Banks, consumer groups both got what they wanted in ‘mini-CFPB’ bill
California lawmakers are on the verge of enacting legislation to create a powerful state regulatory agency resembling the Consumer Financial Protection Bureau after negotiators agreed to legislative changes allowing banks and consumer advocates to both claim victory.
The state Senate was expected as early as Monday to approve the “mini-CFPB” bill that strengthens supervision and enforcement powers over financial services companies but limits the effects of the expanded authority on banks and auto lenders. Gov. Gavin Newsom could sign the measure within days as part of a larger budget bill.
But the California Bankers Association said last week that it was “neutral” on the identical bills in the state Senate and Assembly after successfully lobbying with other trade groups to exempt banks and auto lenders from the most dramatic reforms in the legislation, including the new agency's ability to bring "administrative actions" against financial firms outside of court.
To satisfy consumer advocates, the bill was strengthened in other areas, including clearer authority for the agency to regulate commercial finance lenders.
Meanwhile, other state reforms could accompany passage of the mini-CFPB bill. Lawmakers are voting on dozens of end-of-session bills, among them a student loan bill of rights and a separate bill to license debt collectors.
"Depending on what happens, it could be the most powerful year ever for consumer financial protections in California," said Richard Cordray, the former CFPB director who has played a key role in crafting the legislation creating the new agency.
The legislation would create the Department of Financial Protection and Innovation, or DFPI, to replace the existing Department of Business Oversight. The tougher regulator will have authority to bring both administrative and civil actions against previously unregulated industries, including debt collectors, fintech firms, credit reporting agencies and merchant cash advance lenders.
A coalition of small-business groups and consumer groups agreed to a carve-out for banks and other licensees that means they will remain subject to existing DBO authorities, even though all of the operations will be housed within the new DFPI. In exchange, the carve-out will not be available for currently licensed payday lenders and student loan servicers, which will become subject to a much tougher enforcement regime.
“The bill is expected to pass,” said Scott Govenar, a lobbyist representing auto lenders.
While the new agency will still oversee banks, there was a desire among regional and community banks to bring unregulated entities under state authority.
“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,” said Beth Mills, a spokeswoman for the California Bankers Association.
California began pursuing the creation of the new agency after the federal CFPB started to cut back on enforcement as part of the Trump administration's deregulatory agenda. Other states are considering teeing up legislation that also expands oversight of unregulated industries.
Small businesses, family farms and nonprofits made a successful pitch to lawmakers for expanded state protections against high-cost predatory lenders that have been targeting smaller companies during the coronavirus pandemic.
Some advocates also have wanted the state to crack down on payday lenders and debt collectors that have targeted service members at military bases.
“The No. 1 consumer complaint is debt collection practices, so this could result in California leading the way and going after unethical practices,” said Joe Lynyak, a partner at Dorsey & Whitney. “This gives California the opportunity to look closely at financial services that need regulation.”
A crucial sticking point in the legislative negotiations had been new specified penalties that could be enforced through administrative actions, meaning the agency could punish a company without have to seek a court's approval. The agency would be empowered to fine registered companies either $2,500 for each violation of the law, or up to $5,000 a day, and require bigger penalties for more reckless violations.
But banks and auto lenders successfully lobbied to be exempt from such administrative actions. They also won an exemption from the bill's expanded authority for the agency to punish firms for “unfair, deceptive and abusive acts or practices.”
While banks can still be punished under the federal UDAAP standard, they will not be subject to an equivalent California UDAAP regime established by the bill that the new state agency could use to pursue actions against other types of firms.
The bill would also require that the new agency issue specific regulations about registration requirements within a three-year time frame.
Up to now, some fintech firms have resisted becoming licensed or registered in California, but the bill would put them squarely in the crosshairs of the powerful new regulator.
Money laundering concerns could also become a hot area for the agency, some experts said. The DFPI is expected to ramp up oversight of digital asset lenders that allow digital currencies to be pledged as collateral to get a loan.
The department would be funded by annual registration fees from thousands of formerly unregulated entities that would be required to register. The law also would create a Financial Protection Fund, similar to the federal CFPB's Civil Penalty Fund, that would consist of fees, fines, penalties and other money received that could be paid out to consumers.
Manny Alvarez, the current DBO commissioner who would become head of the revamped department, would be required to appear annually before the legislature and present information on enforcement actions, proposed and finalized regulations, outreach and other activities. The agency also would establish a Financial Technology Innovation Office.
Currently, the DBO has a budget of roughly $108 million with 615 employees who oversee 360,000 individuals and businesses. If the legislative plan passes, the department would be revamped and its budget would rise incrementally over three years by roughly $19.3 million and 90 additional employees, according to the legislation.
Experts said the new department will not become fully operational overnight.
"There are time frames" established in the bill "for ramping up over several years, so this will take some time," Lynyak said.
He said the California state agency "reflects and follows" the federal version of the CFPB that was created by the Dodd-Frank Act.
“It’s a mirror image for unregulated consumer financial services companies that the legislature thinks need regulation,” he said.