California might soon have its very own Consumer Financial Protection Bureau (“CFPB”) if California Governor Gavin Newsom gets his way. Governor Newsom’s proposed 2020–21 state budget includes a line item of $44.3 million to be spent over the next three years to overhaul and reorganize the Department of Business Oversight (“DBO”). For those of you who have not dealt with the DBO, it is the agency that either licenses or has regulatory authority over most financial service businesses in California.
As an opening foray in the governor’s efforts, the DBO’s name would be changed to the Department of Financial Protection and Innovation (“DFPI” or the “Department”). One of the goals of the reorganization is for the Department to serve a role at the state level similar to the role of the CFPB at the federal level. According to Governor Newsom, “the federal government's rollback to the CFPB leaves Californians vulnerable to predatory businesses and leaves companies without the clarity they need to innovate."1 In fact, former CFPB Director Richard Cordray is reportedly serving as a spokesman for the governor’s plan and has also been working with Assemblywoman Monique Limon (D-Santa Barbara) and others in the California legislature on this project. The DBO currently regulates financial services providers and oversees state-licensed financial institutions, security brokers and dealers, payday lenders, mortgage lenders, escrow agents, money transmitters, and other commercial and consumer lenders. If Governor Newsom’s proposal is approved by California's legislature, the Department would gain authority over other financial services providers; the proposal would also establish a new office of innovation within the Department. As of the writing of this Legal Update, no bill has been presented to the legislature, and few details have been released.
To give you a sense of scope, the governor’s plan contemplates an initial $10.2 million budget increase for the DPI, and 44 new positions in the first year, growing to an extra $19.3 million and 90 positions in 2022–23. Financial services providers should expect to see increased fees for engaging in business in California, since the Department intends to be self-funded. While existing reserves would cover the initial costs of the DFPI, future costs would be provided through expansion of the revamped Department’s authority to supervise and regulate unlicensed financial services providers who are not currently subject to regulatory oversight, such as debt collectors, credit reporting agencies and fintech companies.
The governor’s plan envisions expanding consumer financial protection by taking a number of actions:
- Increasing public outreach and education to more vulnerable populations, such as the elderly, students, military members and recent immigrants.
- Licensing and examining new industries currently deemed "under-regulated," including debt collectors and those making loans to members of the military.
- Providing more effective responses to consumer complaints.
- Analyzing patterns and market developments to support new policies and to inform enforcement efforts.
- Enforcing against unfair, deceptive and abusive practices. The DBO currently has authority to enforce against unfair and deceptive acts and practices but lacks authority to take action against “abusive” acts and practices. This could be a significant issue for the financial services industry, since the perimeter of the abusiveness standard in financial services is not well defined at the federal level.
- Creating an Office of Financial Technology Innovation to analyze emerging technologies, including virtual currencies, and fostering the responsible development of new consumer financial products.
- Establishing a new consumer protection ombudsperson.
Additionally, the DFPI would include a new position that will serve as a liaison to other law enforcement agencies.
The creation of a mini-CFPB would—standing alone—make the governor’s proposal interesting. But what makes it even more interesting is the ability of the mini-CFPB to shape policy without significant limits that might otherwise be established, given that California has a Democrat as a governor and Democrat super-majorities in both houses of the legislature. At a minimum, in light of the Department’s expanded charter, budget and staffing, financial service businesses that are subject to the DBO’s jurisdiction should expect increased enforcement activities by the new Department.
Additional details for the proposed DFPI will be made publicly available by February 1, 2020, in a trailer bill.