Over the past 16 months, a growing number of states have taken action against banks and consumer finance companies for violations of Dodd-Frank's prohibition of unfair, deceptive or abusive acts or practices. The attorneys general for New Mexico, Illinois, Mississippi, Connecticut and Florida, as well as New York's Department of Financial Services, have used their Dodd-Frank authority to assert civil claims alleging violations of UDAAP and other federal regulations in at least 12 different actions.
The states' targets included national banks, an auto lender, student lenders, a payday lender and a credit monitoring agency. It is unclear, however, if the wave of state actions signals a burgeoning state scrutiny of consumer finance companies or if state enforcers will only employ this new approach on occasion.
Dodd-Frank explicitly authorizes states to investigate and bring civil actions to enforce its provisions as well as regulations issued by the Consumer Financial Protection Bureau. Under Dodd-Frank's UDAAP provision, an act or practice is prohibited as unfair if it "is likely to cause substantial injury to consumers"; as "deceptive" if it is material and likely to mislead, or misleads, the consumer; and as abusive if it interferes with, or takes advantage of, "a consumer's ability to understand a consumer financial product or service." Because these standards are inherently subjective, they can be applied to a broad spectrum of practices and present significant compliance risks to consumer finance companies. The wave of state enforcement actions is in part a result of the increased information sharing and coordination between states and the CFPB. But more likely, the recent spike in state-initiated UDAAP actions is the result of the ways in which Dodd-Frank has expanded states' enforcement powers. As New York's DFS superintendent Benjamin Lawsky commented in an interview this year, there is "no reason, in appropriate cases, state regulators" should not be enforcing Dodd-Frank, particularly when the UDAAP provision offers several real advantages over state banking laws.
For instance, Dodd-Frank erodes traditional federal preemption of state enforcement of federal consumer finance laws. The UDAAP provision, with its additional "abusiveness" prong, is also broader than equivalent state laws. And UDAAP permits states to sue on behalf of out-of-state citizens and allows regulators, not just attorneys general, to bring suit.
Another advantage of Dodd-Frank is the vast remedies available to states. Courts are permitted to impose daily civil penalties of up to $1 million for intentional conduct that violates the provision. Dodd-Frank also allows for, among other things, restraining orders, disgorgement of profits, and restitution to consumers of any ill-gotten gains. Earlier this year, the NYDFS used its Dodd-Frank authority to bring a claim against a subprime auto lender and to obtain a court-appointed receiver to assume the lender's operations.
However, both the UDAAP provision and Dodd-Frank have potential drawbacks that might limit their appeal to some state actors. Since it is a federal law, any claims asserted under Dodd-Frank give defendants a realistic chance to remove the action to federal court, meaning that states risk losing the potential advantage of trying the case in friendly and familiar state courts.
Additionally, state enforcers must inform the CFPB before bringing an action under Dodd-Frank. The bureau then has the right to intervene in the action. Some states may prefer to remain in complete control of their enforcement actions and could be reluctant to share the enforcement stage with the CFPB. The UDAAP provision also offers significantly less legal precedent than equivalent state laws. This could be a drawback or benefit, depending on the state.
Despite these drawbacks, there are clear incentives for states to bring UDAAP claims under Dodd-Frank. And while it remains to be seen whether Dodd-Frank becomes a regular or occasional weapon employed by the states against banks and consumer finance companies, it is clear that both states and federal enforcers show no sign of letting up in their intent to enforce consumer finance laws.
Benjamin P. Saul is a partner, and W. Kyle Tayman is an associate, in Goodwin Procter's consumer financial services litigation practice group. Both represent banks and consumer finance companies in federal and state enforcement actions. Twitter: @goodwinprocter, @LenderLawWatch.