As the federal government's chief consumer protection agency shifts its focus toward consumer financial education and away from enforcement actions, two key states have taken tangible steps to develop their own consumer financial regulators.
The governors of California and New York announced plans last week to create mini versions of the Consumer Financial Protection Bureau to oversee consumer-focused financial companies and products in their respective states.
CFPB Director Kathleen Kraninger, appointed by Republican President Donald Trump, has emphasized informing, educating and engaging consumers through various programs and initiatives to help them avoid financial pitfalls.
That strategy is a marked departure from that of the CFPB's first director, Richard Cordray, who focused more on enforcement and who said in an interview that "the federal bureau has retreated over the last two years ... ."
Kat Taylor, founder and CEO of Oakland-based Beneficial State Bank and wife of Democratic presidential candidate Tom Steyer, said the agency's shift has left a void in the oversight of lending practices, which is harmful to low-income individuals.
California Gov. Gavin Newsom proposed creating a CFPB-like state agency in his 2020-2021 budget as the agency under President Donald Trump has shifted its focus.
Source: Associated Press
On Jan. 10, California Democratic Gov. Gavin Newsom announced that the Department of Business Oversight will be renamed the Department of Financial Protection and Innovation and that his 2020-21 budget included $10.2 million and 44 positions for it to establish and oversee the California Consumer Financial Protection Law, "which will provide consumers with more protections against unfair and deceptive practices when accessing financial services and products."
The agency's funding and staff will grow to $19.3 million and 90, respectively, in fiscal year 2022-23, according to the governor's budget summary.
Newsom told reporters that while the federal government is "getting out of the financial protection business; we're getting into it ... Trump's pulling away; the state's asserting itself."
"It's going to be about facilitating new innovation, fintech, others, but also about enforcement: expanding scope and tools to go after debt collectors, to go after payday lenders and the like," Newsom said.
The Golden State's new initiative comes after Taylor, Cordray and others spent months pushing state lawmakers to ramp up consumer financial protections.
California Bankers Association spokesperson Beth Mills said the group supports the proposal's aim to bring nonbank lenders under the same rules as banks but that the organization will "take a closer look" as the proposal's impact on California banks and financial services companies becomes more clear.
In 2019, the group voiced opposition to the creation of an additional financial regulator.
New York Democratic Gov. Andrew Cuomo announced Jan. 8 that he would introduce legislation that would help enhance the state's Department of Financial Services ability to: stop practices deemed deceptive or abusive; eliminate exemptions for consumer financial products and services; close loopholes for regulated entities; and cap fines at the greater of $5,000 and twice the size of damages incurred from a violation.
A spokesperson for the New York Bankers Association declined to comment.
The proposals still need approval by the California and New York state legislatures and will likely face legal challenges.
Compass Point policy analyst Isaac Boltansky wrote in a note to clients that regardless of the outcomes of the California and New York proposals, "we continue to believe that certain states will push to counterbalance shifts in consumer financial protection at the federal level."
Former CFPB Director Cordray said that it is unlikely that other states have the capacity to create and maintain their own consumer protection agencies due to their limited resources relative to California and New York.