Can California's mini-CFPB pick up slack left by federal agency?
An effort by California to create a powerful state consumer protection bureau could have a significant impact on banks, debt collectors and other financial firms as Gov. Gavin Newsom seeks to fight against the Trump administration's regulatory rollback.
The new agency, modeled off of the federal Consumer Financial Protection Bureau, is being pushed by former CFPB Director Richard Cordray and several other ex agency officials. If approved by California's legislature, it would create a new office of innovation within the agency and subject more financial firms to state oversight.
In part, the state agency appears designed to guard against the ebbs and flows of policy in Washington, where Republicans have put less emphasis on exercising the federal CFPB's powers.
“It is going to catapult California into the forefront of consumer protection around the country on the state level,” said Cordray, who served six years as director of the federal CFPB. “This is an emphatic statement by the governor that he intends California to be a real leader on consumer protection.”
How big an impact it will ultimately have on national financial firms is still unclear, though it may effectively act as a "mini-CFPB" given how many companies do business in California. The state has long been a laboratory for progressive ideas and Democrats now hold the governor's mansion as well as super-majorities in both legislative chambers. As a result, Democrats can make policy in California without much input from Republicans.
“It not only creates a super-state analog to the CFPB but it charts a new direction that will be very interesting,” Cordray said. “It is a huge first step to have the governor champion consumer advocacy in this manner.”
Newsom's budget released Friday would require legislation to revamp the current Department of Business Oversight and rename it the Department of Financial Protection and Innovation. The plan would expand the department's 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," according to the budget document.
It would also "protect consumers through enforcement against unfair, deceptive, and abusive practices," known as UDAAP.
Experts said UDAAP will be a big concern.
“There’s going to be a lot of pushback, and this isn’t over yet because the plan requires legislation," said Todd Baker, senior fellow at the Richman Center for Business, Law and Public Policy at Columbia University. "I see expanded UDAAP authority as likely to happen. This is not an unusual situation for California from a regulatory standpoint in taking an aggressive role in trying to drive policy at the national level.”
Jan Lynn Owen, the former DBO commissioner, who is now a senior adviser at Manatt, called the plan “a very credible opportunity.”
The budget sets aside $10.2 million for a financial protection fund and 44 added positions at the department, which now has a staff of roughly 700 and a $120 million budget. Funding would increase to $19.3 million and 90 positions by fiscal 2022-23 to establish and administer the California Consumer Financial Protection law. The department will be self-funded by fees on newly-covered industries "and increased fees on existing licensees," the budget stated.
Democrats have complained that the transition from the Obama to the Trump administrations has resulted in a drop in enforcement actions by the federal CFPB with lighter penalties for wrongdoers. Since California often leads the nation in regulatory policymaking, financial institutions will have to pay close attention to a state CFPB.
Newsom’s plan seeks “to fill the consumer protection gaps left by federal withdrawal and inaction,” according to a statement Thursday from Newsom’s office.
No information has been released so far on how a revamped department would address innovation by fintechs. California Attorney General Xavier Becerra joined 21 other state AGs in opposing the federal CFPB’s fintech sandbox because it would potentially shield companies from the threat of legal liability in the testing of new products and services that could benefit consumers.
Cordray, who co-wrote the bill and is serving as de facto spokesman for Newsom's plan, said it would allow the consumer agency to move forward in much the same way as the federal CFPB did after Dodd-Frank passed.
“The same process will unfold in California,” said Cordray. “The governor is focused both on consumer protection and financial innovation. He wants to make sure that both of those important pieces can be advanced and balanced and coordinated.”
Newsom’s budget includes legislation called the California Consumer Financial Protection Law. The budget will be submitted to the legislature, which must pass it by June 15.
At the state level, the new California consumer bureau may be even more powerful than the federal CFPB. For example, California may give the new agency authority to examine firms compliance with the Military Lending Act. That has become a point of contention because CFPB Director Kathy Kraninger claims the federal agency does not have authority to examine financial firms for MLA compliance.
A California bureau also could go further afield to protect consumers from being harassed on their cell phones by debt collectors or from being harmed by a predatory small business loan, according to testimony in March before the state Assembly’s Banking and Finance Committee about how expanded powers would work.
“The devil is in the details,” said Vijay Das, national policy director at the California Reinvestment Coalition, a leading consumer advocacy group, in an interview Friday. “This is something advocates have been encouraging given the takeover of the CFPB by Trump and the slow-walking of rules.”
Das said consumer advocates have been discussing with current DBO Commissioner Manual Alvarez, a former CFPB enforcement attorney, ways in which a revamped department could also help with housing issues.
“We are ramping up all our work to talk about the displacement crisis in California,” Das said. “If there is a new DBO, it can go after financial actors responsible for displacement of tenants.”
Still, it is unclear yet, beyond covering more entities, what additional tools California's DBO would be given.
The governor's plan would set aside $44.3 million in the state’s 2020-21 budget to cover the first three years of start-up costs for the revamped department, which currently has a budget of $102 million.
As for concerns that the state consumer protection agency may conflict with the federal CFPB, the Dodd-Frank Act expressly provided for expansive consumer protections at the state level that go beyond federal safeguards, Cordray said.
“To put it simply, the law says clearly that federal law sets a floor, not a ceiling, on consumer financial protection in this country,” Cordray testified before the state Assembly in March. “Congress thus opened the door for more vigorous protection of consumer rights through state officials who can ensure that these laws are strong and that they are enforced effectively.”