States Flexing Enforcement Muscle on Prospect of CFPB Pullback

By Chris Bruce

States are poised to boost enforcement in areas such as auto finance, student loans, and money laundering amid concerns of a pullback by federal regulators, lawyers told Bloomberg BNA.

Stepped-up state activity, including multi-state actions, could be driven by changes at the Consumer Financial Protection Bureau. CFPB Director Richard Cordray may soon leave the agency, which could result in a downturn in enforcement action. The CPFB, which has been under fire since its creation under the 2010 Dodd-Frank Act, could be further weakened if President Trump and congressional Republicans successfully push legislative changes to curb many of the bureau’s powers.

That means more state-initiated enforcement activity ahead, including action by state attorneys general, said Lucy Morris, the CFPB’s former deputy enforcement director for litigation. “I do think we’re going to see increased state attorney general enforcement activity,” Morris, now a partner with Hudson Cook in Washington, told Bloomberg BNA.

Pennsylvania has already taken a big step in that direction. Attorney General Josh Shapiro in July unveiled a new Consumer Financial Protection Unit to give Pennsylvania consumers more protection and tapped Nicholas Smyth, a CFPB veteran, to head the new office.

According to Morris, establishment of the new Pennsylvania unit — which some have dubbed a “mini CFPB” — may signal more activity by other states if the CFPB takes a less prominent role going forward. “It’s significant that the Pennsylvania attorney general is dedicating and committing resources to that effort,” Morris said. “There may be some concerns that there will be less enforcement at the federal level.”

In Maryland, former Commodity Futures Trading Commission Chairman Gary Gensler is taking the helm of the newly formed Financial Consumer Protection Commission. The state body is charged with assessing the potential impact of changes to Dodd-Frank and other federal laws and policies and will “recommend ways to protect Marylanders in financial transactions and services,” according to its website.

As head of the CFTC during the Obama administration, Gensler led federal efforts to tighten rules on the $400 trillion derivatives market following the financial crisis and the enactment of Dodd-Frank.

The Maryland commission Gensler will chair has a statutory two-year life span and is authorized until June 30, 2019, though state lawmakers could extend its life.

Joint Effort on Student Loans

One under-appreciated factor going forward is the importance of multistate actions, according to Ashley L. Taylor Jr., a partner in the consumer financial services practice with Troutman Sanders in Richmond. States increasingly are joining together on financial enforcement and regulation on a concerted basis, Taylor told Bloomberg BNA. Taylor founded and now co-chairs an American Bar Association committee on state attorneys general matters.

As an example of state coordination, he cited efforts in July by a coalition of attorneys general from 18 states and the District of Columbia — efforts that include an ongoing lawsuit — to block the U.S. Department of Education from rolling back rules that protect student loan borrowers. The states said the department’s move to delay the November 2016 rules violated the federal Administrative Procedure Act. “That’s a concrete example of state attorneys general stepping in to fill what they see as a regulatory void,” Taylor said.

Although multistate actions against companies aren’t new, they’ll only take on more importance, he said. “There’s a significant difference between one state taking action and states banding together and taking collective action,” Taylor told Bloomberg BNA. “The pressure that a multistate investigation creates for a company is significant,” he said.

Companies will also need to think more about how they manage information. Any company that receives an inquiry from a regulatory body has to weigh the possibility that the information it provides, including trade secrets and other critical information, will be shared with other regulators, such other state regulators, the CFPB, the FTC, or some combination of those bodies.

“You can no longer look at things in isolation,” said Taylor. “You have to think about these things from the very beginning of a case.”

Picking Up the Slack

Even if particular practices don’t result in enforcement action at the federal level, they may run afoul of state laws. State attorneys general have plenty of laws at their disposal, according to Joseph Lynyak III, a partner in the Washington and Los Angeles offices of Dorsey & Whitney.

“Something that’s been lost is that a violation of a federal consumer financial law is frequently also deemed to be a violation of a state consumer law,” Lynyak told Bloomberg BNA. “Accordingly, there really is a very strong set of tools that attorneys general have for consumer protection if they want to use them.”

Although states have focused on mortgage servicing, they’re now expanding that focus to include other forms of loan servicing, such as auto finance and student loans, according to Morris. “Those are areas that some states see as lacking in sufficient protection for consumers,” she said.

Laura R. Biddle, counsel with Hogan Lovells in Washington, said anti-money laundering (AML) scrutiny is rising at the state level. “The majority of new actions we’re seeing on the bank side are related to anti-money laundering requirements,” she said. One such state is New York, where new state AML regulations took effect in January. “New York now has its own anti-money laundering law, and it’s very forceful in initiating actions against large institutions, especially foreign banks with a New York presence,” Biddle said.

New York was a robust enforcer prior to the new rules, levying more than than $1 billion in fines against several foreign banks for alleged AML and other violations, among them Deutsche Bank, Italian bank Intesa Sanpaolo, and Agricultural Bank of China, according to Bloomberg Law’s AML Enforcement Tracker.

New York’s law may end up as a model for others, Biddle added, saying more states “may look at enacting potentially stricter laws like New York has done.”

Focus on Fintech

Financial technology companies are also being given a close look by the states, said Scott Talbott, senior vice president of government affairs for the Electronic Transactions Association (ETA). “At ETA, we’ve seen a dramatic increase at the state level in examining policy matters related to or focused on financial services and payments, but a lot of the focus is on fintech,” Talbott told Bloomberg BNA.

He said his group is seeing several major themes in terms of increased state action and attention, even outside the pure enforcement area. In general, he said, states are wrestling with how to regulate the new financial services marketplace in light of fintech advancements. “They’re looking at all the new products and services being deployed by the industry and they’re confronted with the reality that the tools they have, the existing laws, are outdated or not modernized,” he told Bloomberg BNA.

That’s also happening against a backdrop where state budgets are already stretched, according to Talbott. States want to boost tax revenues, and are looking at the financial services and payments industry as a potential source for those funds, he said, by means of taxes on payments, new taxes or fees on money transmitters, or other measures.

Then there are more fundamental changes on the horizon, where some states want to change the role of the payments industry. For example, Massachusetts is considering a rule in connection with an appropriations measure that would require payment companies to collect and remit sales tax on merchants on a daily basis. At present, sales tax is calculated on a monthly basis, he said.

“It’s an important and worrisome development because it’s a move by the state to change how payments companies do business,” said Talbott. “They’re asking us to become tax collectors.”

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