California Legislature Sends Bill Creating a “Mini-CFPB” to Governor’s Desk
On Tuesday, September 8, the California State Legislature passed AB-1864, the California Consumer Financial Protection Law (CCFPL). If signed by Governor Gavin Newsom, the new law would transform California’s Department of Business Oversight (DBO) into the Department of Financial Protection and Innovation (DFPI). The DFPI would maintain the current agency leader – the Commissioner of Business Oversight – as the Commissioner of Financial Protection and Innovation.
The would-be DFPI has drawn comparisons to the federal Consumer Financial Protection Bureau (CFPB), which was created by Title X of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). The CCFPL effectively shifts California’s oversight focus from an agency that enforces specific laws to an agency with the ability to more broadly oversee “consumer financial products and services.” AB-1864 is the latest effort by a state to strengthen its consumer financial protection enforcement capabilities given the current CFPB’s more restrained enforcement approach at the federal level and the ongoing COVID-19 pandemic which has wrought considerable financial hardship on the U.S. economy.
Expanded Regulatory Coverage
The CCFPL enables the DFPI to regulate “consumer financial products and services” as opposed to enforcing more specific statutes, as the DBO currently does. This change, which greatly expands the scope of the agency’s regulatory authority, mirrors the CFPB’s authority, which extends to “consumer financial products and services” under Title X of the Dodd-Frank Act. The CCFPL defines “consumer financial product or service” broadly to include any “financial product or service that is delivered, offered, or provided for use by consumers primarily for personal, family, or household services.” The CCFPL would transfer the DBO’s current licensing and regulatory authority over state-chartered banks, mortgage lenders, and others to the DFPI. However, the DFPI would also gain regulatory and enforcement authority over companies that were previously unsupervised by the DBO, including debt collectors, consumer reporting agencies, and fintechs that offer financial products to consumers.
Specifically, the CCFPL regulates “covered persons” and “service providers,” requiring them to “file certain documents, under oath,” with the DFPI. The CCFPL also makes it unlawful for them to “among other acts, engage in unlawful, unfair, deceptive, or abusive acts or practices with respect to consumer financial products or services, or offer or provide a consumer a financial product or service that is not in conformity with any consumer financial law.” The CCFPL defines “covered persons” as “[a]ny person that engages in offering or providing a consumer financial product or service.” Meanwhile, the bill defines “service providers” as “any person that provides a material service to a covered person in connection with the offering or provision by that covered person of a consumer financial product or service.”
Increased Enforcement Authority
The CCFPL gives the DFPI the authority to bring enforcement actions against covered persons and service providers for engaging in unfair, deceptive, or abusive acts or practices. However, there are exceptions to the DFPI’s enforcement authority under the CCFPL. Specifically, the CCFPL exempts national and state-chartered banks, credit unions, and entities currently licensed under the DBO, from the DFPI’s enhanced regulatory and enforcement system. The CCFPL will have the biggest impact on nonbanks offering financial products and services, such as fintechs, previously not directly regulated by the DBO.
A Guidebook for Other Jurisdictions
California’s DFPI, if signed into law by Governor Newsom, would be the latest state consumer financial protection agency created during the Trump administration. Many states have criticized the CFPB under the current Administration’s Directors for taking a “hands off” approach to consumer protection and engaging in deregulatory activities. Pennsylvania (the Consumer Financial Protection Unit), New York (the Consumer Protection Task Force), and New Jersey (the Division of Consumer Affairs) have already created “CFPB-like” agencies in the last three years. The DFPI, if passed, would dwarf these efforts in both size and scope. Therefore, it could create a regulatory guidebook for other states seeking to take more aggressive action on financial consumer protectionamid the current economic downturn brought on by the COVID-19 pandemic. Stakeholders such as fintechs and debt collection agencies should pay close attention to this space, as the DFPI may soon become the model other state consumer financial protection agencies.
 Manuel P. Alvarez is the current DBO Commissioner and would become the Commissioner of the DFPI should the governor sign the bill into law. Mr. Alvarez previously served as General Counsel at the fintech company Affirm, Inc. and worked as an Enforcement Attorney at the CFPB.