California's New State "Mini-CFPB" Is Not Very "Mini," but Very "CFPB"

California now has its own mini Consumer Financial Protection Bureau (CFPB). Although California is not the first state to create such an entity, the new regulator's resources and authority—not to mention the size of the California market—mean that it is poised to have a larger impact on consumer financial services regulation and enforcement than other state "mini-CFPBs."

The new California Department of Financial Protection and Innovation (DFPI) is closely modeled after the federal CFPB. Indeed, Richard Cordray, the CFPB's first director, teamed with California DBO Commissioner Manny Alvarez, a former CFPB enforcement attorney, to draft the California Consumer Financial Protection Law (CCFPL). The law transforms the existing financial industry regulator, the Department of Business Oversight (DBO), into the new DFPI. In passing the CCFPL, California's stated goal is to be the "premier financial regulator and national model for consumer protection."

This will be the first in a series exploring California's new law. Here, we discuss the law's purpose and funding structure. Future installments will provide further insight into the law's impact and compare California's new structure to similar developments in other states.

Why Does California Need a New Regulator? 

Since President Trump's inauguration, in response to perceived lax federal consumer protection, consumer protection advocates pushed for more powerful state-level consumer protection regulators. Joining this chorus, California's DBO concluded that the state "lacks a singular body to oversee the state's providers of financial products and services, which leaves consumers vulnerable to abusive financial products and practices," and advocated for "modern, effective financial protection."

COVID-driven threats to vulnerable groups and financial challenges—along with concerns about unfair, deceptive, or abusive acts or practices by unlicensed entities—accelerated the drive toward creating this new regulator. In announcing the governor's signing of the "landmark bill," the state lauded the DFPI's ability to protect consumers from "pandemic-inspired scams, promote innovation, clarify regulatory hurdles for emerging products and increase education and outreach for vulnerable groups," including "seniors, new Californians, service members, and students."

Whom Does the DFPI Regulate, and What Does It Have Authority to Do?

The CCFPL transforms California's existing financial services regulator, the DBO, into the DFPI. The new regulator has expansive authority to enforce consumer financial laws, some of which overlaps with the California Attorney General, the CFPB, and state licensing entities.

Under the "first-in-the-nation" consumer protection legislation, the DFPI has broadened authority over all providers of financial products and services to California consumers and unfair, abusive, or deceptive acts or practices (UDAAP) authority similar to the CFPB's authority under Dodd-Frank. In shifting the focus from regulating financial service providers to financial products and services themselves, California, like the CFPB, has positioned itself as a leading regulator for new financial products and services.

Like the CFPB, California's intent is to "level the playing field" so that similar products have similar compliance obligations regardless of who offers the product. In summary, the DFPI will:

• Enforce California laws relating to the following consumer financial businesses, among others:
  
  • Banks;
  • Credit unions;
  • Money transmitters;
  • Issuers of stored value or payment instruments;
  • Deferred deposit originators;
  • Finance lenders and brokers;
  • Residential mortgage lenders and servicers; and
  • Persons offering or providing consumer financial products or services in California.
• Enforce the federal Consumer Financial Protection Act;
• Be led by the Commissioner of Financial Protection and Innovation, who is appointed by and serves at the pleasure of the Governor with approval of the California Senate; and
• Issue rules and regulations necessary to execute the DFPI's powers and responsibilities.

The DFPI Is Equipped to Enforce Aggressively and Independently. 

While the law does not necessarily create any new compliance obligations (yet), it gives the DFPI the substantial resources and independence to investigate and enforce existing laws. The DFPI may bring civil actions in state or federal court, and it may do so without the approval of the California Attorney General. As with other state enforcers, the DFPI's use of the federal Consumer Financial Protection Act is subject to notice and possible intervention by the CFPB.

In recent years, California attorneys general have been aggressive enforcers of consumer financial protection laws. But in contrast with the independently elected attorneys general, the DFPI is led by a governor-appointed commissioner. At least for now, California's governor and attorney general are mostly aligned on issues of consumer protection, but these dynamics will be important to monitor.

In support of the expansive authority and agency independence, the DPFI is likely to be well funded. In its 2020-2021 budget proposal, the DBO requested $10.2 million for 44 positions for the year but would about double its size—to $19.3 million and 90 positions—by 2022-2023.

To support its administration, the DPFI will collect licensing fees from entities that currently pay fees to the DBO, and will also collect registration fees from newly covered persons, all of which will be maintained in a new Financial Protection Fund. The Fund will be supplemented by settlements and penalties obtained by the DFPI, which, like the CFPB, may be up to $1 million per day during which a violation continues.

While this funding structure is not unique among enforcement agencies, it is distinct from the CFPB's funding structure. In particular, the CFPB may not retain funds it collects in enforcement matters but, rather, remits these funds to the U.S. Treasury. (The CFPB retains civil money penalties in the Civil Penalty Fund, but those funds may only be returned to consumers; they may not be used to fund CFPB administration.)

Similarly, most state attorneys general must remit funds from settlements to the state's general fund. Allowing an enforcement agency to retain funds from settlements can incentivize an agency to seek larger penalties and focus its attention on bigger, more complex, targets rather than more routine fraud cases.

In future posts, we will explore how the DFPI might deploy these resources.