California tables ‘mini-CFPB’ idea — for now
With days to go before a key deadline for California legislators, a plan to establish a new state consumer financial protection agency is shrouded in uncertainty.
An initial proposal to create the agency as part of Gov. Gavin Newsom's budget was temporarily shelved last week as negotiators focus on more pressing issues —
including funding tied to coronavirus relief — and scramble to meet a June 15 statutory deadline.
But policy experts believe the proposal still has a shot at being revived later in the budget process. Some have noted the new agency could play a role in supporting the post-pandemic recovery. Legislators have until Aug. 31 to finalize the budget for 2020-21, and negotiations are expected to intensify later this summer.
“It will be a nail-biter until we get to the end of the session,” said Suzanne Martindale, senior policy counsel and Western states legislative manager at Consumer Reports. “The financial fallout from COVID-19 is already devastating and yet just beginning. If we don’t act now it will prolong the harm and the time it takes for small businesses and consumers to recover.”
In January, Newsom proposed the creation of the Department of Financial Protection and Innovation, or DFPI, to be housed within the existing Department of Business Oversight. The new agency would be fashioned somewhat after the federal Consumer Financial Protection Bureau. Many have referred to it as a mini-CFPB.
The new agency would have the authority to bring enforcement actions against companies, issue fines and crack down on "unfair, deceptive and abusive acts or practices," known as UDAAP.
But on June 4, the proposed agency was stripped from the budget plan currently being negotiated by state legislators. The exact reasoning was unclear, but observers believe negotiators are prioritizing other items, and the state's coronavirus response has garnered most of the government's attention. Budget negotiators must send the governor an updated spending plan by June 15, but the final budget will not be approved until later in the summer. California's legislative session typically runs from Jan. 6 to Aug. 31, but this year's calendar was truncated because of the virus outbreak.
Some observers say Newsom has his hands full with the pandemic response. The state also is grappling with protests, a homeless crisis and a recent outbreak of wildfires.
“The legislature has other things on their plates in a very short legislative session,” said Jan Lynn Owen, a senior adviser at Manatt and the former Department of Business Oversight commissioner. “Because the legislature and state government shut down due to the crisis, this was a very abbreviated legislative session, which can cause some good public policy to be put on hold.”
Some state lawmakers have urged legislative leaders to introduce the mini-CFPB plan as a standalone bill. That would subject it to more oversight from a legislative committee.
Even though Democrats hold a supermajority in California’s legislature, some lawmakers are wary of ceding too much authority to the governor by creating a new regulatory agency. They viewed putting the mini-CFPB proposal into the original budget document as a power grab.
The Legislative Analyst’s Office even recommended that the statutory changes be removed from the budget process.
“This would allow the changes to be vetted by the policy committees that have expertise on the specific issues that are raised,” the Analyst’s Office said in a report. “This would better position the Legislature to determine which policies should be established in statute and which could be left to the regulatory process.”
Consumer advocates say Newsom would throw his full support behind legislation.
Under the original budget proposal, the new agency would be self-funded through licensing fees and fines.
The proposal initially was linked to another proposal to establish new restrictions on industrial banks chartered by the state, but that plan was later separated from the mini-CFPB idea during the budget process.
The mini-CFPB plan also has the backing of Tom Steyer, the hedge fund billionaire and former presidential candidate, who was named by Newsom in April to be co-chair of the governor's task force on business and jobs recovery.
Many are hoping that the proposed agency gets authority to protect both small businesses and consumers from predatory lenders. Consumer advocates are pressing for the changes because the pandemic has hit small businesses and low- and moderate-income households the hardest.
“We’re at a period of uncertainty, where conceptually people acknowledge that government leaders need to do something,” Martindale of Consumer Reports said. “A lot of small businesses are concerned about predatory lenders going after them and trying to market fast cash to people. Consumers and small businesses need to know who is legitimate and who is not.”
For small businesses in particular, the coronavirus pandemic has provided added urgency. A coalition of fintechs, small-business lenders, community development agencies and consumer advocates has lined up to support the new agency proposal, telling lawmakers that small-business protections must not be removed.
“Small business protection is crucial to our economic recovery,” the 47 groups said in a letter to state lawmakers last month. “For years, California small businesses have faced an epidemic of predatory lending and today, the predatory lending vultures are circling.”
The groups specifically are calling for the DFPI to have oversight over small-business financing.
Notably, Newsom’s plan would give the new DFPI the authority to collect data on how minority-owned, women-owned and small businesses are being served by lenders. The groups also want added protections for small businesses that were not previously in the budget proposal.
Under the proposal, the Department of Business Oversight’s two main funds would be merged. Newsom's original budget proposed an initial $10.2 million to fund 44 additional positions in 2020-21 fiscal year, with funding increasing to $19.3 million a year with 90 new positions by the 2022-23 fiscal year.
Still, the Legislative Analyst’s Office has proposed that the agency be funded in its first year on a pilot basis, with funding increasing along with more legislative oversight.