State Attorneys General Are the New Bank Regulators
Spurred by the financial crisis and its impact on their constituents, state attorneys general appear to be carving out a new role as de facto bank regulators. This trend, an unexpected fall out of the financial crisis and the passage of Dodd-Frank, may not as yet be fully appreciated. However, it seems increasingly clear that state AGs will be important arbiters of the way banks do business on a going forward basis.
Anyone who doubts this is true need only consider how state AGs are already engaged in defining bank behavior:
- The so-called "robo-signing" investigation is led by Iowa Attorney General Tom Miller. This multistate initiative seeks not only to correct errors in the foreclosure process, but to redefine mortgage servicing practices and to obtain an estimated $25 billion in relief for under water homeowners. And this proposed settlement may not be the end of the story, since attorneys general of some of our largest states are reluctant to sign on.
- The Obama administration's new financial fraud task force creates an important role for state AGs, including appointment of New York AG Schneiderman as co-chairman. This task force clearly contemplates a significant role for the state AGs in investigating and pursuing remedies against financial executives.
- The Dodd-Frank Act contains specific authorization for state AGs to enforce rules promulgated by the new Consumer Financial Protection Bureau.
- The National Association of Attorneys General has entered into a joint statement of principles with CFPB regarding enforcement of consumer protection laws.
- The Dodd-Frank Act seeks to limit the broad federal preemption provisions historically available to federally chartered institutions dealing with state law enforcement personnel. The Comptroller of the Currency has interpreted the scope of these preemption restrictions quite narrowly, but state AGs have indicated their intent to challenge the Comptroller's interpretation.
Banks have historically been regulated almost exclusively by Federal and State bank regulators, whose regulatory model is a formal administrative rulemaking process, accompanied by bank examinations to ensure compliance with laws and regulations. For banks used to this regulatory model, interactions with state AGs will require some adjustment.
- Not infrequently a bank's interaction with a state AG begins with the receipt of a civil investigative demand compelling production of information to the AGs office. This is followed by a series of interactions that have a more adversarial feel than the traditional bank examination. Outside lawyers are usually retained to help a bank respond to a CID, negotiating the scope and timing of information production and the terms of any agreement that the state AG may seek.
- Rather than promulgating regulations, state AGs tend to define their expectations for financial market participants by entering into a published settlement agreement to resolve an investigation or enforcement action with an individual bank. Having set out the rules of the road in that settlement, the state AG will expect other institutions to conform to the provisions of the settlement or to be investigated themselves. This model lacks some of the due process protections provided for in the Administrative Procedures Act, but it is a common way of establishing compliance expectations among law enforcement personnel.
- Since their success in securing multi-billion dollar settlements in the tobacco cases, state AGs have wielded the power of multi-state initiatives to obtain results for their constituents. By sharing the costs of legal research and investigative resources, AGs are able to mount more effective investigations collectively than they can individually. Of course, a one time settlement of a multi-state action can hold some attraction for the banks that are the focus of the investigation. However, as the "robo-signing" controversy illustrates, divisions among attorneys general can prolong negotiations and make a settlement less attractive if some of the AG's refuse to enter into the joint settlement.
State AGs clearly intend to play a much more active role in defining permissible bank practices, particularly in the provision of consumer financial services. Banks need to consider the best way to adapt to this emerging de facto regulatory trend. Here are some suggestions:
- Banks should get to know state AGs in the states where they do business. Don't let the first interaction with the AGs office be in the context of responding to a CID. Seek to establish relationships not only with the AG, but with the assistant AGs who make recommendations on when and how an AG's office will pursue an investigation.
- Be aware that most State AGs are either running for reelection or considering a bid for higher office. They are very attuned to public opinion and tend to view themselves as "tribunes of the people" when it comes to protecting consumers. Expect them to be responsive to complaints from consumers and advocacy groups, to news stories about perceived financial abuses, and to observations of colleagues in the trial bar who are often among their principle supporters.
- Be responsive to consumer complaints as well as media or advocacy group criticism. Not every criticism is reasonable, nor can every demand be satisfied, but a good faith effort to respond to expressed concerns positions a bank much better to fend off an aggressive AG investigation.
- Work with the state banking regulators in states where your banks does business to encourage more dialogue with state AGs on bank regulatory issues. Discussions of this kind are already taking place between the Conference of State Bank Supervisors and NAAG. These interactions offer an opportunity to find less confrontational ways to resolve concerns related to the impact of financial products on consumers. Not every financial problem encountered by a consumer is traceable to a banking abuse, even if that has become a part of the popular narrative.
- Get to know staff at the CFPB, the federal agency that currently appears to have the closest interaction with state AGs on consumer financial services issues. The CFPB is headed by former Ohio AG Richard Cordray. At present, there seems to be disposition at the CFPB to develop a deeper understanding of financial services products and practices before launching enforcement actions. To the extent that state AGs can be persuaded to model this approach, the chances of a positive interaction with banks will be enhanced.
- Finally, keep "fairness awareness" at the front of your bank's mind. Being sensitive to the impact your bank's products and services have on the economic well being of consumers is essential, as is monitoring the way in which bank personnel interact with your customers. Every customer should be treated as if he or she were an assistant attorney general. This is not only a prudential measure, but one that could ultimately enhance the bank’s business.
State Attorneys General Enforcement Network, a recently launched service in which my law firm and others are participating, seeks to promote greater understanding among financial services companies regarding the changing relationship between state AGs and the industry. Widespread participation by banks and other financial services providers in the initial webinars offered by Stage Network indicates a keen interest in understanding and adapting to a regulatory environment in which state AGs will play a major, yet still evolving, role.
What appears certain, so far as the financial services industry is concerned, is that the state AGs are not going to go away any time soon.
Jeremiah S. Buckley is a founder of BuckleySandler LLP and Treliant Risk Advisors LLC.