California’s State of Emergency Jeopardizes Proposed Sweeping Changes at the Department of Business Oversight Given Likely Budget Adjustments to Respond to COVID-19 Pandemic

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By James D. Colleran

On January 10, 2020, the Office of the Governor of California published its 2020–2021 Governor’s Budget Summary, a comprehensive overview of Governor Newsom’s proposed statewide fiscal initiatives for the upcoming year. Among the most momentous undertakings discussed in the Budget Summary is the Governor’s proposal to expand the Department of Business Oversight’s (DBO) authority and capacity to protect consumers and foster the responsible development of new financial products. The Governor also proposes to rename DBO to the Department of Financial Protection and Innovation (DFPI) to better reflect its current and future role.

Specifically, the Governor proposes a new law, the California Consumer Financial Protection Law (CCFPL), outlined in the Governor’s proposed Budget Trailer Bill, which, according to DBO’s website, “seeks to cement California’s consumer protection leadership amidst a retreat on that front by federal agencies including the Consumer Financial Protection Bureau, which also remains subject to constitutional challenge.” The Governor’s budget proposes $10.2 million and 44 positions in 2020–21, increasing to $19.3 million annually and 90 positions in 2022–23 to support DFPI’s implementation of these changes and related activities.

A Legislative Analyst’s Office (LAO) report on the restructuring of DBO, dated February 26, 2020, provides a detailed analysis of the new law and newly proposed budget but concludes that it “raises several key questions related to the (1) appropriate role for DFPI, (2) preferred approach to funding DFPI and its new proposed activities, (3) regulation of industrial banks, and (4) process that should be used for making policy choices. We also find that the specific choices the Legislature makes could affect the amount and timing of the funding needed by the department.”  Ultimately, the LAO recommends that the proposed statutory changes work through the legislative policy process, and not a budget trailer bill.  “This would allow the changes to be vetted by the policy committees that have expertise on the specific issues that are raised.”

In light of the Governor’s Proclamation of a State Emergency on March 4, 2020 to prepare the state to address the COVID-19 pandemic, however, the Governor’s proposed budget will significantly change.  On March 24, 2020, the California Department of Finance issued a Budget Letter to all state Agency Secretaries, Department Directors, Departmental Budget and Accounting Officers, and Department of Finance Budget and Accounting Staff, announcing that the state expects a severe drop in economic activity, with corresponding negative effects on anticipated revenues, as a result of the virus. Accordingly, the Department of Finance will be reevaluating all budget changes, and these reevaluations will be reflected in the May Revision of the budget.

At this writing, it is unclear how the Governor’s initial proposal with respect to the DBO revamp will be impacted by these new developments.

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