In mid-2019, the New York Department of Financial Services (NYDFS) rearranged a few existing bureaus to form a new watchdog group called the Consumer Protection and Financial Enforcement Division-a miniature state version of the federal government's Consumer Financial Protection Bureau (CFPB).
Citing federal cutbacks at the Bureau, the NYDFS created the new regulatory agency to pick up the slack (so to speak) on enforcement of consumer protections. Critics in the banking sector claim the new agency's guidelines add unnecessary compliance pressure where federal mandates already exist. But despite these claims, the mini-CFPB model is gaining traction. Pennsylvania was the first state to establish its own version of the CFPB, followed by New York, New Jersey, and Delaware-and now California.
Coming to California
As part of the state’s budget plan for 2020, California Governor Gavin Newsome proposed their new agency in January-the Department of Financial Protection and Innovation, or DFPI. But, by June, tabled the proposal as the pandemic took hold.
In August, California brought their version of the 'mini-CFPB' back to life and on August 31, 2020, the California legislature passed the California Consumer Financial Protection Law (CCFPL) which funds and approves the reorganization of the California regulator, the Department of Business Oversight (DBO) into the DFPI with expanded authority. The new agency gives California state regulators expanded oversight and enforcement authority over nearly all financial services companies.
One of the consultants for the law is former CFPB director Richard Cordray, who has long pushed for joint efforts between state and federal regulators in enforcing consumer protection. According to Cordray, the new agency creates a "super-state analog to the CFPB" and could send consumer financial protection regulation in an entirely new direction.
Sometimes referred to as a nation state, California boasts the 5th largest economy in the world (as many corporations are headquartered there, including many FinTechs). Yes, 5th in the entire world, just below Germany. As California is often a trend-setting state, this could be a tipping point for other states to create their own consumer watchdog agency.
What's in the CCFPL?
The new California law has a few keys points for compliance leaders to be aware of. The most important factors include:
- Expanding penalties for "unfair, deceptive, or abusive acts or practices" (UDAAPs)
- Reorganizing and expanding the the state's Department of Business Oversight (DBO) into the DFPI
- Exempts national banks, banks chartered by California or any other state, and existing DBO licensees other than payday lenders and student loan servicers, from the CCFPL
- Helping to foster new responsible product development
- Increasing the study of emerging financial technology
- Empowering marginalized groups when it comes to financial decision making
While many of the components of the law are expected to provide consumer protections, it's the first bullet point here that's become a sticking point for banks and compliance officers. The California Financial Services Association has called the UDAAP provisions "redundant and lacking in clarity," mainly due to already existing federal mandates. Critics of the law argue they should be exempt if they're already complying with federal guidelines.
What a State-Run Mini-CFPB Means For Compliance
For compliance officers, a mini-CFPB likely means navigating a tangled world where federal and state regulations often run parallel (or perhaps even conflict) with each other.
Balance Between Federal And State UDAAP
Banks must balance working under federal guidelines to state guidelines-which can cause major headaches for compliance officers, especially when the state regulations are vaguely defined. The new law increases enforcement and penalties for abusive acts, but unlike federal legislation, an "abusive act" isn't clearly defined in California's bill.
Be Ready for Extra Scrutiny
State-chartered banks, current DBO licensees, and previously unlicensed entities covered by the CCFPL should be ready for increased scrutiny by the newly organized California financial regulator who now has oversight and enforcement authority over nearly all financial services companies. Stay informed by reading what the new agency is doing.
Meet Your Compliance Obligations
Just like the CFPB, California has a complaint database. Under the new law, the DFPI must establish procedures for covered entities to provide a timely response to consumer complaints and specifies the information that must be included in the response.
Automation allows compliance officers to efficiently organize their teams and scale their compliance programs by centralizing communication and sharing important data throughout the organization. PerformLine enables compliance teams to cut down on manual monitoring while helping decipher the nebulous world of UDAAP regulations.
Speak to one of our experts today and see how PerformLine can take the stress out of your ever-changing compliance needs.