Rich Pedroncelli / AP
California lawmakers are rushing to create a new financial protection oversight agency by the end of the month. They say it’s necessary because, under the Trump administration, the main federal regulator was crippled.
And they say that during the pandemic, millions of Americans who are in dire financial straits are more vulnerable to predatory lenders, debt exit scams, and other wrongdoing.
A study last year found that the enforcement activity of the Federal Bureau of Consumer Financial Protection fell 80% from 2015. And money returned to consumers fell 96%.
“We are now, as states, left to do the work ourselves,” said Monique Limón, member of the California assembly.
Together with Governor Gavin Newsom, she proposed to create the new state watchdog agency, which would be called the Department of Financial Protection and Innovation. But a legislative deadline means they have to do so by August 31.
“Consumer protection is one area where California wants to show we care,” says Limón. “As the world’s fifth largest economy, we believe this is very important and the right thing to do.”
The new agency would give the state greater power and capacity to control aggressive debt collectors, credit repair programs, predatory lenders and other shady financial practices.
Limón proposed the agency before the pandemic. But she says given the economic fallout, the need for more oversight is greater now.
“The timing is even more important,” she said, noting that since the Covid epidemic, consumer complaints about financial malfeasance in the state have increased by 40%. State officials say some of the complaints involve mortgage companies, personal loans and companies that promise to help people get out of debt.
A long list of fair lending and consumer protection groups support the proposal. With over 8 million people claiming unemployment in California alone, “a lot of people are on the verge of insolvency here,” says Suzanne Martindale, who works on policy issues for Consumer Reports.
“A bad loan, a risky payday product, an aggressive debt collector, who can push someone to the brink of poverty, bankruptcy and homelessness at the worst possible time in the midst of a public health crisis “, she says. “So the business is even stronger now.”
In a recent legislative hearing, groups of small businesses said they wanted the new agency to protect them from predatory financial practices as well.
Of course, financial companies are generally not big fans of additional regulations. But Beth Mills of the California Bankers Association says she is supporting the new agency by better controlling some of the banks’ competitors.
She says many online lenders, for example, face much looser regulations than banks.
“We would love to regulate them further to make sure we operate under the same rules,” Mills said.
But when it comes to the companies her group represents – which she says are mostly big and small banks and state lenders, she says, “We would like to be exempt from the bill because the banks and financial institutions that we represent are already very heavily regulated at the state and federal levels.”
And it seems financial companies have the ear of some lawmakers. A group of moderate Democrats are pressuring Newsom to allow significant exclusions for many financial companies, a source familiar with the proposal negotiations told NPR. And that could weaken the new agency’s ability to go after businesses that take advantage of people.
Richard Cordray, former director of the Federal Bureau of Financial Consumer Protection, says that would be a big mistake.
“I don’t think the legislature should prevent consumers from getting their money back when they have been the victims of unfair, deceptive and abusive practices,” said Cordray, who consulted on the bill.
Cordray says that if done right, the new agency could be a model for other states on how to have their own financial monitoring agency. And he says Congress considered that when it created the federal CFPB under the Dodd-Frank Financial Reform Act.
“The financial reform law,” he says, “included an implicit promise that there would be financial consumer protection at the federal level, but there would also be room for meaningful consumer financial protection at the federal level. ‘State and that the two could work in partnership. “
He said he also envisioned that “if one did its job and the other pulled out, there would still be consumer protection.” Cordray says this new agency could keep that promise.
But, a legislative deadline means the bill must be passed by the end of the month if the agency is to be created this year. There is a key audience with lawmakers this weekend.
Technically, the new agency would be created by restructuring and expanding the size and authority of an existing agency called the Department of Business Oversight.