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California Passes Legislation to Create Mini-CFPB

In Short

The Situation: On January 1, 2021, the California Consumer Financial Protection Law ("CCFPL") will go into effect, and the Department of Financial Protection and Innovation ("DFPI") will become the financial sector's new state regulator.

The Result: The DFPI will replace California's current Department of Business Oversight ("DBO"), and DFPI will regulate financial products and services in the state in accordance with the CCFPL.

Looking Ahead: Nonbank small business lenders and fintech companies, and the institutions that work with them, should prepare for the rollout of the new law, and all financial institutions should expect to be subject to more comprehensive oversight and regulation in California.

On August 31, 2020, the California State Legislature passed a bill that would enact the CCFPL and launch the DFPI as a new state regulator in the financial sector. As discussed in a previous Jones Day Alert, this proposal was initially introduced through Governor Gavin Newsom's 2020–21 budget and was tabled due in part to COVID-19 considerations. This led to the proposal moving over to the California State Legislature. Governor Newsom signed the bill on September 25, 2020, and it will go into effect on January 1, 2021.

Under the CCFPL, California's current Department of Business Oversight ("DBO") will be replaced by the DFPI, and, while retaining the DBO's prior powers, the DFPI will be charged with regulating financial products and services in the state in accordance with the CCFPL. The CCFPL will "make it unlawful for covered persons or service providers, as defined, to, among other acts, engage in unlawful, unfair, deceptive, or abusive acts or practices with respect to consumer products or services, or offer or provide a consumer a financial product or service that is not in conformity with any consumer law." The DFPI will have wide-ranging regulatory and enforcement power, including the ability to conduct investigations, issue subpoenas, levy fines, bring civil and administrative actions, and declare acts as "abusive." After the CCFPL becomes law, the DFPI will be required to promulgate implementing regulations, which will undoubtedly bring into further focus the regulated activities that will be within the scope of the CCFPL and DFPI.

Much of this structure is borrowed from the Consumer Financial Protection Act of 2010, which created the federal Consumer Financial Protection Bureau ("CFPB"). As a result, the DFPI is widely considered a "mini-CFPB," and various commentators have highlighted the importance of the new law. For example, former DBO Commissioner Jan Lynn Owen explained that the CCFPL will enable California to become "a gold standard as a financial services regulator." And, Richard Cordray, the first Director of the CFPB who had substantial involvement in the creation of the DFPI and CCFPL, noted that "it could be the most powerful year ever for consumer financial protections in California."

In enacting its mini-CFPB, California follows in the footsteps of states like New York, New Jersey, and Pennsylvania. But, California's version of the mini-CFPB differs in a few key ways; namely, unlike in New Jersey and Pennsylvania, this unit will not be housed within the state Attorney General's office. Instead, like the Department of Financial Services in New York, the DFPI will operate as an independent agency, with a dedicated staff and budget. As a result, the DFPI will be empowered to bring civil suits, with the possibility of big fines, independent of the Attorney General.

The CCFPL, however, is limited in a very important way. A "Covered Person" under the law is a person, or the affiliate of a person, that: (i) engages in offering or providing a consumer financial product or service to a resident of California; or (ii) any service provider to the extent that the person engages in the offering or provision of its own consumer financial product or service. But, this is carved back by a long list of exempted entities in the law including: (i) banks, savings associations and credit unions, as well as bank or savings and loan holding companies; (ii) persons otherwise licensed by the DFPI (i.e., finance lenders, brokers, residential mortgage lenders, money transmitters, escrow agents, and check sellers); and (iii) persons licensed under other California state laws not administered by the DFPI.

This exemption is key insofar as it seems to suggest that many major financial institutions will not be directly subject to the CCFPL. The California Bankers Association—which successfully lobbied for the exemption—said it is "neutral" on the bill due to the exemption being included. The end result is that mostly nonbank small business lenders and fintech companies are subject to the CCFPL. These entities should be actively preparing for the rollout of the new law and should expect to be subject to more comprehensive oversight and regulation in California, and the banks and financial institutions that partner with these entities should get ready to feel some effects as well.

Two Key Takeaways

  1. The DFPI will have broad regulatory and enforcement power, including the ability to conduct investigations, issue subpoenas, levy fines, bring civil and administrative actions, and declare acts as "abusive."
  2. While California's mini-CFPB will be a powerful force in consumer financial protections, the CCFPL is limited due to the exemptions carved out under the law.

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