California lawmakers are on the verge of enacting laws to create a powerful state regulator similar to the Bureau of Consumer Financial Protection after negotiators approved legislative changes that would allow banks and consumer advocates to both win.
The Senate was expected to pass the "Mini-CFPB" law as early as Monday, which will strengthen supervisory and enforcement powers for financial services companies but limit the impact of the expanded authority on banks and auto lenders. Governor Gavin Newsom could sign the measure within days as part of a larger budget bill.
The upcoming passage comes after the legislature only presented the idea of the new agency in June. The plan was revived earlier this month, much to the disapproval of the bankers.
But the California Bankers Association said last week that it was "neutral" on the identical bills in the Senate and Assembly after successfully lobbying other trade groups to keep banks and auto lenders from the most dramatic reforms in legislation, including the new agency, exempting ability to bring "administrative actions" against financial firms outside of court.
To please consumer advocates, the bill has been strengthened in other areas, including clearer powers for the agency to regulate commercial finance lenders.
In the meantime, other government reforms could accompany the passage of the Mini-CFPB law. Lawmakers will vote on dozens of bills by the end of the session, including a student loan bill of rights and a separate bill for debt collection agency licensing.
"Depending on what happens, it could be the most powerful year for consumer finance protection in California," said Richard Cordray, former CFPB director who played a key role in drafting the laws creating the new agency.
The legislation would create the Department of Financial Protection and Innovation [DFPI] to replace the existing corporate oversight department. The stricter regulator will have the power to bring both administrative and civil lawsuits against previously unregulated industries, including debt collection agencies, fintech firms, credit bureaus and pre-paid merchant lenders.
A coalition of small business and consumer groups agreed to a spin-off for banks and other licensees, which means they will remain subject to the existing DBO authorities, although all operations will be housed in the new DFPI. In turn, the spin-off will not be available to currently licensed payday lenders and student loan service providers, which will be subject to a much more stringent enforcement regime.
"The bill is expected to pass," said Scott Govenar, a lobbyist who represents auto lenders.
While the new agency will continue to oversee banks, regional and municipal banks have wanted to bring unregulated companies under state authority.
“The changes we advocated – that the intent of the legislation is to cover current businesses that are unregulated and that there is no new enforcement agency for existing licensees – are now confirmed in these recent changes … so that we can be neutral on the bill, "said Beth Mills, a spokeswoman for the California Bankers Association.
California began creating the new agency after the federal CFPB began restricting enforcement as part of the Trump administration's deregulation agenda. Other states are considering enacting laws that extend oversight over unregulated industries.
Small businesses, family businesses and nonprofits have successfully campaigned with lawmakers for expanded government protection against expensive predatory lenders targeting smaller businesses during the coronavirus pandemic.
Some proponents also wanted the state to crack down on payday lenders and debt collection agencies targeting members of the military.
"The main consumer complaint is about debt collection practices. This could lead California to lead the way and pursue unethical practices," said Joe Lynyak, partner at Dorsey & Whitney. "This gives California a chance to take a closer look at financial services that need regulation."
A key sticking point in the legislative negotiations was redesigned penalties that could be enforced through administrative action, which meant the agency could punish a company without having to seek court approval. The agency would have the power to punish registered businesses with either $ 2,500 for each violation of the law, or up to $ 5,000 per day, and impose higher penalties for more reckless violations.
However, banks and car lenders have successfully campaigned to be exempt from such administrative measures. They were also granted an exemption from the law's extended powers to penalize companies for “unfair, misleading and abusive acts or practices”.
While banks can still be penalized under the federal UDAAP standard, they are not subject to an equivalent California UDAAP regime established by the bill that would allow the new state agency to take action against other types of businesses.
The bill would also require the new agency to adopt specific rules on registration requirements within a period of three years.
So far, some fintech firms have refused to be licensed or registered in California, but the bill would put them right in the crosshairs of the powerful new regulator.
Money laundering concerns could also become a hot area for the agency, some experts said. The DFPI is expected to step up oversight of digital asset lenders who allow digital currency to be pledged as collateral for a loan.
The department would be funded by annual registration fees from thousands of previously unregulated companies that would be required to register. The law would also create a financial protection fund similar to the federal CFPB's civil penalty fund, consisting of fees, fines, penalties, and other monies received that could be paid out to consumers.
Manny Alvarez, the current DBO commissioner who would become head of the revised department, would have to appear before lawmakers annually and provide information on enforcement actions, proposed and final regulations, public relations and other activities. The agency would also set up a financial technology innovation bureau.
Currently, the DBO has a budget of approximately $ 108 million with 615 employees overseeing 360,000 individuals and companies. If the legislative plan is passed, the department will be revised and its budget will gradually increase by approximately $ 19.3 million and 90 additional employees over three years according to the legislation.
Experts said the new department will not be fully functional overnight.
"There are timeframes" set out in the bill "to ramp up over several years so it will take time," Lynyak said.
He said the California state agency "reflects and follows" the federal version of the CFPB created by the Dodd-Frank Act.
"It is a reflection of unregulated financial services companies that lawmakers believe needs regulation," he said.