Potential Surge in State CFPB Enforcement Activity
State attorneys general and financial services regulators may be highly motivated to ramp up their enforcement activity in any perceived void created by Cordray’s eventual departure.
By Sue Johnson, Strategic Alliance Consultant
Both critics and supporters of the Consumer Financial Protection Bureau (CFPB) are awaiting developments that will determine the direction of the agency over the next several years.
So many questions: Will the full First Circuit Court of Appeals in the CFPB’s legal dispute with PHH uphold a three-judge panel’s October 2016 ruling that the CFPB’s Director should be accountable to the President, opening the door for President Trump to fire Director Richard Cordray? Will Trump try to fire him with cause regardless of the ruling? Even if Cordray survives these challenges, he is certain to leave when his term expires in July 2018, allowing Trump to nominate a Director who likely would have a less aggressive approach to consumer financial protection law enforcement.
However, little attention has been paid to state attorneys general and financial services regulators, many of whom will be highly motivated to ramp up their enforcement activity in any perceived void created by Cordray’s eventual departure. Thus, it is worth paying attention to where the potential danger spots are, and to prepare now for increased state enforcement activity.
The Danger Spots
Expect certain states to be more active in filling any enforcement gap they think will be created by a change at the helm of the CFPB.
Currently, 21 states have Democratic attorneys general, who traditionally have taken a more aggressive approach towards general consumer protection enforcement. One also could look to the 16 Democratic attorneys general who signed a motion to intervene on behalf of the CFPB in its appeal of the PHH ruling, saying that they have a “vital interest” in enforcing consumer financial protection laws. The motion, which was denied, was signed by attorneys general in Connecticut, Delaware, Hawaii, Illinois, Iowa, Maine, Maryland, Massachusetts, Mississippi, New Mexico, New York, North Carolina, Oregon, Rhode Island, Vermont, Washington, and the District of Columbia.
Financial services attorneys also point out that Democratic-controlled states such as California, Illinois, Massachusetts and New York (through Department of Financial Services Superintendent Benjamin Lawsky) are particularly known for taking an activist approach toward consumer financial protection law enforcement.
Many state attorneys general or regulators—including Lawsky and attorneys general in Illinois, Maryland, Virginia, Florida and Connecticut—already filed lawsuits under Dodd-Frank (often in coordination with the CFPB), Federal consumer protection statutes, and state consumer protection laws. Attorneys general network with each other through the National Association of Attorneys General and the Democrat Attorneys General Association (DAGA), enhancing the possibility for successful consumer financial protection enforcement actions to spread to other states.
Laws That State Regulators Can Enforce
States that pursue enforcement actions have a variety of laws they can use to challenge consumer finance practices.
- State UDAP Laws: Most states have consumer protection statutes that prohibit “unfair and deceptive acts and practices” (UDAP) that generally are not subject to federal preemption.
- Dodd-Frank’s UDAAP Provisions: Dodd-Frank authorizes state attorneys general and regulators to bring enforcement actions under its broader “unfair, deceptive and abusive acts and practices” UDAAP ban. According to a paper by the National Consumer Law Center, the ability to enforce Dodd-Frank’s UDAAP provisions “may be especially helpful in states that have holes in their UDAP statutes; as a counter to any claim that a state UDAP statute is preempted; and if the conduct is ‘abusive’ but not as clearly unfair or deceptive”.
- Federal Consumer Protection Statutes: Dodd-Frank authorizes a state attorney general or regulator to bring a civil action against any entity that is “state-chartered, incorporated, licensed, or otherwise authorized to do business under state law” under Title X of Dodd-Frank and its regulations, which include consumer mortgage regulations such as “ability to repay” and steering. In addition, some Federal Statutes (e.g., RESPA, the Fair Credit Reporting Act and the Truth in Lending Act) expressly confer on state attorneys general the authority to enforce all or part of these laws.
- State Consumer Protection Statutes: Many states have their own consumer financial protection laws, including laws that specifically restrict affiliated businesses or prevent salespersons from wearing “two hats” in real estate or mortgage transactions.
Summary
Providers of consumer financial services need to be prepared for this potential surge in state enforcement activity. While states may not have the supervisory and research capacity of the CFPB, a good compliance management system that is knowledgeable about relevant state law and regulators could significantly lower a company’s future legal risks.
