Regulation Migration: An Update on the Movement of Enforcement for Financial Services Companies from the Bureau to the States
Since the 2016 election, insiders for the financial services industry have predicted that the Trump Administration would bring not just a roll-back in federal regulation, but a different, more relaxed approach to enforcement as well. At the same time, others have predicted that any roll-back in federal oversight on the federal level would be met with a corresponding uptick in activity from state Attorneys General and agencies charged with enforcing state UDAP laws.
This article provides a brief update on the movement of enforcement activity for financial services companies from the federal level to the states.
Much of the attention to whether or not a lightening of federal enforcement activity might occur has focused on the Bureau of Consumer Financial Protection (the “Bureau”). This attention makes sense considering the Bureau averaged two to four enforcement actions per month under its prior Director, Richard Cordray. However, since Director Cordray’s replacement Acting Director Mick Mulvaney took over in November of 2017, the Bureau’s enforcement activities have slowed to a crawl. In fact, the Bureau did not enact a single enforcement action during the first five months of Director Mulvaney’s tenure.
Since April of this year, however, the Bureau’s enforcement activities have seen an uptick, with the Bureau announcing five enforcement actions over the past few months. Still, as shown below, the perception that the Bureau is no longer serving as a primary enforcer of consumer protection laws is leading many states to take specific action to fill the perceived gap and may lead to additional compliance headaches for financial services providers down the road.
State Actions: Dodd-Frank Work-Around and Mini-CFPBs
States reacting to the changes at the Bureau, and, in particular, statements from Director Mulvaney signaling the Bureau would shift away from its governing enforcement philosophies under former Director Cordray, have done so by attempting in some ways to recreate the Bureau’s enforcement capabilities at the state level. One primary avenue the states have for achieving this objective is included in Dodd-Frank itself. Specifically, Section 1042 of Dodd-Frank grants state Attorneys General the ability to enforce the Dodd-Frank Act and its regulations, provided notice is given to the Bureau and any prudential regulator, at which point the Bureau may intervene. Given the posture of certain state Attorneys General toward the current leadership at the Bureau, it’s foreseeable that Section 1042 may be used on the state level to enforce applicable provisions of Dodd-Frank.
Aside from stepping into the Bureau’s shoes for purposes of enforcing Dodd-Frank, some states are taking action to create their own versions of the Bureau at the state level. In particular, Maryland, Pennsylvania, and New Jersey have created or empowered “mini-CFPBs,” or agencies charged with protecting consumers from being taken advantage of by bad actors in the financial services industry. The authority and responsibilities of these “mini-CFPBs” look strikingly similar to the authority and role of the Bureau, and include taking consumer complaints and investigating potential wrongdoing by financial services providers.
Aside from creating or expanding state agencies to mirror the enforcement role of the Bureau, states are also considering and passing laws designed to shore up their consumer protection statutes ahead of perceived retrenchment on the federal level. For example, on May 15, 2018, Maryland passed the “Maryland Financial Consumer Protection Act of 2018.” The act makes several notable changes to Maryland’s consumer protection laws to make it easier for the Attorney General to bring actions against companies engaging in abusive or deceptive acts. Some of the more notable changes to Maryland law included in the act include expanding the definition of prohibited conduct to include a broad prohibition on “abusive” behavior and to up the statutory penalties imposed on companies deemed to be engaging in deceptive or abusive acts. There’s a real chance that other states seeking to beef-up their own consumer protection statutes may look to Maryland’s act as a model.
Still, it is unclear if all of these changes at the state level will really amount to a significant increase in enforcement activity nationwide. Many states have budgets that are already at capacity, meaning their Attorney Generals do not have the resources to expand enforcement activities beyond their current levels. This has caused some commentators to doubt whether or not a move of enforcement initiative from the Bureau to the states is actually occurring or plausible at this time.
Conclusion and Take-Away
Commenters looking for evidence that the federal government is easing its enforcement activities with respect to the financial services industry, and that states are taking up the slack, do not need to look far. A handful of states are indeed taking very public action to fill the perceived gap in consumer protection by the Bureau. However, the majority of states have not significantly modified their enforcement activities and may even lack the budgetary ability to do so. In light of this, the “Regulation Migration” from the federal government to the states has thus far been a mixed bag. Nevertheless, as states continue to modify and increase their enforcement activities in response to what is happening at the federal level, providers should review and audit their compliance programs to ensure they address state, as well as federal, consumer protection and UDAP issues.