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California’s ‘Mini-CFPB’ Law May Extend to Small Business Loans

Sept. 2, 2020, 7:47 PM

Tucked into California’s new law to expand its financial watchdog’s enforcement powers over consumer financial products is a provision that could extend to online small business lenders.

The bill, headed to Gov. Gavin Newsom (D) for his signature after legislative approval Monday, would transform the Department of Business Oversight and expand its ability to charge companies engaged in certain categories of misconduct, called unfair, deceptive, or abusive acts or practices (UDAAP). It’s modeled after the Consumer Financial Protection Bureau’s UDAAP enforcement authority.

The legislation gives the department the option to regulate nonbank small business lenders—many of them fintech companies—but doesn’t require it. If the department, which will change its name to the Department of Financial Protection and Innovation (DFPI), opts to regulate commercial finance lenders using UDAAP, it will have to issue a rulemaking first, said Todd Baker, a senior business, law and public policy fellow at Columbia University’s Richman Center.

“We believe this oversight will provide much needed protection for the state’s 4 million small businesses,” said Ryan Metcalf, spokesman for the Responsible Business Lending Coalition and head of regulatory affairs at Funding Circle, an online small business lender.

Nonbank small business financing has grown swiftly since the 2008 recession but has often been left in a “Wild West” of little to no regulation, said Catherine Brennan, partner at Hudson Cook, LLP. “It’s not surprising the largest state in the country would try to impose regulations onto that market,” she said.

If the DFPI decides to regulate small business lenders under UDAAP, it could cause a shift in how lenders view their borrowers, said Vaishali Rao, partner at Hinshaw & Culbertson LLP. “Lenders will need to start thinking about small businesses the way they would an ordinary consumer, without the presumption of sophistication,” Rao said.

What remains to be seen is how the law’s implementation would impact a shift from the state attorney general’s office’s long-standing UDAAP authority in financial services to the new DFPI—and whether the regulator interprets it differently than the AG, said Rao, a former supervising attorney in the Illinois AG’s Consumer Fraud Bureau.

Keeping Pace

The bill would shift the DFPI’s focus from regulating financial services providers to financial products and activities themselves. It also says the DFPI can take action against companies using “subterfuge” designed to get around the provisions of the law. “That’s potentially extremely broad,” Baker said.

Those provisions would allow the DFPI to keep up with consumer protection and enforcement as new financial products and services come to market, Baker said. That’s likely to benefit a regulator in a state where many fintech companies are headquartered.

The changes will enable California to become “a gold standard as a financial services regulator,” said former DBO Commissioner Jan Lynn Owen, now senior advisor at Manatt, Phelps & Phillips, LLP.

The agency’s oversight of some of the most cutting-edge fintech companies, including virtual currency issuers and exchanges and wage access and payments companies, is set to expand. The legislation also broadens the UDAAP authority over payday lenders, student loan services, and debt collectors.

Some companies not licensed by DBO under current law, such as some cryptocurrency companies, may welcome gaining a regulator as boosting their bona fides with customers, said Thomas Brown, partner at Paul Hastings.

The DFPI’s oversight will also help them answer questions from regulators in other states about who their primary regulator is, Brown said.

A broad coalition of consumer advocates, community groups, and small business organizations are cheering the DFPI’s souped-up enforcement and oversight powers, said Ted Mermin, director for the Center for Consumer Law and Economic Justice at the University of California Berkeley School of Law.

Californians facing a financial cliff or targeted by predatory financial products “are going to find that someone’s got their back,” Mermin said.

To contact the reporter on this story: Lydia Beyoud in Washington at

To contact the editors responsible for this story: Michael Ferullo at; Roger Yu at