States preparing to pick up slack if CFPB backs down

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WASHINGTON — As Republicans policymakers pursue efforts to revamp the Consumer Financial Protection Bureau and replace its leadership, state agencies are already preparing to fill any vacuum that might ensue if the CFPB steps back.

“We are seeing a significant uptick in activity by the states both legislatively and regulatorily,” said PJ Hoffman, the director of regulatory affairs at the Electronic Transactions Association, who was hired earlier this year specifically to lead the organization’s response to state-level measures.

In recent years, states have become more aggressive in their oversight of the financial industry — a trend that could be traced back to the Dodd-Frank Act and a growing sense that consumers must be protected from the types of predatory actors that caused and exacerbated the financial crisis.

The 2010 law contained a provision that expressly allowed state attorneys general to pursue companies for violations of certain federal laws, including the ban on unfair, deceptive or abusive conduct.

This cleared the way for state authorities to easily pursue companies that had also been investigated by federal regulators. Before that, "they had to argue over whether or not they had the authority to even make an inquiry,” said Joseph Lynyak III, a partner at Dorsey.

In an August report on "state battles" over lending regulations, the National Consumer Law Center pointed to a string of new local laws that had significantly changed usury rates across the country. South Dakota, for instance, had no restrictions on interest rates or fees until voters approved a ballot initiative this month to enforce a 36% cap.

“In state after state, high-cost lenders have sought to weaken state laws that protect consumers from high-cost installment loans by non-banks,” Carolyn Carter, the law center's deputy director, said in a press release. “Although there are some notable exceptions, consumers and their advocates have not only persuaded legislators to vote down most of these proposals, but have also won improvements in existing state laws.”

States have also become more aggressive on niche issues, like cybersecurity — with New York leading the charge in a tough new rule issued this year — as well as other areas like virtual currency.

The consumer protection fight has become particularly resonant under the Trump administration, as many advocates fear that once CFPB Director Richard Cordray leaves (his term expires in July 2018, but he is widely expected to leave soon to run for governor of Ohio), the new leader will dial back the CFPB's activities.

In Pennsylvania, a swing state that turned blue in 2015 (though it voted for President Trump in 2016), the newly elected attorney general Josh Shapiro has created a local Consumer Financial Protection Unit. Like the CFPB, the unit fields consumer complaints and focuses on “lenders that prey on seniors, families with students, and military service members,” according to a press release issued last month.

“Attorney General Shapiro places a high priority on protecting Pennsylvanians from financial scams,” Nicholas Smyth, a former CFPB official who was appointed to head the new unit, said in an interview. “We've always done good work in this area, but [he] wants to bring even more emphasis on it."

In Maryland, the state’s Democratic legislature in April passed a bill to create a Consumer Protection Commission, which would be in charge of filling in legislative gaps created by the Trump administration’s deregulatory efforts.

“States like Maryland are setting up legislative watchdogs,” said Avy Mallik, a consumer protection attorney at Civil Justice Inc., who testified in favor of the new commission. “There is a broader trend of state legislature making sure that people are protected and are not susceptible to the kind of behavior that occurred during the crisis.”

States are also bolstering their efforts by working across borders to share information on bad actors either through official forums, like lawsuits, or informal communication.

“We have regular calls with other states,” Smyth said. “We try to coordinate our efforts, because obviously a lot of the companies we are investigating are impacting consumers across the country.”

To be sure, if the CFPB does get repealed or declawed, the states will lose an important ally in the consumer protection fight.

For one, the CFPB wields more power than any of the 50 states on their own. Additionally, enforcement actions by the CFPB create an opportunity for a ripple effect, as states may follow up by pursuing companies for violating state laws comparable to the federal laws for which they were initially investigated.

“It's one thing to have a state attorney coming after you,” Lynyak said. “It's another thing to have the federal government coming after you.”

States have already banded together to publicly support the CFPB’s work. Last year, 18 state attorneys general signed a joint letter supporting the bureau’s rule banning mandatory arbitration clauses.

But states involved in these efforts are overwhelmingly Democratic, indicating one limitation to the work they will be able to do on consumer protection.

"Some states have got a more protectionist posture than others,” said Lynyak, citing California and New York.

Still, states have a significant role to play in enforcing consumer protection laws. And it is likely to grow if the CFPB pulls back.

"That's one of the great things about the state AGs,” Smyth said. “Even if things shift at the federal level, the states are always going to be working hard to protect consumers.”

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