CFPB California Style: New Name Is Just the Start for a Much More Powerful Regulator

California has become the latest state to create its own mini Consumer Financial Protection Bureau (CFPB). As part of the 2020-21 budget, Governor Gavin Newsom set in motion a reorganization and significant expansion of the authority of the California regulator, the Department of Business Oversight (DBO). This reorganization includes:

• a new name (Department of Financial Protection and Innovation);
• greatly expanded examination and enforcement resources; and
• a new law (California Consumer Financial Protection Law or CCFPL) that gives the regulator unfair, abusive, or deceptive acts or practices (UDAAP) and other authority mirroring the CFPB’s authority under Dodd-Frank Act Title X.

This reorganization and expansion of the state banking agency is the latest in California’s attempts to lead the way in state consumer protection. Governor Newsom specifically called out the Trump administration in identifying the need for these changes, and he and others consulted with former CFPB Director Richard Cordray on the legislation. 

In this Client Alert, we outline the governor’s justification for and reorganization of the DBO into the DFPI. In a companion Client Alert, we highlight the key provisions in the CCFPL.

Focus on Expanded Consumer Protection

The DBO explains the need for the reorganization and increased funding in the Budget Change Proposal (BCP). According to the DBO, California “lacks a singular body to oversee the state’s providers of financial products and services, which leaves consumers vulnerable to abusive financial services and products.” The goal is to provide the DBO with additional powers so it can be a “leader in providing consumer financial protection to California,” using the CFPB as a model. The CCFPL is intended to provide “more tools to comprehensively protect consumers of financial services against harm” by “hold[ing] more industries and companies accountable.” 

Funding Mechanism Will Impact DFPI Activities

The 2020-21 budget signed by Governor Newsom in June provides $10.2 million in 2020-21 growing to $19.3 million in 2022-23 to fund the DFPI reorganization and expansion as well as the initial implementation of the CCFPL.[1] Starting in 2023-24, DFPI activities will be funded by registration fees from new licensees. Current DBO licensee assessments may increase as well, but the funding structure will provide a strong incentive for the DFPI to focus on licensing as many new covered persons as quickly as possible. The same is true for enforcement actions given that penalties imposed on covered persons provide another agency funding source.

New and Expanded Offices Indicate Areas of Focus

To accomplish the purpose of the reorganization, the DFPI will use the additional funding to create new DFPI units and increase resources in existing units. 

To make good on the “Innovation” in DFPI, the DBO indicates in the BCP that it will use funds allocated in the governor’s budget to create a new Financial Technology Innovation Office as required by the CCFPL.[2] The DFPI also will use these funds to increase the DBO’s Information Technology Office resources to support “innovation strategies.” The new Office will have three primary functions: encourage innovation and job creation, modernize laws relating to industrial banks to allow FinTech companies to operate nationwide with a DBO license, and research new industries and technologies.[3]

The rest of the reorganization reflects the governor’s focus on expanded consumer financial protection. Of particular interest, this includes:

• A new Consumer Financial Protection Division to handle research, education, and outreach. This Division will include an Office of Consumer Outreach and Education Office that will focus on financial empowerment, military service members, seniors, students, immigrants, and individuals with limited English proficiency.
• A Supervision and Registration Office to handle the new registrations with 18 new examiners and specialists. The DBO expects to register or re-register 9,000 companies annually, to examine 10% of those registrants, and to increase the number of examinations over time. 
• Increased Enforcement Division resources to “pursue bad actors,” including “significant resources for complex investigations and prosecutions” against new “covered persons” under the CCFPL, and “additional resources dedicated to active litigation.” The proposal anticipates 16 new positions to conduct undercover shops, issue subpoenas, develop cases, conduct hearings, and bring cases.

The DFPI advises in the BCP that it intends to create an Office of the Ombudsman to “make sure complaints about DBO receive a confidential, full, and impartial review and resolution.” This is a welcome addition, although the Ombudsman is slotted to have only one full-time staff person.

Phased Implementation

The DFPI envisions a three-year, three-phase implementation of the CCFPL. Year One: focus on engaging new industries and adding examination staff to start examining unregulated products. Year Two: concentrate on procedures to implement the Consumer Financial Division. Year Three: begin registering new covered persons and develop exam cycles. 

In total, the increased funding will allow the DFPI to add 90 positions. In 2018-2019, the DBO had 660 authorized positions and 58 vacancies. So the implementation plan anticipates that the DFPI will fill around 150 positions during the three-year implementation period.

Takeaways

State-chartered banks, current DBO licensees, and previously unlicensed entities covered by the CCFPL should brace for increased scrutiny by a reorganized and significantly expanded California financial regulator. It remains to be seen whether the new DFPI will follow in the footsteps of its predecessor DBO in regulating by enforcement. 

It also remains to be seen whether the addition of “Innovation” to the agency’s name will translate into an agency that truly encourages and supports innovative financial products and services, or whether the benefits of the innovation element will be drowned out by the burdens of increased regulation and enforcement. The focus on innovation could provide guidance for FinTechs operating in California and for bank/FinTech partnerships.

[1] As amended in Section 14, the budget includes provisions for contingency funding if the CCFPL becomes law and for DFPI annual reporting to the legislature.

[2] Cal. Fin. Code § 90006(d).

[3] Industrial bank provisions in the original CCFPL proposal were eliminated in the legislative process.