The CFPB Under Siege: A Combative Federalism Solution to CFPB Erosion

Nolan Anderson

As a result of the subprime mortgage crisis of 2007, millions of victims of predatory lending practices, often society’s most vulnerable individuals, were ousted from their homes, stripped of equity, and flushed into debt spirals.[1]Congress responded by passing the Consumer Financial Protection Act (CFPA).[2] Its twin aims sought to curtail predatory lending practices by: (1) empowering enforcement of federal regulations via state attorneys general (AGs) working in conjunction with the newly formed Consumer Finance Protection Bureau (CFPB or Bureau) and (2) sharply narrowing the standards by which federal agencies could preempt state consumer finance laws.[3] The former was premised on cooperative federalism whereas the latter, by definition, contemplated state autonomy.[4] A highly publicized constitutional challenge,[5] proposed rollbacks,[6] underenforcement,[7] and infiltration by those openly hostile to its mandate[8] paint a picture of a CFPB that is increasingly unresponsive to consumers’ needs. Alarmed, many are calling for the states to fill the void of a retreating CFPB.[9] This post echoes those calls and offers some more combative measures state actors can take in filling that void.

1. Weighing the Costs and Benefits of Joining Federal Claims in State Enforcement Actions

Many of the enforcement powers granted to state AGs under the CFPA are accompanied by a certain level of Bureau oversight. AGs seeking to exercise such enforcement powers must notify the CFPB and explain their enforcement decision.[10] In turn, the CFPB has the right to intervene, remove, and appeal.[11] However, in an action brought solely under state law the CFPB cannot exercise any oversight.[12]

Given the current threats to the Bureau’s independence, state AGs should balance several factors when deciding to include federal claims in their enforcement actions, such as (1) the availability of alternative state causes of action; (2) the level of parity those state actions have with federal actions; (3) the likelihood that the CFPB will not support the contemplated litigation; and (4) the need for federal resources in prosecuting the action. Of course, no precise formula exists when performing this cost-benefit analysis. The point is that AGs should be cognizant of the risks associated with opening the door to CFPB intervention in light of the deregulatory pressures influencing it.

Notably, New York’s Attorney General, Letitia James, has recognized that state AGs should move from a cooperative federalism approach to a state-centric one because the “side-by-side” relationship between the CFPB and AGs has eroded.[13] In the face of a “systematic[] dismantling” of the Bureau, AG James is “is fighting back . . . [by] reach[ing] settlements and launch[ing] investigations to thwart the efforts of a number of unscrupulous student loan servicers and for-profit colleges that have violated consumer protection laws.”[14] As more state AGs become increasingly disillusioned with the cooperative-federalism approach, one can expect them to follow the example of New York.

2. State AGs Should Primarily Focus Their Lobbying Efforts Internally

The ability of state AGs to forgo federal causes of action is limited by the enforcement tools that their state legislatures provide them.[15] Without alternative state causes of action with equal or greater potency, state AGs will be forced to rely on federal law to pursue bad actors. Accordingly, the lobbying efforts of state AGs are more effectively channeled towards their own legislatures rather than the CFPB.

In late 2018, the CFPB announced a proposed rule[16] that critics claimed “would erode critical consumer protections under the guise of fostering innovation in the consumer financial marketplace.”[17] In response, 21 state AGs issued a comment letter to the Bureau opposing the policies.[18] In October 2019, the CFPB “proposed rule changes [that] would allow debt collectors to use social media as a form of debt collection communication.”[19] This time, a coalition of 28 state AGs counseled against the Bureau’s pro-industry move.[20]

While these AGs should certainly continue their federally aimed lobbying efforts, federal lobbying should not be relied upon as a primary means of increasing enforcement options. As one article aptly points out, “the proposed [CFPB rule] changes still allow states to create their own laws that would supersede federal regulations.”[21] Given the increasing likelihood that state AGs’ efforts to advocate for their citizens will fall on deaf federal ears, they should turn the bulk of their lobbying focus inward. They may find more sympathetic and responsive listeners in the form of state legislators and regulators.

3. States Legislatures Should Take Anticipatory Action in the Face of Rollbacks

 In recent years, states and individual cities have shown a remarkable ability to stand their ground against the federal government. Some have even invited open conflict with the national government by pushing the federalism envelope.[22] If state legislatures want to protect against predatory lending practices going forward, they should likewise be willing to push the envelope in regulating consumer finance.

As an example, the California legislature has taken significant steps to “fight back against the Trump administration’s efforts to shield predatory companies and reduce borrowers’ rights.”[23] The state legislature is currently contemplating a California Student Borrower Bill of Rights,[24] “the first legislation in the nation that would create clear, enforceable borrower protections to rein in abuses by student loan companies . . . .”[25] This is combative federalism in action.

Other states can learn from California’s experience and employ similar combative federalism tactics. If the CFPB considers repealing regulations that state legislatures deem necessary to protect their citizens, that legislature should consider ensuring those protections in its own codes. If the CFPB declines to issue necessary regulatory protections, states should exercise their right to provide greater protections to their own citizens.[26] The text of the CFPA presumptively protects such action.[27] Additionally, lower federal courts interpreting that text do not appear eager to preempt state law.[28]

4. States Should Not Abandon Cooperative Federalism Altogether

All this being said, states should continue to work within the framework of the CFPA to exhaust cooperative federalism measures in pursuing the desired level of protection. There are still avenues for states to force the CFPB to consider new rules. For example, the “Bureau shall issue a notice of proposed rulemaking whenever a majority of the States has enacted a resolution in support of the establishment or modification of a consumer protection regulation by the Bureau.”[29] Some important procedural obligations accompanying this provision preclude the CFPB from merely shrugging these requests aside.[30]

Conclusion

The CFPB currently faces significant threats to its independence. This development fundamentally alters the symbiotic relationship it was meant to have with its state counterparts. However, the loss of the Bureau’s independence does not render the CFPA impotent. In response, the states should deemphasize portions of the CFPA that depend upon CFPB cooperation and intensify their focus on the provisions that empower them to act on their own initiative. Read in this light, the states have the ability and the obligation to fill the void left by the retreating shadow of the CFPB.

