California’s ‘Mini-CFPB’—Gov. Newsom’s Budget Proposal Forecasts Significant Expansion of Consumer Financial Services Oversight and Enforcement in the Golden State

I. A Perceived Void by the Administration Creates Opportunities for States

Following the 2017 departure of Richard Cordray, the first Director of the federal Consumer Financial Protection Bureau (Bureau or CFPB), consumer advocates and elected officials vocalized concerns regarding the perceived hands-off approach of the Trump administration to consumer financial protection enforcement. Thereafter, many states initiated or augmented existing efforts to oversee market actors for compliance with consumer financial protection regulations.

Beginning in 2017, Pennsylvania, and later New Jersey and Maryland, began to restructure their offices of Attorneys General or other regulatory offices to create divisions focused on consumer financial protection. In doing so, New Jersey committed to create a “state-level CFPB.”[1] Many of these announcements occurred simultaneously with an influx of former Bureau staff into state offices. Indeed, Pennsylvania Attorney General Josh Shapiro’s announcement of the formation of a Consumer Financial Protection Unit within his office coincided with his appointment of former Bureau enforcement lawyer Nicholas Smyth to run it.[2] In May 2019, New York’s Department of Financial Services (NYDFS), among the most well-known and aggressive state regulators in financial services, similarly created a new Consumer Protection and Financial Enforcement Division by merging its Enforcement & Financial Frauds and Consumer Protection Divisions.[3] NYDFS also recently hired Leandra English, former Bureau Deputy Director, as a special policy advisor to the Superintendent.[4]

The timing for California was slightly different, with Governor Newsom’s appointment of Manny Alvarez, another former Bureau enforcement attorney, as commissioner of California’s Department of Business Oversight (DBO) in March 2019.[5] Coming almost one year later, the Proposal sets the stage for a significant expansion and restructuring of California’s existing consumer financial protection regime.

II. California’s Proposal Envisions Expanded Authorities and Increased Focus on Fintech

Governor Newsom’s Proposal aims to accomplish the following goals:

• License and examine new industries,
• Research market developments of consumer financial products and services to support evidence-based policies
• Offer consumer services targeting financial empowerment and education for older Americans, students, military service members, and recent immigrants
• Provide enforcement to prevent unfair, deceptive, and abusive practices by examining, investigating, and supervising unregulated products to protect California consumers[6]

The Proposal intends to accomplish these goals in three meaningful ways.

First, the Proposal includes new legislation in the form of the California Consumer Financial Protection Law (Law), and would further rebrand the DBO as the Department of Financial Protection and Innovation (Department) and establish a new consumer protection ombudsperson.[7] The Department would have expanded authority “to pursue unlicensed financial service providers not currently subject to regulatory oversight,” which would include “debt collectors, credit reporting agencies and financial technology companies, among others,” and thereby facilitate the Department’s ability to police predatory practices.[8]

Second, the Law would create an Office of Financial Technology Innovation (“innovation office”), which would be tasked with “study[ing] emerging technologies in financial services” to anticipate trends in financial products and preemptively curb practices that harm consumers.[9] The innovation office, which would be based in San Francisco, would further promote innovation among California companies in the financial services industry to “cultivate the responsible development of new consumer financial products.”[10]

Third, while similar to the Bureau in spirit, the proposed Department and innovation office would not incorporate the Bureau’s safe harbor “sandboxes,” which California Attorney General Xavier Becerra strongly opposes as “a free pass to avoid the law.”[11]

Fourth, to “offer[ ] legal support for the administration of the new law” and “expand[ ] existing administrative and information technology staff to support the Department’s increased regulatory responsibilities,” the Proposal includes $44.3 million in appropriations to cover initial costs for the first three years.[12] This would allow the creation of 44 new positions at the Department for 2020–21, expanding by the 2022–23 budget year to 90 positions, 16 of which would be dedicated solely to enforcement.

III. Context and the Implications of California’s Proposal

The California Proposal emerged in the larger context of recent legislative changes in other states, including the more recent uptick in state and local consumer financial protection enforcement. At the local level, Philadelphia and Miami are just two examples of cities that have pursued claims against Bank of America, JPMorgan Chase, and Citibank for redlining and other practices that allegedly violated the Fair Housing Act.[13]

At the state level, New York Governor Andrew Cuomo recently proposed legislative changes that would give DFS additional authority to require debt collectors operating in the state to apply for a license, which DFS could revoke for improper conduct.[14] Governor Cuomo’s proposed changes would also codify a Federal Trade Commission rule prohibiting confessions of judgment and bring any activity subject to Bureau enforcement within the purview of DFS’s supervision and enforcement.[15]

