February 10, 2019; Yahoo Finance
California is a leader when it comes to consumer protection, and by setting high standards, the state often brings the rest of the country along. It’s difficult for firms to sell different cars, for example, just to California. So, there is excitement over a new proposal from Governor Gavin Newsom. In his 2020–21 state budget, he has proposed creating a Department of Financial Protection and Innovation modeled on the federal Consumer Financial Protection Bureau (CFPB).
One of the architects of the proposal is Richard Cordray, the first permanent director of the CFPB. In an interview with Yahoo Finance News, Cordray remarked on the importance of this move by the nation’s biggest state. “This is a major, major initiative that will make a big difference, not only in California—certainly in California—but also nationally.”
Why is this so important? Americans are drowning in debt once again. In 2019, household debt—credit cards, mortgages, auto loans, and so on—reached $14 trillion, surpassing levels of debt in the run-up to the 2008 financial crisis. Student loan debt alone is over $1.6 trillion. Debt isn’t in and of itself a bad thing, but individuals and families can be badly hurt by unscrupulous lenders.
That’s why back in 2007, Elizabeth Warren proposed the Consumer Financial Protection Bureau. She believed a government agency modeled after the Consumer Products Safety Commission, which makes sure toasters don’t burn down the house and children’s toys don’t cause them to choke to death, could offer a similar kind of safety for financial products. These products had become increasingly complex, leaving consumers at the mercy of predatory lenders. That agency came to life as a result of the Dodd-Frank financial reform bill that passed Congress in 2010. Despite being embroiled in controversy from day one, under the Obama administration, the agency returned some $12 billion dollars to consumers who had been bilked by financial services and products.
Protecting consumers from financial fraud, however, is not high on the Trump administration’s to-do list. Though the CFPB has not been entirely dismantled, its mission has been changed from protecting consumers to promoting “access to free markets,” according to the American Constitution Society.
Newsom has proposed the California agency in response to the federal government turning away from CFPB’s original mission. A bill introduced into the state legislature on February 1st explains:
The lack of a single regulatory body over providers of financial products and services in California leaves California consumers vulnerable to abuse financial products and practices….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.
According to the legislation, the purpose of the new agency “shall be to promote consumer welfare, fair competition, and wealth creation” by:
- Promoting nondiscriminatory access to responsible, affordable credit on terms that reasonably reflect consumers’ ability to repay.
- Promoting nondiscriminatory access to consumer financial products and services that are understandable and not unfair, deceptive, or abusive.
- Protecting consumers from discrimination and unfair, deceptive, and abusive acts and practices in connection with financial practices and services.
- Promoting nondiscriminatory consumer-protective innovation in consumer financial products and services.
The need for a consumer watchdog agency, says Cordray, is the result of the dramatic increase in the use of credit. “People use credit cards more than ever, and mortgages…and student loans have proliferated to a degree that they didn’t exist 25 years ago,” he explained to Yahoo Finance reporter Aarthi Swaminathan. When people run into problems with these financial products, they are facing off against enormous companies. As Cordray notes, that can be very frustrating.
In its original vision, CFPB was intended as a place where consumers could direct their complaints and be assured that the agency would look into potentially nefarious practices. Warren saw the need to create CFPB in part because by the early 2000s state financial regulators had been neutered by changes in the way financial companies did business. How much California can do on its own remains to be seen. But Cordray is hopeful, saying the new agency can make “sure people are protected, that they are treated fairly, that things are being disclosed properly, so they can make good judgments about choices they make in their financial lives.”—Karen Kahn