California’s legislative session, which ended last week, often comes under scrutiny as a progressive political barometer. This year it took heat to our own Harold Meyerson and others for not having passed a number of police reforms, including one that would have caught abusive cops off the street. Other measures were able to pass, such as the Racial Justice Act, which allows racial discrimination as an affirmative defense in criminal convictions; the closure of two large state prisons; bans on choke holds; and the transfer of police use of force cases to the state attorney general’s office.
But less talked about criminal justice reform is a big step forward in the area of white collar crime. In an innovative move, California created its own consumer financial protection agency, modeled on the ten-year-old federal agency established in the Dodd-Frank Act. The new agency, the Department of Financial Protection and Innovation (DFPI), would bring together a host of existing state consumer protection laws under the auspices of one agency and add new powers to investigate financial companies operating in the state. The same vulnerable communities that need to be protected from aggressive cops and violent police presence also need a shield against financial predators, and California’s DFPI would take care of that task.
The bill, which spent August 31, expands the powers and tightens the direction of the existing Department of Business Supervision. Much like at the federal level, consumer protection laws in BOD were something of an afterthought. “Businesses had to operate on a safe and healthy basis, and then there were law-breaking protections, unevenly enforced,” says Rich Cordray, the first senior director of the Federal Consumer Financial Protection Bureau (CFPB), who worked with state lawmakers on the bill. “You really have to focus on consumer protection. “
This is more true than ever, given the effective sterilization of the CFPB. During the Trump administration, enforcement activity and money returned to consumers have fell dramatically. A state-level mini-CFPB can alleviate times when a pro-finance executive power shatters federal financial consumer protection.
The coronavirus crisis has heightened the need to protect consumers.
The coronavirus crisis has also increased the need to protect consumers. The increased need for individual financial support has been hampered by the tightening of the lending standards of traditional banks. Online lenders have trapped borrowers into high cost personal loans, threatening defaults and mass suffering. In addition, the CFPB released the reins of payday lenders at the worst possible time, allowing them to sign borrowers for costly debts. without assessing their ability to pay. Banks are now allowed to make deposit advance loans, a payday loan type agreement and can participate in rent-a-bank programs, where shady lenders are using national bank charters to eliminate interest rate caps on personal loans.
The DFPI is intervening in this breach with authority over state-owned financial corporations such as debt collectors, payday lenders, fintech companies (known as fintechs), and student loan services. The latter has usually been ignored at the federal level, although it routinely directs borrowers to more expensive options for repaying student loans.
State-level protections for those harmed by debt collectors and credit bureaus are new. Small business protections were also added towards the end, creating a coalition for the passage. The agency will have subpoena power to investigate and civil and administrative enforcement powers. It can revoke the licenses of offending companies, preventing them from operating in California.
Entities already licensed by the DBO, including banks, credit unions, mortgage brokers and investment advisers, remain under the responsibility of the new agency. The existing DFPI will have increased funding to tackle these businesses. However, existing license holders are exempt a new strong authority from the DFPI, which allows it to target companies that engage in unfair, deceptive or abusive acts and practices (UDAAP). Existing licensees also avoid DFPI administrative fines for violating companies, up to $ 5,000 per day. The DFPI can cite any company for violating rules issued by the CFPB, an unusual part of Dodd-Frank that allows state authorities to enforce federal law. For existing licensees, however, the state must give advance notice to federal regulators.
These were certainly victories for the bankers, who simply win by their counterparts and competitors with tighter control. But Cordray still thinks the agency may make sense, as it may enforce stricter rules than the federal prosecutor’s office. “California can often be a leader for the nation,” he says. “If you’re a national company, you don’t want to do business differently from place to place. If California sets a higher standard, you would be inclined to meet it and enforce it nationwide. “
This is probably true in at least one area. According to several sources, while car dealerships operating under their normal DMV license would be exempted, those who engage in some form of loan would likely be covered by the new agency, which would go further than the federal CFPB, which gave dealers automobiles a complete exclusion. This is subject to implementation and interpretation, and dealers could always find a way out. But if that remains intact, it would be a starting point for the surveillance of auto dealerships that is not contemplated in federal law.
Under no circumstances can a state-based consumer agency fully cover a beaten CFPB. “A strong consumer protection agency in an economy the size of California can only be a good thing,” says Linda Jun, senior policy adviser at Americans for Financial Reform. “But with the onslaught on consumer protection at the federal level under the Trump administration and the inability to move forward in the face of new threats, we must remember that there is no substitute for a strong CFPB. “
Notwithstanding this important point and despite the exceptions for certain financial institutions, the concept of an agency dedicated to consumer protection is solid and should make the difference. Particularly at a time when there appear to be two justice systems – one for the rich and well-connected and one for everyone – having an agency in California with the opposite objective, designed to monitor the predations of the powerful on the population, could prove to be powerful. “DFPI is going to be a game changer,” Cordray says. “It could be a model for the country.”