California’s financial services regulator soon will likely have a new name and a significantly expanded mission after state lawmakers passed legislation on August 31, 2020 that would revamp the agency in the image of the U.S. Consumer Financial Protection Bureau, signaling an increased focus on fintech in particular.
In a last-minute push before adjourning for the year, the California legislature sent the California Consumer Financial Protection Law (“CCFPL”) to Governor Gavin Newsom for his approval, which is expected. The CCFPL would change the name of the state’s current financial services regulator, the Department of Business Oversight (“DBO”), to the Department of Financial Protection and Innovation (“DFPI”). The reorganization of the California regulator under the CCFPL includes greatly expanded jurisdiction, rule-making authority, and enforcement resources to prosecute unfair, abusive, or deceptive acts or practices (“UDAAP”). The bill would take effect on January 1, 2021.
Focus on Fintech:
The legislation would fold the DBO’s existing licensing and prudential regulatory functions over state-chartered banks, mortgage lenders and others into the DFPI, which would then have authority over all “covered persons.” The law defines that term to mean persons engaged in offering or providing consumer financial products or services, affiliates that act as service providers, and any service provider that engages in offering or providing its own consumer financial product or service. As in Title X of the Dodd-Frank Act, which created the CFPB, a “service provider” is any person that provides a material service to a covered person in connection with the covered person’s offering or providing of a consumer financial product or service.
The new statute, importantly, exempts virtually all entities operating under a license issued by the DBO / DFPI, such as finance lenders licensed under Division 9 of the Financial Code, residential mortgage lenders licensed under Division 20 of the Financial Code, and depository institutions. However, the CCFPL would apply to a great number of entities not previously subject to oversight by a primary regulator, including debt collectors, consumer reporting agencies, and certain fintech companies.
Expanded Enforcement and Rulemaking Authority:
The Legislature intends that the DFPI will have broad authority to protect vulnerable California consumers from abuse and protect California businesses from having to compete with unscrupulous providers. The Legislature also emphasizes that technological innovation, while offering great promise, poses risks to consumers and challenges to law enforcement.
California’s new law gives the DFPI the same UDAAP authority that Dodd-Frank Title X gives the CFPB: the authority to bring enforcement actions and write rules defining UDAAPs. Importantly, the CCFPL not only gives the new DFPI the authority to prevent unfair and deceptive practices (consistent with Business and Professions Code § 17200), but the DFPI will have the authority to declare an act “abusive.” Such abusive practices are those that materially interfere with a consumer’s ability to understand the terms or conditions of a consumer financial product or service; or that take unreasonable advantage regarding: (i) a consumer’s lack of understanding of the material risks, costs, or conditions of the product or service; (ii) the consumer’s inability to protect the consumer’s own interests in selecting a product or service; or (iii) the consumer’s reasonable reliance on a covered person to act in the consumer’s interests.
The arrangement signals that the DFPI will have a sharper consumer protection focus on financial products and services offered by previously less-regulated nonbank players in the industry, namely fintech companies. On the other hand, in recognition of the importance of the industry’s innovative focus, the legislation would requires the DFPI to establish a “Financial Technology Innovation Office.”
Registration and Resources:
The DFPI also would be authorized to require any “covered person” to file a registration, pay a fee, file annual or other special reports with the agency, and submit background checks for principals, officers and other key personnel. The registration fees will help fund the DFPI’s operations, as supplemented by additional moneys provided to the agency by the Governor’s 2020-21 Budget.
An Example for Other States:
The CCFPL’s passage comes at a time when many other states are also bolstering their consumer financial protection capabilities, particularly as federal oversight has relaxed.
Pennsylvania, New Jersey and New York have all formed versions of “mini-CFPBs” within existing state agencies in recent years. And as we have covered previously, New York Governor Andrew Cuomo has also been working on plans to institute licensing requirements for debt collectors and equip his financial services regulator with abusiveness enforcement authority.
The DFPI would likely overshadow these other efforts in size and scope, creating an agency that merges expanded statutory authority with increased funding and additional dedicated resources to exercise it, such as the power to hire in-house counsel to prosecute enforcement actions and defend the agency in court.
Governor Newsom has until September 30, 2020 to sign the CCFPL, which he is expected to do. After that, the CCFPL would as noted become effective on January 1, 2021.