California Governor Gavin Newsom submitted his $222 billion budget proposal for the 2020-2021 fiscal year on January 10. Among other priorities identified, the budget earmarks tens of millions of dollars for the creation and administration of the California Consumer Protection Law (CCPL). The governor’s budget proposal specifically notes the need for this expanded consumer protection law as arising from “[t]he federal government’s rollback of the CFPB [which] leaves Californians vulnerable to predatory businesses and leaves companies without the clarity they need to innovate.” Under the proposal, California’s Department of Business Oversight (DBO) would dramatically expand its consumer protection role to define the contours of, and to administer, the CCPL. The stated aim of this move is to enhance consumer protection in California and “foster the responsible development of new financial products.”
Should California’s lawmakers adopt this proposal, the DBO would be renamed the Department of Financial Protection and Innovation (DFPI). In an expansion of the DBO’s current role, which includes consumer protection in financial transactions and oversight of state-licensed financial institutions, the renamed agency would gain greater authority to “pursue unlicensed financial service providers not currently subject to regulatory oversight such as debt collectors, credit reporting agencies, and financial technology (fintech) companies, among others.”
The summary proposal notes that the DFPI’s new activities would include the following:
- 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
- Expanding existing administrative and information technology staff to support the [DBO’s] increased regulatory responsibilities
Regarding funding sources for the proposed DFPI, the proposal cites to the use of $10.2 million from an existing settlement fund to cover the initial need, which includes adding 44 positions to the DBO’s existing staff of roughly 700. For fiscal 2022-23, funding would increase to $19.3 million to cover a total of 90 positions to establish and administer the CCPL, and “future costs [would be] covered by fees on the newly covered industries and increased fees on existing licensees.” The budget will be submitted to the California legislature, which must pass it by June 15 in order for these provisions to take effect.
- Additional details of the governor’s budget proposal have not yet been made available. However, some sources are reporting that the plan would be for the DFPI to act, effectively, as California’s own Consumer Financial Protection Bureau (CFPB). Such an effort could follow in the footsteps of Pennsylvania and New York, each of which has created its own state-level version of the CFPB. When those two states are considered together with Illinois, which has one of the few state attorneys general that actually brings enforcement actions under federal UDAAP prohibitions, there are currently a swath of large states across the country—in an election year—with the effective power to halt meaningful federal rollback in many areas.
- It is telling that Richard Cordray, the former CFPB director and Ohio attorney general, co-wrote the proposal and is serving as de facto spokesman for Governor Newsom’s plan. Given Mr. Cordray’s apparent involvement and support, as well as that of other former CFPB senior officials, it is likely that the DFPI, if approved, would move forward in much the same way as the CFPB did after the Dodd-Frank Act was passed, with similar regulatory, enforcement, and supervisory priorities. Notably, Congress drafted the Dodd-Frank Act’s consumer protection provisions with the express design not to preempt state enforcement; the purpose was to set a floor, not a ceiling for consumer financial services enforcement and regulation. In certain areas, California may give the new agency expansive authority beyond that provided to or exercised by the CFPB. For example, the agency may be authorized to examine financial companies’ compliance with the Military Lending Act (current CFPB Director Kathy Kraninger claims that the CFPB does not have authority to examine financial companies for MLA compliance).
- The practical geographic scope of the CCPL will depend on the details but could be functionally far more expansive than regulating obviously “California” conduct. California has historically imposed regulatory regimes that reach to the boundaries of—and in some cases arguably beyond—its power to regulate under the interstate commerce clause of the Constitution. Further, as recent experience under the California Consumer Privacy Act demonstrates, the combination of California’s outsize role in the US economy and companies’ limited practical ability to limit internet-based offerings to exclude California means that most financial services providers will likely have few options to avoid conforming to whatever requirements the CCPL and DFPI may ultimately impose.
- This proposal is likely to be one of the major developments in the area of consumer protection law in the years to come. California has a long tradition of establishing powerful agencies, which have historically worked quite well with their federal counterparts when appropriate, but have shown no reluctance to part ways with them when federal agencies engage in “regulatory rollback” efforts similar to those currently under way at the CFPB.
- It remains to be seen how a revamped and reorganized regulatory department would address innovation by fintechs. California Attorney General Xavier Becerra joined 21 other state attorneys general in opposing the CFPB’s fintech sandbox because it would potentially protect companies from legal liability in the testing of new financial products and services.