 

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[1] See Financial Crisis Inquiry Commission, The Financial Crisis Inquiry Report, 389–90 (2011).
[2] Dodd–Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, 124 Stat. 1376, 1955–2113 (2010).
[3] See Arthur E. Wilmarth, Jr., The Dodd–Frank Act's Expansion of State Authority to Protect Consumers of Financial Services, 36 J. Corp. L. 893, 920 (2011).
[4] See Lauren Saunders, The Role of the States Under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, Nat’l Consumer L. Ctr. 9 (Dec. 2010), https://www.nclc.org/images/pdf/legislation/dodd-frank-role-of-the-states.pdf.
[5] See generally Seila Law LLC v. Consumer Fin. Prot. Bureau, 140 S. Ct. 427 (2019) (granting cert.).
[6] See, e.g., Press Release, N.Y. State Office of the Attorney Gen., Attorney General James Leads Coalition Of 21 State Attorneys General To Urge The Consumer Financial Protection Bureau To Reject Anti-Consumer Protection Policies (Feb. 12, 2019), https://ag.ny.gov/press-release/2019/attorney-general-james-leads-coalition-21-state-attorneys-general-urge-consumer [hereinafter NY AG Press Release]; Stephen J. Steinlight et al., AGs From 28 States Send Letter to CFPB to Stop Proposal Allowing Debt Collectors to Use Social Media, Lexology (Oct. 22, 2019), https://www.lexology.com/library/detail.aspx?g=756a6218-c3fc-455a-a437-40a2c5fb704c.
[7] See Ken Sweet, Under Trump and Mulvaney, CFPB has Filed no Enforcement Actions Since November, USA Today (Apr. 10, 2018, 10:52 AM), https://www.usatoday.com/story/money/economy/2018/04/10/under-trump-mulvaney-cfpb-has-filed-no-enforcement-actions/502451002/.
[8] For an in-depth analysis of Mick Mulvaney’s efforts to dismantle the CFPB from within, see Nicholas Confessore, Mick Mulvaney’s Master Class in Destroying a Bureaucracy From Within, N.Y. Times (April 16, 2019) https://www.nytimes.com/2019/04/16/magazine/consumer-financial-protection-bureau-trump.html.
[9] See, e.g., James Gutierrez, States Must Step Forward as CFPB Retreats on Predatory Lending, Hill (Feb. 4, 2019, 11:00 AM), https://thehill.com/blogs/congress-blog/politics/428330-states-must-step-forward-as-cfpb-retreats-on-predatory-lending.
[10] See Dodd–Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, § 1042(b)(1), 124 Stat. 1376, 2013 (2010).
[11] See id. § 1042(b)(2), 124 Stat. at 2013–14.
[12] See id. § 1042(d)(1), 124 Stat. at 2014.
[13] Letitia James, AG James: NY Steps up as Trump Administration Retreats on Student Debt Crisis (Commentary), Syracuse (Nov. 20, 2019), https://www.syracuse.com/opinion/2019/11/ag-james-ny-steps-up-as-trump-administration-retreats-on-student-debt-crisis-commentary.html.
[14] Id.
[15] For a survey of state enforcement tools, see Carolyn Carter, Consumer Protection in The States, NCLC 3–4 (Mar. 2018), https://www.nclc.org/images/pdf/udap/udap-report.pdf.
[16] Policy on No-Action Letters and the BCFP Product Sandbox, 83 Fed. Reg. 64036 (proposed Dec. 13, 2018).
[17] NY AG Press Release, supra note 6.
[18] Id.
[19] Steinlight, supra note 6.
[20] See id.
[21] Id.
[22] See generally, e.g., Ilya Somin, Federalism, the Constitution, and Sanctuary Cities, Wash. Post (Nov. 26, 2016, 11:05 AM), https://www.washingtonpost.com/news/alifo-conspiracy/wp/2016/11/26/federalism-the-constitution-and-sanctuary-cities/; Zack Coleman, Trump Deepens Legal War Against California, Automakers, Politico (Sept. 6, 2019, 11:37 AM), https://www.politico.com/story/2019/09/06/doj-auto-trump-fuel-efficiency-1483589?fbclid=IwAR19LdQXPoNkpeR2pWt0wt7SL9zrfoUXA0nbS6EVNNPg4TUFnh0uSpSCMuA.
[23] Seth Frotman & Natalia Abrams, Student Loan Borrowers Need More Protection—and California is Leading the Way, Nation (Nov, 21, 2019, 10:07 AM), https://www.thenation.com/article/archive/california-borrowers-rights/.
[24] Assemb. B. 376, 2019–20 Reg. Sess. (Ca. 2019). 
[25] Frotman, supra note 22.
[26] See Dodd–Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, § 1041(a)(1), 124 Stat. 1376, 2011 (2010).
[27] See, e.g., id. at § 1041(a), 124 Stat. at 2011; § 1044–46, 124 Stat. at 2014–18.
[28] See Gregory D. Omer, Federal Banking Law Preemption in the Post-Dodd Frank World: A Review of Significant Developments, A.B.A. (July 17, 2019), https://www.americanbar.org/groups/business_law/publications/committee_newsletters/banking/2019/201904/fa_1/.
[29] § 1041(c)(1), 124 Stat. at 2011 (2010).
[30] See id.