With the stroke of his pen, Governor Newsom morphed the Department of Business Oversight (DBO) into the Department of Financial Protection and Innovation (DFPI) with responsibility to enforce all state laws relating to “persons offering or providing consumer financial products or services.” It is an expansion of authority beyond what was vested in DBO. The Governor originally proposed the concept as part of his budget, but the Legislature amended it into AB 1864 (Limon), the California Consumer Financial Protection Law (CCFPL), when the budgetary process was derailed by periodic legislative shutdowns from COVID-19 quarantine and sanitation requirements.
Most of the provisions, but not all, in the CCFPL are from the federal Dodd-Frank Act Title X which currently regulates financial service providers and the banking industry. The federal Consumer Financial Protection Bureau was created to protect consumers from discriminatory and unfair practices, assure timely and understandable financial information, provide consistent enforcement and efficient operation of markets for consumer financial products and services while at the same not burden the industry with unwarranted regulations.
According to the findings in AB 1864, there is not a dedicated financial services regulator with broad authority over providers of financial products and services which leaves consumers open to abuse. California compliant businesses are forced to compete on an unlevel playing field with unregulated providers. Also mentioned is technological innovation that “offers great promise,” but also “poses risks to consumer and challenges to law enforcement” which suggests that services are unregulated. It is thought that financial technology companies (fintech) are the major target of the bill. The financial service providers and banking industry worked with DBO early in the process and with the author to clarify which entities were already regulated were neutral on the bill.
Fintech refers to the integration of technology into offerings by financial services companies in order to improve their use and delivery to consumers. Fintech companies are generally startups companies that exist on virtual platforms. These companies provide an alternate source of seed capital, loans, financial advice, digital financial solutions, and online services. Fintech companies mostly work with small-scale entrepreneurs. Morningstar, Acorn and Chime are a couple of the most innovative fintech companies.
The CCFPL gives the department expanded authority and resources to create an Office of Financial Technology Innovation, expands to require any “covered person” to file a registration, pay a fee, file annual or other special reports, and submit to background checks. It gives investigatory and subpoena power, allows civil actions or administrative proceedings, significant penalties, and registration revocation.
Although the law expands DFPI’s authority over “covered persons,” it also expands the list of individuals and entities exempt from the law. Those exempted:
- An escrow agent under the Escrow Agents Law.
- A finance lender, broker, program administrator, or mortgage loan originator under the California Finance Law.
- A bank, bank holding company, trust company, savings and loan association, savings loan holding company, or credit union acting under the authority of federal law or the law of another state.
- A residential mortgage lender servicer, or originator under the Residential Mortgage Lending Act.
- A check seller, bill payer, or prorate under the Check Sellers, Bill Payers, and Proraters Law.
- A capital access company under the Capital Access Companies Law.
- An organization doing business subject to the Farm Credit Administration.
The broad jurisdiction of the statue applies to entities that previously were not licensed by the DBO, and who previously were not subject to oversight by a primary regulatory. This may include:
- Fintech companies;
- Debt collectors;
- Credit reporting agencies;
- Credit repair providers;
- Debt settlement providers;
- Check cash storefront;
- Rent-to-own contractors;
- Other financial services providers who are currently unregulated or under-regulated.
It will take time to discover which parties DFPI will consider “covered persons.” Put plainly, if a financial service provider is not currently regulated, they probably will be in January 2021 when AB 1864 becomes effective. It is likely that licensees impacted by AB 1864 were not aware of the legislation.