Hector Amezcua/AP Photo
An almost empty Assembly gallery in Sacramento last week
The California legislative session, which concluded last week, often draws scrutiny as a progressive policy bellwether. This year it took heat from our own Harold Meyerson and others for failing to pass a number of policing reforms, including one that would have taken abusive cops off the street. Other measures were able to pass, like the Racial Justice Act, which allows racial discrimination as an affirmative defense in criminal sentencing; the closure of two large state prisons; prohibitions on choke holds; and transfer of police use of force cases to the state Attorney General’s office.
But one reform of criminal justice that hasn’t been talked about as much is a substantial advance in the area of white-collar crime. In a path-breaking move, California created its own consumer financial protection agency, modeled on the decade-old federal agency established in the Dodd-Frank Act. The new agency, the Department of Financial Protection and Innovation (DFPI), would congregate a host of existing state consumer protection laws under the auspices of one agency, and add new powers to investigate financial firms operating within the state. The same vulnerable communities that need to be protected from aggressive cops and violent police presence also need a shield from financial predators, and California’s DFPI would handle that task.
The bill, which passed August 31, expands the powers and tightens the focus of the existing Department of Business Oversight. Much like at the federal level, consumer protection laws in the DBO were something of an afterthought. “Companies had to operate on a safe and sound basis, and then there were protections violating the law, unevenly enforced,” says Rich Cordray, the first confirmed director of the federal Consumer Financial Protection Bureau (CFPB), who worked with state lawmakers on the bill. “A real focus on protecting consumers is needed.”
That’s more true than ever, given the effective neutering of the CFPB. During the Trump administration, enforcement activity and money returned to consumers has plummeted dramatically. A state-level mini-CFPB can smooth over the times when a finance-friendly executive branch grinds federal consumer financial protection into dust.
The coronavirus crisis has heightened the need to protect consumers.
The coronavirus crisis has heightened the need to protect consumers as well. Greater need for individual financial support has clashed with tightened lending standards from traditional banks. Online lenders have trapped borrowers in high-cost personal loans, threatening mass defaults and suffering. In addition, the CFPB has loosened the reins on payday lenders at the worst possible time, allowing them to sign up borrowers for expensive debt without assessing their ability to pay. Banks are now allowed to make deposit advance loans, a payday loan–style arrangement, and can participate in “rent-a-bank” schemes, where shady lenders use national bank charters to eliminate caps on interest rates for personal loans.
The DFPI steps into this breach with authority over state financial firms like debt collectors, payday lenders, financial technology companies (known as fintech), and student loan servicers. The latter has been habitually ignored at the federal level, despite routinely steering borrowers to higher-cost options for paying back student loans.
The state-level protections for those harmed by debt collectors and credit-reporting agencies are new. Small business protections were also added toward the end, building the coalition for passage. The agency will have subpoena power to investigate, and civil and administrative enforcement powers. It can revoke the licenses of offending firms, preventing them from operating in California.
Entities that were already licensed through the DBO, including banks, credit unions, mortgage brokers, and investment advisors, remain under the purview of the new agency. The suped-up DFPI will have increased funding to go after those companies. However, existing licensees are exempt from one strong new DFPI authority, which allows it to target firms that engage in unfair, deceptive, or abusive acts and practices (UDAAP). Existing licensees also avoid the DFPI’s administrative fines for violating companies, up to $5,000 per day. The DFPI can cite any company for violations of rules issued by the CFPB, an unusual part of Dodd-Frank that allows state authorities to enforce federal law. For the existing licensees, however, the state must give advance warning to federal regulators.
These were definitely victories for bankers, who win simply by their counterparts and competitors gaining stricter scrutiny. But Cordray still thinks that the agency can be meaningful, because it can apply rules that are more stringent than the federal floor. “California can often be a leader for the nation,” he says. “If you’re a national company, you do not want to do business differently in one place than another. If California sets a higher standard, you’d be inclined to meet those and apply them across the country.”
This is likely true in at least one area. According to several sources, while auto dealers operating under their normal DMV license would be exempted, those that engage in certain forms of lending are likely to be covered under the new agency, which would go further than the federal CFPB, which gave auto dealers a full carve-out. This is subject to implementation and interpretation, and dealers could still find a way out. But if that stays intact, it would be a foothold for auto dealer oversight that isn’t contemplated in federal law.
In no way can a state-based consumer agency cover completely for a battered CFPB. “A strong consumer protection agency in an economy the size of California can only be a good thing,” says Linda Jun, senior policy counsel at Americans for Financial Reform. “But with the assault on consumer protection at the federal level under the Trump administration, and the failure to move ahead on new threats, we have to remind ourselves that there's no substitute for a strong CFPB.”
That important point notwithstanding, and despite the carve-outs for some financial institutions, the concept of an agency dedicated to protecting consumers is sound, and should make a difference. Particularly in a moment where there seems to be two justice systems—one for the rich and well-connected and one for everybody else—having one agency in California with the opposite focus, designed to look out for the predations of the powerful on the population, could prove powerful. “The DFPI is going to be a game changer,” says Cordray. “If could be a model for the country.”
