California blazing a trail on banking policy for other blue states
In a divided Washington, D.C., only the most surgical and uncontroversial proposals stand much chance of becoming law. But at the state level, partisan control of both legislative chambers has become the norm. One result is that a lot of the more ambitious policy action has shifted to state capitals.
Against that backdrop, it is worth considering how much change Democratic lawmakers in California have enacted in the financial services policy realm since the start of the Trump era, and how that change is likely to spread to other blue states.
While the nation’s largest state has long been a laboratory for progressive ideas, California Democrats now hold supermajorities in both legislative chambers, as well as the governor’s mansion. The upshot is that Democrats can make policy in California without much input from Republicans.
In addition, more states are now poised to import California’s policies than in the past. Following the 2018 election, Democrats in 14 states controlled both legislative chambers and the governor’s office, up from just six states after the 2016 election.
New York, New Jersey, Illinois, Colorado and Washington are among the states where Democrats are now solidly in control of state government. Lawmakers in Democratic-leaning states have already turned to California for leadership on issues from student loan servicing to small-business lending.
What follows is a rundown of the left-leaning financial policies that California has passed over the last few years and how those ideas are spreading.
Data privacy. California’s first-in-the-nation law, which has drawn comparisons to the European Union’s General Data Protection Regulation, is scheduled to take effect on Jan. 1, 2020. While banks and credit unions won certain carve-outs, the law’s impact on the financial services industry is still expected to be significant.
In the absence of a federal law that establishes nationwide data privacy standards — a possibility that seems remote at the moment — the California Consumer Privacy Act is the main blueprint available. In the wake of the California law’s passage, approximately 15 other states have introduced similar legislation, according to the law firm BakerHostetler.
Public banks. California recently became just the second state, and the first in 100 years, to legalize government-owned banking. The law, which was signed by the governor on the same day that state regulators released guidance on cannabis banking, authorizes California municipalities to open their own banks. Those public banks could then invest in projects that are deemed to be in the public interest.
The law’s passage marked a defeat for private-sector banks and a major victory for the U.S. public banking movement, which arose out of popular discontent following the financial crisis.
Before public banks are up and running in California, they will have to secure approvals from state regulators and the Federal Deposit Insurance Corp.
Progressive activists and Democratic lawmakers in other states will be watching closely. Besides California, 12 U.S. states have introduced legislation, conducted a feasibility study, set up a task force or introduced a ballot measure on public banking since 2017, according to the Public Banking Institute. Among them are New York, New Jersey, Massachusetts, Michigan and Illinois.
Interest rate caps. Earlier this year, the California Legislature approved a bill that would cap rates on many consumer installment loans at 36% plus the federal funds rate. The legislation is now before Democratic Gov. Gavin Newsom, who has been critical of high-cost lenders.
The bill does not go as far as some consumer advocates would like — payday lenders would still be able to charge annual percentage rates of around 375% — but it still represents a breakthrough in a state where high-cost lenders have long had lobbying clout.
Consumer advocacy groups are now appear likely to push similar reforms in other states where lenders can currently charge triple-digit annual percentage rates.
“It appears the tenets of the bill in some form will move across the country,” predicted Jan Lynn Owen, who served as commissioner of the California Department of Business Oversight from 2013 until earlier this year.
Student loan servicing. A state law that took effect last year requires servicers of student loans to be licensed by the California Department of Business Oversight. The measure is intended to improve accountability and oversight at a time when Democratic politicians have been sharply critical of the Trump administration’s handling of federal student loan servicing.
The law has already been mimicked by several other states, including New York and New Jersey.
Now the sponsor of the California law wants to go further with a bill that would give borrowers the right to sue for damages when servicers of both federal and private student loans fail to process payments in a timely manner. That proposal hit a legislative roadblock in Sacramento over the summer but is expected to be revived next year.
Small-business loan disclosures. In 2018, California became the first U.S. state to require small-business lenders to make standardized interest rate disclosures, providing consumer-style guardrails in an industry where customers often complain about misleading loan terms.
The law, which exempts banks and credit unions, will not take effect until after California regulators finalize rules that will spell out exactly how the disclosures must be made. Similar legislation was introduced in New York earlier this year.
The point here is not to argue that Sacramento now rivals Washington as a center of financial policymaking. Far from it.
But California bears close attention, and not just because the state has nearly 40 million residents. Unlike the gambling mecca to the state’s east, what happens in California often does not stay in California.
Bankshot is American Banker’s column for real-time analysis of today's news.