As Federal Regulations Slip, States Are Filling The Gap

As Federal Regulations Slip, States are Filling the Gap

In the years since its 2011 inception, the Consumer Financial Protection Bureau (CFPB) has been a valuable shield between consumers and predatory financial practices. The federal regulatory body held Wells Fargo accountable when the bank was caught opening fake accounts in customers’ names, and it forced Capital One Bank to reimburse customers for unnecessary add-ons.

Now, however, political winds in Washington tend to blow in the direction of deregulation, marked by a decrease in federal oversight in the financial services industry. And a Supreme Court case regarding the constitutionality of the CFPB’s structure could further weaken the federal agency.

In response to this federal step away from consumer financial protections, California Gov. Gavin Newson’s 2020-21 state budget includes the creation of a Department of Financial Protection and Innovation (DFPI), a state-level agency modeled after and serving a similar purpose as the CFPB.

A Response to Federal Inaction

Speaking to Yahoo Finance News, Gov. Newsom said the goal of the DFPI will be to “provide consumers greater protection from predatory practices,” highlighting that the entity comes in response to “a retreat [from consumer protection] by federal agencies including the CFPB.”

The CFPB was initially proposed by Senator Elizabeth Warren as a response to the 2007-08 financial crisis. Originally designed to protect consumers from predatory financial institutions, the CFPB has since officially shifted its goal away from consumer protection to “access to financial markets” under Trump.

Gov. Newsom is not the first to take action in response to the CFPB’s abandonment of its original mission. In 2017, New Jersey, Maryland, and Pennsylvania all added divisions focusing on state-level consumer financial protection. New York also took a step in this direction in 2019 when it merged its Enforcement & Financial Frauds and Consumer Protection divisions to create a new division dedicated to consumer financial protection.

It was only a matter of time until California, famous for its consumer protections, followed suit. “The lack of a single regulatory body over providers of financial products and services in California leaves California consumers vulnerable to abusive financial products and practices.” reads Gov. Newsom’s proposal. The new agency aims to, (among other things) create fair competition, protect consumer welfare and create wealth for the state of California and its citizens.

 Empowering Consumers Through Increased Regulation

 A primary goal of the DFPI is to prevent unfair, deceptive, and abusive practices. According to the proposal, this will be done “by examining, investigating, and supervising unregulated products to protect California consumers.”

New industries will be licensed and examined by the DFPI in order to regulate predatory practices in cases where protective laws might not yet exist. The proposal includes legislation that would give the DFPI authority to pursue unlicensed financial service providers that aren’t currently subject to regulatory oversight. This will make it harder for companies in industries like debt collection and fintech to prey on consumers.

The proposal also includes the creation of an Office of Financial Technology Innovation. This office will be dedicated to researching emerging technologies in order to anticipate and preemptively restrain harmful practices in new industries. The findings from this office will be put in practice to create evidence-based policies and promote responsible development in the California financial services industry. As a result of the law, new financial education services will also become available to students, veterans, immigrants, and the elderly.

The proposal allocates $44.3 million over three years to cover the costs of administering the law and expanding staff to cover the department’s increased responsibility.

California Looks to Set the National Tone

The proposal was created in part by Richard Cordray, the first director of the CFPB. Although this legislation only applies to California, Cordray expects it to influence other states, in the same way, that The California Consumer Privacy Act has already begun to inspire similar data privacy laws in other states.

“This is a major, major initiative that will make a big difference, not only in California but also nationally,” Cordray said to Yahoo Finance News.

The implementation of the new laws and agency will not be immediate. The proposal is open to revision until June 15. Once revisions have been decided, it will go to Newsom who will either veto the bill or sign it into law.

However, participants in the financial service industry should prepare for an increased wave of state regulation as a result of California’s “mini-CFPB.” Whether this starts a new national trend or stays in California, companies should prepare to adjust their policies and monitor these new laws in order to comply with future regulations.

Max Totsky

Max Totsky is journalist based in Chicago. His writing can be found at Inc.com, PopMatters, and ADCG.org.

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