A California bill that would create a powerful state agency modeled on the Federal Bureau of Consumer Financial Protection has made a comeback with support from small businesses and fintech companies who want enhanced protection during the coronavirus pandemic.
However, most financial institutions, including banks, auto and payday lenders, are trying to stop the bill as it would expand the state's enforcement powers and potentially increase the fines and compliance costs.
Governor Gavin Newsom's plan to expand oversight of all financial services companies in California has been reinserted into a final budget bill that lawmakers must pass by August 31. The plan was originally removed from a budget bill in June.
The proposal would replace the state's existing Department of Corporate Oversight with a new agency called the Department of Finance and Innovation, with powers similar to those of the CFPB.
State senators should hold an important hearing over the weekend to discuss the merits of what some refer to as "mini-CFPB". The plan would, among other things, extend consumer protection to small business borrowers who have complained about being attacked by unregulated, high-cost lenders.
But nearly a dozen trading groups made up of banks and financial services providers are making last-minute efforts to kill the proposal. Industry officials have stepped up their commitment to lawmakers and sent letters to state officials. In particular, financial companies reject a provision in the draft law that extends enforcement and imposes administrative penalties for "unfair, misleading or abusive acts or practices", also because the federal government has already enforced a ban on so-called UDAAPs.
"The state has new enforcement requirements that are unclear and seem redundant," said Scott Govenar, lobbyist for the California Financial Services Association, which represents auto lenders.
However, the plan has been backed by 47 fintech, small business, and consumer stakeholders looking to register and regulate a wide variety of unregulated industries – debt collection agencies, credit bureaus, and lenders who market to small businesses.
"It hurts borrowers and lenders alike when responsible businesses face actors who take advantage of unfair and misleading conduct," said Kim Wilson, director of politics and advocacy for the Responsible Business Lending Coalition, which includes fintech companies like LendingClub and Funding Circle as represents and non-profit community development financial institutions.
California provides a glimpse into the legislative process other states might be trying to revise consumer protection. After the Trump administration implemented a deregulation agenda and the CFPB withdrew its enforcement efforts, several states, including New York, Pennsylvania, New Jersey, Delaware and Maryland, responded with increasing oversight.
As the primary financial regulator in the state, DBO currently has a budget of $ 108 million and 615 employees who oversee and oversee 360,000 individuals and businesses. If the legislative plan is passed, the department will be revised and its budget gradually increased to around $ 152 million over three years with 90 additional employees.
Although the Democrats have a majority in the state parliament, it is unclear whether the moderates are ready to approve the plan. Some suggest that Newsom bypass the legislative process by adding the proposal to the draft budget. Others argue that consumer protection is needed now more than ever due to the coronavirus pandemic.
"This is probably the most important policy we could take right now for the benefit of California consumers and if we lose this opportunity it will become increasingly difficult to adopt," said Mark Stone, Rep. Mark Stone, D-Monterey Bay. said at a congregation hearing earlier this month.
Nevertheless, trading groups from banks, auto and payday lenders have drawn a line in the sand. You want existing state licensees and federally licensed companies to be completely exempt from the proposed California Consumer Financial Protection Act.
"Proper attention must be paid to the proposal so that providers of financial products and services – and the consumers who are being protected by this proposal – have a clear understanding of what the law requires," said Beth Mills, a California bankers association Spokeswoman.
Financial institutions are concerned about inconsistencies between state and federal definitions of UDAAP. While federal law currently defines "abusive" practices, California bill would include but not define that term.
The state already has UDAAP authority over current licensees under the Dodd-Frank Act and some state licensing laws. The bill would adopt a California-specific UDAAP standard that would apply to both these licensees and a new subset of companies that would need to be registered under the bill. The legislation would result in an estimated 9,000 new registrants.
In a letter to DBO Commissioner Manny Alvarez, financial trading groups said they refuse to give the new department "extensive investigative and subpoena powers with a nearly unlimited amount of records and information that can be obtained before any wrongdoing is ever alleged" .
"We believe these powers should be limited and should be subject to due process," the financial trading groups said in a July letter.
Alvarez, former general counsel at fintech startup Affirm and former CFPB lawyer, told lawmakers that the department is ready to testify before lawmakers annually and produce reports on the department's work.
"This financial crisis threatens to have a long tail and, as we are learning, problems with a long tail require early decisive action," Alvarez said at the meeting of the meeting earlier this month.
Former CFPB director Richard Cordray, a prominent proponent of the plan, said the proposal would fill a loophole in federal law by protecting small businesses, family businesses and nonprofits from predatory lenders. He countered criticism of the UDAAP by stating that Dodd-Frank envisioned states adopting their own versions of federal law.
"California wants to be able to have UDAAP in its own law," Cordray said.
Even some traditional financial institutions say it is worth the bill.
Kat Taylor, co-founder of the Beneficial State Bank in Oakland, California, and the wife of Tom Steyer, the hedge fund billionaire and former presidential candidate, said stricter standards were needed to curb bad actors.
"It's really difficult to offer high-road banking products and stand up to fraudulent bait-and-switch products," said Taylor, who leads the small business coalition that supports the plan. "California is the largest market for financial services and auto loans, so how we regulate is important as it will affect other states."
But most financial firms have other concerns as well. You want to limit investigations by multiple agencies, including the Attorney General, and prevent overlapping or duplicate actions. They also oppose the draft law that would allow the department to reimburse legal costs if it successfully sues a company.
Some lawmakers in support of the plan said they needed more time to discuss the issues. Many important details of the implementation of the department's responsibilities would not be stipulated by law, but left to the agency.
"Legislators may want to take more time to evaluate the proposal and could instruct the department to reintroduce the proposal and work on refining it during next year's legislature," said Drew Soderborg, deputy legislative analyst in the legislature Analyst & # 39; s Office, told the legislature at the hearing of the meeting.
Alvarez has urged lawmakers to consider the impact of the COVID-19 pandemic on small consumers, coupled with the deregulatory environment in Washington.
"I fear the Californians will get through the worst parts of this recession without important protection," he said.