IV. Looking Ahead and Practical Tips

While the final form of California’s “mini-CFPB” will not be implemented for some time, market participants should proactively assess compliance protocols given the exponential strengthening of state and local regulatory monitoring and enforcement activities. State laws are often much broader in scope than their federal counterparts and do not include the exemptions or safe harbor provisions sometimes present at the federal level, as the California Proposal illustrates. Moreover, Section 1042 of the Dodd-Frank Act authorizes state attorneys general or state banking agencies to bring civil actions to enforce the Bureau’s enabling statute, including the federal prohibition of abusive, unfair, and deceptive practices (UDAAP).[16] Moving forward, companies will need to allocate increasing resources to cover new compliance and monitoring costs as the pool of states turning up the heat in the consumer financial protection space expands.

[1] Press Release, Office of the New Jersey Attorney General, “Attorney General Grewal Announces New Leadership at the Division of Consumer Affairs,” (Mar. 27, 2018), https://bit.ly/31rMafl.

[2] Joann Needleman, “Pennsylvania Enters into a New Era of Consumer Protection Enforcement: What Financial Services Companies Must Do Now,” insideARM (Oct. 12, 2017, 8:37 A.M.), https://bit.ly/2RXVB2H.

[3] Press Release, New York Department of Financial Services, “Acting DFS Superintendent Lacewell Announces Appointment of Katherine Lemire as Executive Deputy Superintendent of Newly Created Consumer Protection & Enforcement Division,” (April 29, 2019), https://on.ny.gov/2OqA4gU.

[4] Press Release, New York Department of Financial Services, “DFS Superintendent Lacewell Announces Appointment of Former CFPB Deputy Director Leandra English to Department of Financial Services Leadership Team,” (January 14, 2020), https://on.ny.gov/2RXF4f8.

[5] Press Release, Office of Governor Gavin Newsom, “Governor Newsom Announces Appointments 3.28.19,” https://bit.ly/31qY5tw.

[6] 2020–21 Governor’s Budget, Business, Consumer Services, and Housing, “1701 Department of Business Oversight,” https://bit.ly/2UOr4Gx.

[7] California Department of Business Oversight, California Consumer Financial Protection Law, https://bit.ly/3bCOhRW; see supra note 6.

[8] Gavin Newsom, Governor’s Budget Summary 2020–21 173–74, available at: https://bit.ly/2UlW8xf.

[9] Id. at 174.

[10] The Law would also amend the California Financial Code so that new types of currencies and consumer financial services businesses can more easily enter the banking industry. Id.

[11] Press Release, California Dep’t Justice, “Attorney General Becerra Opposes CFPB Proposal to Exempt Companies from Oversight” (Feb. 12, 2019), https://bit.ly/381SJrh.

[12] Initial costs for the new program would be covered by available settlement proceeds in the State Corporations and Financial Institutions Funds, with future costs covered by fees on the newly covered industries and increased fees on existing licenses. See supra note 8.

[13] While Philadelphia settled its claims against Wells Fargo for $10 million late last year, Miami’s recent voluntary dismissal of its claims against the four banks illustrates the difficulty of proving these cases in light of the heightened standard of proof beyond just demonstrating racial disparity that the Supreme Court articulated in 2015. See Texas Dep’t of Hous. & Cmty. Affairs v. Inclusive Communities Project, Inc., 135 S. Ct. 2507, 2523–26 (2015); see also Dan Ennis, “Miami drops reverse redlining claims against top 4 banks,” Banking Dive (Feb. 4, 2020), https://bit.ly/2Sj6paD; Laura Alix, “Wells Fargo, Philadelphia reach settlement in redlining lawsuit,” American Banker (Dec. 16, 2019, 11:48 A.M.), https://bit.ly/2vJJBcu.

[14] Press Release, Office of Governor Andrew Cuomo, “Governor Cuomo Unveils 8th Proposal of 2020 State of the State: Protecting Consumers from Abusive Debt Collectors,” (Dec. 19, 2019), https://on.ny.gov/2u8QILn

[15] Id. (stating that the proposed changes would stop “the abusive use of confessions of judgment,” which “gives the lenders—if they claim the borrower missed a payment—the unfettered power to go into court, get a judgment from a clerk, and empty the consumer’s bank account”); Andrew Cuomo, 2020 State of the State Proposals, “Protecting New York Consumers from Unfair and Abusive Practices by Strengthening New York’s Consumer Protection Laws,” https://on.ny.gov/2v9Minl (noting that “the Governor proposes making New York State consumer protection law consistent with federal law”).

[16] Notwithstanding the substantive protections that state statutes provide, states including Illinois, Virginia, Massachusetts, and New York have already initiated actions to enforce UDAAP under the Dodd-Frank Act.