Two Powerful New State CFPBs? California, New York Proposals May Rock the Financial World

Financial Services Law

Joining Pennsylvania, California looks to be the next state to create a state version of the federal Consumer Financial Protection Bureau. And with recent pronouncements from New York that may place greater authority with its prudential regulator, will that state be far behind? We discuss both news stories below.

What happened

Back in July 2017, Pennsylvania Attorney General Josh Shapiro announced the formation of a Consumer Financial Protection Unit within his office, and appointed a former Consumer Financial Protection Bureau (CFPB) enforcement lawyer, Nicholas Smyth, to run the unit. Although this led to speculation that other states would quickly follow with their own mini-CFPB agencies, little meaningful activity followed after the Pennsylvania announcement, and the Pennsylvania unit continues to function within the AG’s office.

That may be changing in 2020. California is looking to expand its oversight of the financial services industry with the creation of a state version of the CFPB. As part of his state budget plans, California Governor Gavin Newsom proposed renaming the current Department of Business Oversight (DBO) as the Department of Financial Protection and Innovation (DFPI), and granting it extensive new authority.

Moreover, New York Governor Andrew Cuomo has separately proposed legislative changes that would likewise grant the state’s prudential regulator, the Department of Financial Services (DFS), additional authority (including over debt collectors) and, among other changes, render any activity within CFPB enforcement authority likewise subject to enforcement in New York. These tasks would assumedly be handled by the Consumer Protection and Financial Enforcement Division at DFS, which was formed back in May 2019.

Why the need for a state-level CFPB?

California’s answer: “The federal government’s rollback of the CFPB leaves Californians vulnerable to predatory businesses and leaves companies without the clarity they need to innovate,” according to the 2020-2021 budget summary.

To alleviate these problems, the state would establish a new California Consumer Financial Protection Law, which would expand the DBO’s current authority “to pursue unlicensed financial service providers not currently subject to regulatory oversight such as debt collectors, credit reporting agencies and financial technology companies, among others.”

The renamed DFPI would be tasked with offering services to “empower and educate” consumers, particularly older Americans, students, military service members and recent immigrants; protecting consumers through enforcement against unfair, deceptive or abusive activities; overseeing the licensing and examining of new industries “that are currently under-regulated”; and analyzing market patterns and developments for evidence-based policies and enforcement.

In addition, the new regulatory body would establish a Financial Technology Innovation Office, focused on promoting “responsible development of new consumer financial products.”

To staff the expanded agency, Gov. Newsom proposed a $10.2 million Financial Protection Fund, with 44 new positions at the DFPI for 2020–2021. Those numbers would jump to $19.3 million and 90 positions in 2022–2023.

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.

To read the California proposal, click here.

To read the New York proposal, click here.

Why it matters

We’ll be providing our readers with a supplemental analysis of these important developments, and what they may mean to regulated (and, in turn, newly regulated) entities in both California and New York. CFPB’s analogues in the two largest states, California (through the DFPI) and New York (through an enhanced unit at DFS), would likely have a significant impact on the financial services industry. Details on the proposals have yet to be released. Stay tuned.

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