorney general. Another key state, New York, created a new division within the pre-existing Department of Financial Services. That entity, the Consumer Protection and Financial Enforcement Division, reflects more of a refocusing of existing statutory authority.
An effort championed by Governor Newsom through a budget proposal in January of this year to expand and transform DBO, which effort seemingly had died with the budget adopted in June, came back to life in August and has now resulted in Assembly Bill 1864 (AB 1864), which (with some last-minute carve-outs) passed the California Legislature on August 31, 2020. Governor Newsom has until September 30 to sign AB 1864 into law, and that signature is expected. When signed, AB 1864 will take effect January 1, 2021, with certain provisions becoming operative thereafter.
That purpose is reflected in AB 1864, with the bulk of the legislation adding the California Consumer Financial Protection Law (CCFPL) to the Financial Code. The CCFPL closely tracks the federal Consumer Financial Protection Act of 2010 (CFPA), which is Title X of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) that created the CFPB. The new state law converts the DBO into a “mini-CFPB” to implement and enforce the CCFPL. However, AB 1864 in some respects goes further than the CFPA, including provisions that provide for potential regulation of small-business lending.
Overview of AB 1864
Here are the key provisions you need to know now:
Exemptions From Scope. However, there are many exemptions from that starting point. Similar to the CFPA, merchants, retailers and sellers of nonfinancial goods and services generally are excluded from coverage except to the extent they qualify as regularly extending credit under the federal Truth in Lending Act. That may include merchants and others financing purchases through retail installment sale contracts meeting certain conditions, which could include, for example, healthcare professionals and hospitals.
Further, as the result of last-minute negotiations, the CCFPL exempts from coverage many entities already regulated in California. These include:
Enforcement. In addition to the expanded DFPI general enforcement authority noted above, the CCFPL provides robust enforcement powers to the DFPI, including the powers to bring administrative and civil actions, and to prosecute those civil actions before state and federal courts. Also, the DFPI will have all the investigatory and subpoena powers set forth in certain provisions of the government code, responding to which can be costly and time-consuming. Enforcement powers also include administrative hearings, which may result in, among other things, desist and refrain orders. Under the CCFPL, these powers do not usurp the powers of the California attorney general, and provide instead for cooperation between the agencies.
The CCFPL also provides for broad remedies for violations, including rescission, refunds, restitution, disgorgement, money damages, public notification regarding the violation, and/or limits on the activities or functions of the person. The new law authorizes the DFPI, just like the CFPB, to assess civil money penalties, including up to $1 million per day for a continuing, knowing violation. These are extraordinary powers that could bring almost any company to its knees, but which have been used with care by the CFPB. It is unclear whether the same may be said for the DFPI, which may feel less constrained in exercising those punitive measures.
Doing business in California? Not everyone is covered by the new law and enforcement regime, and that is good news for those concerned about the grant of such extraordinary powers to a progressive jurisdiction that is also the most populous state. But for those that will now be within coverage, there are many traps for the unwary. As a result, it would be wise to carefully review the new laws and prepare, in advance, for the changes about to take place.
One of the coauthors of this summary is Manatt Financial Services senior advisor and former DBO Commissioner Jan Lynn Owen. As Ms. Owen put it in a recent Bloomberg article, the new DFPI allows California to become “a gold standard as a financial services regulator.” With its broad new powers, expect the DFPI to not just supplement but in some cases supplant the role of the CFPB in pursuing those in California’s crosshairs.