This post has been updated with a comment from California Governor Gavin Newsom.
Frustrated with federal inaction, California aims to build a “mini” version of a federal agency that is tasked with consumer protection.
Billing it as California’s version of the Consumer Financial Protection Bureau (CFPB), Governor Gavin Newsom revealed in his proposed 2020-2021 state budget that the new entity — a Department of Financial Protection and Innovation — intends to “cement California’s consumer protection leadership amidst a retreat on that front by federal agencies including the [CFPB]” and “provide consumers greater protection from predatory practices.”
Richard Cordray, one of the architects of the proposal and the first director of the federal CFPB, told Yahoo Finance that the state’s move is monumental.
“California really is a very influential policymaker when it wants to be,” Cordray said in an interview. “This is a major, major initiative that will make a big difference, not only in California — certainly in California — but also nationally.”
A California state flag at the Coachella Valley Music And Arts Festival on April 14, 2017 in Indio, California. (Photo: David McNew/Getty Images)
Newsom revealed his overall budget proposal in late January, which includes the new CFPB proposal. More details were introduced in the state legislature on Feb. 1, in the form of a “trailer bill.”
The bill was clear in laying out its purpose.
“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,” the budget stated. “Unfair, deceptive, or abusive practices in the provision of financial products and services undermine the public confidence that is essential to the continued functioning of the financial system and sound extensions of credit to consumers.”
The proposal pushed for consumer financial protection laws and the new agency. Revisions by the Assembly and the Senate will be decided by June 15, and the bill would then go back to Newsom for his review (i.e. to sign or to veto).
California Gov. Gavin Newsom looks on during a a news conference about the state's efforts on the homelessness crisis on January 16, 2020 in Oakland, California. (Photo: Justin Sullivan/Getty Images)
‘There wasn’t a need for this 50, 60 years ago’
The need for a consumer watchdog in the first place was due to the stunning increase in the use of credit, Cordray explained.
“Things have changed dramatically in the last two generations, in terms of the financialization of our lives… People use credit cards more than ever, mortgages… And student loans have proliferated to a degree that they didn't exist 25 years ago,” he said, stressing that Americans overall are “carrying much more debt.”
But when they run into problems with these financial products, “they're often facing off against big financial companies,” Cordray explained. “And people can get very frustrated when they feel they're being treated unfairly and there's nothing much they can do about it.”
That’s where an entity like the federal or state CFPB steps in to help these consumers out, he added: “There wasn't a need for this 50, 60 years ago to anything like the degree there is a need today.”
The bottom line for creating such an agency, he said, is to make “sure people are protected, that they're treated fairly, that things are being disclosed properly, so they can make good judgments about the choices they make on their financial lives.”
A woman looks for credit cards she wants to melt over a hot plate as she tries to dig herself out of credit card debt during a sermon at the Miami Vineyard Community Church on March 7, 2009 in Kendall, Florida. (Photo: by Joe Raedle/Getty Images)
‘Plugging the gap’ left by the Trump administration
Two factors propelled the California’s mini-CFPB initiative into Newsom’s orbit.
First, the governor is relatively new — Newsom took office in January 2019 — and entered office deeply interested in consumer issues.
“When he was mayor of San Francisco, he tried to do an initiative to outlaw payday lending... and during his inauguration speech, he also talked about predatory lenders, and they have always been on Governor Newsom's mind,” Jan Lynn Owen, the former Commissioner of the California Department of Business Oversight and currently a senior advisor with Manatt, Phelps & Phillips, told Yahoo Finance.
The second was the rapidly growing concern overall, over who was enforcing consumer protection laws.
“Things have changed in ways that leave consumer advocates very concerned,” Cordray said. “And plugging the gap that's left is especially important.”
The Golden Bear Statue on a bridge crossing the Klamath River in California. (Photo: Visions of America/Education Images/Universal Images Group via Getty Images)
Owen noted that Newsom “is focused and he understands the issue, which is pretty, pretty wonderful... [and] Governor Newsom thinks that it's now time… as the Trump administration continues to undermine and weaken rules at the federal level.”
In a statement to Yahoo Finance, Gov. Newsom responded: “As the Trump administration undermines and weakens the rules that protect consumers from predatory businesses, California is filling the void and stepping up to protect families and consumers.”
California Assemblymember Monique Limon, who had previously introduced similar-minded legislation, and co-authored a “Student Borrower Bill of Rights” or AB 376, told Yahoo Finance that the effort was driven by the fact that “we wanted to do something to advance the consumer protections in the absence of the federal government being able to.”
Back in D.C., California Rep. Katie Porter cheered on the effort: “We need a strong Consumer Financial Protection Bureau that will protect everyday Americans from the predatory practices. This is an issue that affects the daily lives of all Americans, regardless of race, income level, or background. When the federal CFPB refuses to do its job, it’s up to states like California to make sure people aren’t getting cheated.”
The CFPB did not respond to a request for comment.
Kathleen Laura Kraninger on Capitol Hill in Washington, U.S., July 19, 2018. (Photo: REUTERS/Alex Wroblewski)
What does this mean for consumers?
So how exactly does this affect American consumers?
For student loan borrowers in California, for example, this move adds oversight into their lenders, servicers, debt collectors, and more — which consumer advocates hail as a win.
“California’s response is a lesson in the power of public policy to improve student loan borrowers’ lives,” former CFPB Ombudsman Seth Frotman, who now leads the Student Borrower Protection Center, said in a previous hearing. “But more than that, it can create a roadmap for how the government oversees all of consumer finance. It can provide the blueprint for California to build an oversight framework that matches the complexity and nefariousness of a financial sector that seems to know no bounds.”
For people like Limon — who said she’s fielded calls from constituents who have been scammed or defrauded and didn’t know where to go — the new agency represents a consistent way to screen the volume and the types of predatory practices that consumers were reporting to address existing issues and prevent abuses from taking place.
