Meeting Invoice 1864 didn’t get a lot media or public consideration because it zipped by means of each homes of the Legislature on the final day of the 2020 session.
Superficially, it appeared merely to reconfigure the state’s monetary regulatory businesses into a brand new entity known as the Division of Monetary Safety and Innovation.
Nonetheless, these in California’s huge monetary trade had been paying numerous consideration as a result of the invoice creates a completely new regulatory regime with broad powers, together with fines of as much as $1 million a day, to police monetary gamers that hitherto have had little oversight.
The official rationale for the laws is that President Donald Trump’s administration neutered the federal Dodd-Frank Wall Avenue Shopper Monetary Safety Act of 2010, so the state should step in with an equal to protect in opposition to predatory monetary practices that hurt shoppers.
The brand new California Shopper Monetary Safety Regulation offers the reconstituted company authority to go after “abusive practices” whose definition within the legislation is pretty obscure. Thus, the company itself will outline the time period because it additionally decides which companies will face its scrutiny.
It seems that the brand new legislation will have an effect on companies concerned in debt settlement, credit score restore, test cashing, rent-to-own contracts, payday lending, pupil mortgage servicing and financing for retail gross sales. Nonetheless, its major goal appears to be monetary providers supplied by non-banks, notably what are known as “fintech corporations” that supply bank-like providers by way of the Web with out sustaining bodily places of work.
Fintechs, lots of them based mostly within the San Francisco Bay Space, have blossomed in recent times as a part of the digital economic system, competing with conventional brick-and-mortar banks. Their disruptive nature is just not in contrast to the problem that technology-based trip providers corresponding to Uber and Lyft pose to taxicabs and buses.
Late-blooming adjustments in AB 1864 exempted conventional monetary companies which are already regulated, corresponding to banks and credit score unions, from the brand new client safety legislation, main some analysts to conclude that its unspoken intention is to assist them stave off competitors from new youngsters on the monetary block.
The vagueness of the brand new legislation was encapsulated in what Gov. Gavin Newsom mentioned throughout a signing ceremony. The brand new legislation and the brand new division, he mentioned, will “create situations for innovation to flourish in a method the place we will steward that and we will simply work in opposition to its excesses. So we help risk-taking, not recklessness.”
Newsom additionally signed two different monetary safety measures, one which requires debt collectors to be licensed starting in 2022 and the opposite making a Scholar Mortgage Borrower Invoice of Rights.
Though the brand new state legislation is alleged to reflect the Dodd-Frank legislation, it accommodates no less than one important distinction. When federal regulators levy fines for what they contemplate to be dangerous conduct, the cash goes into the federal treasury. When state regulators impose their fines of as much as $1 million a day, the cash can be retained by the brand new company to finance extra exercise.
Will that give the brand new company a monetary incentive to skip over minor client points and go after large corporations? It’s a query that solely time will reply.
Considerably, too, the brand new investigative and regulatory mechanism contained in AB 1864 particularly doesn’t usurp the authority of the lawyer basic to additionally goal corporations beneath the state’s equally obscure “unfair competitors” legislation.
From its inception a decade in the past, Dodd-Frank has attracted criticism from enterprise executives for regulatory overkill. Will California’s new model be much less controversial? We received’t know till the brand new company places some definitional meat on its bones.
CalMatters is a public curiosity journalism enterprise dedicated to explaining how California’s state Capitol works and why it issues. For extra tales by Dan Walters, go to calmatters.org/commentary