Insight: A Shift in Regulation From the CFPB to the States

Allison Schoenthal

Allison Schoenthal

Allison Schoenthal is the head of the Consumer Finance Litigation Practice at Hogan Lovells. Allison has over a decade of experience representing banks, trusts, lenders, government-sponsored enterprises, private equity companies, and loan servicers. She defends clients in state and federal litigation, as well as against enforcement actions and investigations by government entities including the U.S. Attorneys’ Offices, Attorneys General and Consumer Financial Protection Bureau (CFPB), and also provides compliance advice and risk assessments.

The consumer finance industry should not get too comfortable thinking that their regulators are in retreat. While the reach of the Consumer Financial Protection Bureau (“CFPB”) may have been curbed since Acting Director Mick Mulvaney took office late last year, state regulation is coming. Many states are preparing, both the Attorneys General and state regulators, to take over where the federal government is leaving off. The consumer finance industry is a headline-worthy target that attracts consumer complaints, and voter attention. This is especially important as multiple attorneys general prepare to run for governor this year. Here is what to expect, and which states to watch.

CFPB Has Left a Void

The CFPB has not filed a new enforcement action in court since Mick Mulvaney became Acting Director in November 2017. Although the CFPB has quietly continued to move forward with ongoing enforcement actions and has even entered a handful of consent orders, Acting Director Mick Mulvaney has made it clear that he would like state regulators to shoulder more of the enforcement burden going forward. In February 2018, he spoke at the National Association of Attorneys General conference and announced that the CFPB would be “looking to the state regulators and state attorneys general for a lot more leadership when it comes to enforcement.” He further suggested the states “know better” how to protect consumers in their own states.

The states have the tools to pick up where the CFPB left off, and the CFPB has offered to hand over the reins. But will the states take them? They haven’t yet – but they could soon.

Past Coordination

The states may have lost a powerful partner in the CFPB. Certain Attorneys General recently complained that a dismantling of the CFPB’s independence would harm the “States’ ability to enforce the many consumer financial laws that protect their residents.” Some states believe they need the power, resources and information provided by the CFPB to conduct joint investigations, coordinate enforcement actions and negotiate joint settlements.

To a large extent, coordinating with the CFPB has worked well for the states. The CFPB has joined with various states, often through the Multistate Mortgage Committee or a joint action with Attorneys General, to conduct broad investigations that have resulted in high dollar consent judgments. For example: A December 2013 consent order, between Ocwen and the CFPB, Attorneys General and state regulators in 49 states and Washington, DC, required the mortgage servicer to pay $2 billion in principal reductions and $125 million to customers. In 2016, in a joint state-federal settlement with the Department of Justice (“DOJ”), Department of Housing and Urban Development (“HUD”), CFPB and 49 state Attorneys General and DC, HSBC agreed to pay $470 million to address mortgage origination, servicing and foreclosure abuses.

States have pursued multi-state enforcement actions, without CFPB or DOJ involvement. When they have, the states have had fewer resources at their disposal, must manage all coordination themselves, and frequently secure smaller fines.

The States Will Step In

The state Attorneys General and the state regulators (i.e. a state department of banking) are positioned to handle investigations and enforcement actions previously left to the CFPB to pursue, and some states are actively gearing up to do just that.

Section 1042 of the Consumer Financial Protection Act (“CFPA”) empowers state Attorneys General and regulators to bring civil actions to enforce the provisions of the CFPA as well as regulations issued by the CFPB under Title X of Dodd Frank, including its oft-used provision prohibiting unfair, deceptive or abusive acts or practices (“UDAAP”). See 12 U.S.C. § 5552 (effective June 29, 2012). In addition, various federal consumer protection statutes give direct enforcement authority to state Attorneys General or state regulators, including the Truth in Lending Act, Real Estate Settlement Procedures Act, and the Fair Credit Reporting Act. In other words, the states already have lots of power, and are just now learning how to use it.

Certain states are strengthening their arsenals by creating mini-CFPBs. State Attorneys General in Massachusetts, Maryland, Pennsylvania and Delaware have formed state consumer protection units within their offices. In Maryland, the state legislature also established the Maryland Financial Consumer Protection Commission in 2017, charged with assessing the impact of potential and actual changes to federal financial laws and providing recommendations for State and local action to protect Maryland residents. This past April, the New Jersey Attorney General announced that he and the Governor will “fill the void left by the Trump Administration’s pullback of the Consumer Financial Protection Bureau” by establishing what the Attorney General’s press release referred to as a “state-level CFPB.”

The full impact of the increased state commitment to consumer protection is not yet known. But it’s clear that several state entities stand poised to fill the enforcement gap created by a more restrained CFPB.

The States Will be Compelled to Protect Their Constituents

There are several reasons why the states will feel compelled to step in. First, states need to protect their constituent consumers. States, similar to the CFPB, determine priorities based in part on the complaints received from consumers. Consumer complaints relating to data privacy and debt have recently attracted scrutiny from a broad field of enforcers and regulators, and will be an area of interest for state regulators going forward. DOJ’s recent announcement of a Task Force on Market Integrity and Consumer Fraud, established pursuant to a Presidential Executive Order, highlighted the need to protect the elderly, service members and veterans. States can be expected to look to protect those groups as well. Second, on its website, the CFPB touts its recovery of $12.4 billion in consumer relief from enforcement actions; funds which could now go to individual states’ consumers, and coffers. Third, politics. With elections upcoming, consumer protection is a hot-button campaign issue.

Conclusion

While the CFPB takes a step back to reassess its focus and the consumer finance industry exhales, the break will be short-lived. States will pick up where the CFPB has left off.

While the CFPB and states have coordinated in the past, fewer joint investigations and settlements are expected going forward. To the extent that states increasingly move on their own enforcement trajectories, the resulting lack of coordination and resources could pose a challenge for those regulators. However, more disparate enforcement efforts will also pose new challenges to companies that provide consumer financial services. Such companies could soon find themselves simultaneously responding to requests for information, managing supervisory exams and defending enforcement actions focused on a variety of concerns and initiated by multiple state enforcers at the same time.

We have not seen a noticeable uptick in state enforcement efforts, yet, likely because state agencies are already busy with planned exams and other activities. But the states are gathering resources, staffing their “state CFPBs” and may soon be compelled to step in.

Those in the industry should be proactive - track and address themes in customer complaints, prepare to respond to all their regulators, and get to know the states regulators before they come knocking.

Allison Schoenthal is the head of the Consumer Finance Litigation Practice at Hogan Lovells. Allison has over a decade of experience representing banks, trusts, lenders, government-sponsored enterprises, private equity companies, and loan servicers. She defends clients in state and federal litigation, as well as against enforcement actions and investigations by government entities including the U.S. Attorneys’ Offices, Attorneys General and Consumer Financial Protection Bureau (CFPB), and also provides compliance advice and risk assessments.

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