New California Financial Watchdog Would Take Aim At Predatory Lenders Amid Pandemic California may be on the cusp of creating a watchdog agency. Proponents say federal regulators aren't doing their job, leaving leaving millions of Americans vulnerable during the coronavirus crisis.

New California Financial Watchdog Would Take Aim At Predatory Lenders Amid Pandemic

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STEVE INSKEEP, HOST:

Millions of Americans who are short on money in the pandemic are vulnerable to scams and predatory loans. California lawmakers want to protect them by creating a new financial protection watchdog agency. They say they have to do that because the federal government hasn't done its job. NPR's Chris Arnold reports.

CHRIS ARNOLD, BYLINE: Critics say that under the Trump administration the main federal watchdog, the Consumer Financial Protection Bureau, has been paralyzed. One study last year found that its enforcement activity plunged by 80% from 2015.

MONIQUE LIMON: We are now as states left to do the work ourselves.

ARNOLD: California Assembly member Monique Limon, along with the governor, is proposing to create the Department of Financial Protection and Innovation. It would give the state broader power to police aggressive debt collectors, predatory loans and other shady practices. Limon proposed it before the pandemic, but now...

LIMON: The timing of it is even more important. You see that at the California level, since COVID, we've seen an increase of 40% consumer complaints. And we want to help them.

ARNOLD: Some of those complaints are about 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 are backing the proposal.

Suzanne Martindale works on policy issues for Consumer Reports.

SUZANNE MARTINDALE: With millions of people in California alone who have filed for unemployment, many people are teetering on the brink of insolvency here. So, you know, a bad loan, a risky payday product, an aggressive debt collector - that can push someone over the edge into poverty, into bankruptcy and homelessness at the worst possible time - in the middle of a public health crisis.

ARNOLD: Financial firms usually aren't big fans of more regulation. But Beth Mills with the California Bankers Association says it's OK if the new agency wants to better police some of the banks' competitors. She says online lenders, for example - many face much looser regulations than the banks do.

BETH MILLS: We would welcome greater regulation on them to make sure that we're operating under the same rules.

ARNOLD: But when it comes to the companies that her group represents, which she says are most of the banks and lenders in the state, large and small...

MILLS: We would like to be exempt from the bill because the banks and financial institutions that we represent are already very heavily regulated at both state and federal level.

ARNOLD: And it appears the financial firms have the ear of some lawmakers. A source close to the legislative negotiations tells NPR that a group of moderate Democrats is pressuring the governor to allow for large carve-outs for many companies, and that that could mean a much weaker watchdog. Richard Cordray is a former director of the federal Consumer Financial Protection Bureau. He's been consulting on the bill and says that would be a big mistake.

RICHARD CORDRAY: I don't think that the legislature should make it hard for consumers to get their money back when they've been victimized by unfair, deceptive and abusive practices.

ARNOLD: Cordray says if it's done right, the new California agency could be a model for other states for how to have a tough financial watchdog agency of their own. But a legislative deadline means the bill has to get passed by the end of the month. There's a key hearing with lawmakers over the weekend.

Chris Arnold, NPR News.

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