The DFPI, which is part of the California Consumer Financial Protection Law (CCFPL) that was given the stamp of approval by Governor Gavin Newsom on Sept. 25, stiffens the state’s oversight of financial services providers. The department’s creation was sparked by the CFPB’s “retreat” as an “aggressive enforcement agency,” said former CFPB Director Richard Cordray during a Ballard Spahr LLP webinar last week. Cordray had worked closely with California lawmakers to draft the new legislation.
The DFPI will replace California’s Department of Business Oversight (DBO) on Jan. 1, 2021. The newly minted agency, which will house the Consumer Financial Protection Division, will have sweeping rulemaking and enforcement authority over consumer protections, including unlawful, unfair, deceptive or abusive acts and practices committed by providers of consumer financial products or services. This oversight extends beyond the scope of the Dodd-Frank Act to include entities currently unsupervised by the DBO or other regulators — notably, debt collectors, credit reporting agencies and certain fintech companies.
The department’s “proactive oversight” over all financial services businesses in California — whether licensed or not — will “put all providers on a level playing field,” according to Cordray. Further, the legislation will enable the agency to scrutinize developing products and niches that are not subject to licensure oversight under existing laws.
Penalties for CCFPL violations are steep. Lenders could face penalties as high as $25,000 for each act or omission — compared with $1,500 per TCPA violation — or as high as $1 million for each day during which the violation occurs.
Not only will the DFPI have extensive powers granted by the statute, but it will also have the ability to exercise those powers. Already, the department is gearing up for action, adding 90 people, including dozens of investigators and attorneys. It will put a team in place to identify emerging market risks to consumers, and another team to promote consumer education and outreach in specific communities, like veterans, immigrants and older Californians.
To start, the agency is following a track similar to the one mapped by the CFPB when it was founded back in 2011. In its infancy the CFPB recruited hundreds of staffers, and those hiring efforts translated into multiple enforcement actions. But in recent years, the CFPB’s activity has slowed. In the auto sector, for instance, it has initiated three enforcement actions since 2018, compared with 11 between 2013 and 2015. Broadly, that decline was the impetus for the California “mini-CFPB,” as the DFPI is often referred to, Cordray said.
The expectation of California regulators, though, is that the consumer financial protections put in place by the legislation will extend beyond the Golden State to the national stage. In fact, there’s precedent for such actions, Cordray noted. Congress has said that if state law is inconsistent with federal law in a way that provides greater protection to consumers, then state law will be upheld and not subject to preemption by federal law. “This law easily could have national effect,” Cordray said, pointing out that California is home to nearly 40 million people and is the world’s fifth-largest economy.
On the auto finance front, California is the second-largest market behind Texas. In August, California lenders financed 201,157 vehicles — 9.8% of the nation’s total, according to AutoCount. Texas financiers clocked in at 214,826 vehicles, or 10.5% of the total market. By comparison, states like Ohio and Michigan accounted for 4.6% and 3.8%, respectively, of auto loan originations in August, according to AutoCount.
With California accounting for about 10% of the country’s auto finance originations, larger lenders, in particular, would have a tough time bowing out of the state altogether. For instance, among the nation’s top 100 lenders according to Big Wheels Auto Finance Data, 72 originated at least one loan in California in August.
Besides, Cordray proposed that the consumer financial protections set up in California might become the baseline for operations nationwide. Similar to the way attorneys general team up to investigate auto finance cases, state regulators could replicate the template for the California legislation in their home states.
Get ready, because the sheriff is taking the job seriously.