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California Seeks New Fintech Regulation in Agency Overhaul (Corrected)

Jan. 10, 2020, 7:41 PMUpdated: Jan. 13, 2020, 10:21 PM

California, the nation’s foremost technology hub, could soon become home to one of the nation’s most potent financial services regulators under new proposals from Gov. Gavin Newsom.

Newsom released Friday the details of his fiscal 2020-2021 budget, including a proposal to remake the California Department of Business Oversight into a direct regulator of fintech companies, debt collectors, credit reporting agencies and others.

The agency, which would be renamed the Department of Financial Protection and Innovation (DFPI), would also see its powers expanded to police “abusive” acts and practices, in addition to existing standards for unfair and deceptive acts and practices (UDAP). Abusiveness in financial services remains an ill-defined term at the federal level but could prove a sharp weapon in bringing enforcement cases.

During a news conference, Newsom (D) criticized the Trump administration and the Consumer Financial Protection Bureau in particular for reducing its enforcement activity of the financial sector.

“They’re getting out of the financial protection business. We’re getting into it,” Newsom said. “We’re going to protect consumers from unfair and deceptive practices better than we have,” he added.

State lawmakers must approve the plan and detailed legislation incorporating the proposals is expected by Feb. 1.

Staff Increases

Newsom is contemplating a significant increase in staff and resources to accomplish his administration’s policy goals. The new budget proposes 44 new positions in fiscal 2021, growing to a total of 90 positions by fiscal 2022. The request includes a total of 16 new enforcement positions.

Newsom is proposing to fund the expansion with an additional $44.3 million, spread out over the next three years. Initial funding is projected at $10.2 million for the first year, growing to $19.3 million by fiscal 2022. The money would come from available settlement proceeds. Future costs would be covered by fees from new licensees and increased fees on existing licensees.

“At a time when so many Californians and Americans are living on the edge, it helps to have someone to keep you from falling over,” said Ted Mermin, director for the Center for Consumer Law and Economic Justice at the University of California Berkeley School of Law.

“The federal government in the current Consumer Financial Protection Bureau has made it clear that they don’t believe in catching people before they fall,” Mermin said.

Whether the DBO, or its proposed successor, will have enough resources to carry out Newsom’s agenda remains unclear, even with the additional staff and money the governor announced.

The DBO already licenses and oversees banks, credit unions and other financial services companies operating in California, and adding the other companies Newsom listed could stretch the agency thin, said Joseph Lynyak, a partner with Dorsey & Whitney LLP in Costa Mesa, Calif.

“State agencies don’t have the same resources” as the CFPB or other federal regulators, he said.

Assemblymember Monique Limón (D), the chair of the California Assembly’s Banking and Finance Committee, introduced legislation in 2019 that would have added 19 staffers to the DBO’s roster with a focus on consumer financial protection.

Limón said in an interview Friday that Newsom’s proposal to reshape the DBO goes beyond what she had envisioned.

Accomplishing the governor’s goal is likely to be difficult, given potential lobbying from industry and the number of hours it takes to get major legislation across the finish line, Limón said.

“This is not a little proposal. We understand that this is going to come with a significant amount of opposition,” she said.

But Limón’s confident that in the end it will get done.

Innovation Office


The new department also plans to foster more financial innovation, Mermin noted.

The governor’s proposal would create a four-person financial technology innovation office “that will proactively cultivate the responsible development of new consumer financial products,” according to the budget proposal.

It would also seek to “modernize” laws related to state-chartered industrial banks to allow fintech companies to operate nationwide while being overseen by the DBO, according to the governor’s budget change proposal.

Community and larger national banks have opposed such business structures. No new industrial banks have been chartered in more than a decade, though several companies, such as online lender Square Financial Services Inc. and online retailer Rakuten, have recently sought industrial bank charters in Utah and deposit insurance from the Federal Deposit Insurance Corp.

The dual approach to both closely scrutinizing business practices for potential harm to consumers as well as seeking to promote new innovations in the market is reflected in the background of the DBO’s Commissioner, Manuel Alvarez.

Alvarez’s career includes a 2011 to 2014 stint as an enforcement attorney during the early years of the CFPB, as well as serving as general counsel for Affirm, Inc., a fintech company.

The focus on innovation has raised concerns among some consumer advocates, however.

The fear is that while there are additional resources and powers for consumer financial protection efforts in Newsom’s proposal, the focus on innovation could potentially water those efforts down, said Marisabel Torres, the California policy director at the Center for Responsible Lending.

“Fintech and Silicon Valley are in the backyard of Sacramento, and they have definitely not been shy in trying to get carveouts in the name of innovation,” Torres said.

Others see the innovation component as a boon. “There’s always a new product out there,” said Jan Lynn Owen, the previous DBO commissioner, now a senior adviser at Manatt Phelps & Phillips, LLP based in Sacramento.

“People are going to be cautious” about what innovation at a regulator might mean, particularly without further details, Owen said, before adding she didn’t think there would be a reduction in DBO’s regulatory oversight.

“For California to be one place to go and work with the regulator to develop a consumer financial product is nothing but a good thing,” she said.

(Corrects the 15th paragraph of Jan. 10 story that misstated the process for amending legislation that would have enhanced the DBO's authority.)

To contact the reporter on this story: Lydia Beyoud in Washington at lbeyoud@bloomberglaw.com

To contact the editors responsible for this story: Michael Ferullo at mferullo@bloomberglaw.com; Seth Stern at sstern@bloomberglaw.com

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