As the legal fight over leadership of the Consumer Financial Protection Bureau lingers, the states are flexing their muscles and promising to fill the gap.
Last week, a group of 17 attorneys general wrote President Trump and vowed to “vigorously enforce state and federal laws to ensure fairness and deter fraud.” The legal chiefs pledged to “redouble our efforts at the state level” if the president impedes the agency from carrying out its mission.
The AGs are on solid ground. In fact, they may have more power than they realize.
When Congress passed the Dodd Frank Act of 2010, the centerpiece of consumer protection was the Consumer Financial Protection Bureau (CFPB), a new agency that would serve as a federal watchdog and protect consumers from predatory practices. Tucked away in the act was an obscure provision that empowered state attorneys general to enforce federal laws protecting consumers in the financial marketplace. These laws include a new prohibition against any “unfair, deceptive, or abusive act or practice” in the offering of any financial product or service, and arguably a long list of consumer finance laws already on the books.
{mosads}Although occupying no more than a paragraph in the voluminous Dodd Frank Act, this provision was ingenious. With only a few sentences, the drafters ensured that if the agency were ever compromised, another cop would always have authority to enforce the law. Absent permission, states cannot enforce federal law. But here Congress empowered the states to wield the federal sword.
All states have a consumer protection law that gives their attorney general powers to go after bad actors in the financial marketplace. While some of these laws are robust, many are hampered by weak remedies or a limited scope of application — including the exempting of whole industries like the provision of credit or debt collection. The federal prohibition on any “unfair, deceptive, or abusive act or practice,” and the remedies that follow, are as strong as they come.
What does all this mean in practical terms for the type of cases that states could bring using these new federal powers? Consider two student lending cases the CFPB brought this year.
In August, the agency took action against Aequitas Capital Management, a private equity firm that participated in the predatory lending scheme hatched by Corinthian Colleges — one of the largest and most notorious for-profit colleges, which bilked students for millions of dollars. As a result, the CFPB secured $183 million in loan forgiveness and loan reductions for victims.
In January, the agency took action against Navient, the nation’s largest student loan company, for failing borrowers at every stage of the repayment process. Among other claims, the CFPB argued that Navient steered borrowers facing financial hardship into more costly forbearance rather than advising them to apply for a repayment plan that would lower their monthly payment. As a result, the company reaped billions while the student borrowers who relied on the company’s advice suffered harm they could have avoided.
Along with the CFPB, several attorneys general also filed suit against both Aequitas and Navient under their state laws. Arguably the strongest argument in these cases, however, was the CFPB’s claim that these companies violated the federal ban on “abusive” practices — a prohibition missing from nearly all state laws.
So far, the states have rarely used this powerful weapon and the often superior remedies that come with it. When the CFPB was fulfilling its mission, the need was less pressing. Now that the agency is in hostile hands, however, state attorneys general must employ all the powers at their disposal. While Democratic attorneys general are likely leaders, a recent study shows several Republican attorneys general lead strong consumer protection programs, as well. This task should not be a partisan affair.
To be sure, the states can never supplant the CFPB. The agency’s supervisory authority, whereby its staff embed in some of the nation’s largest financial institutions; its power to act across all 50 states; and its financial resources render the agency irreplaceable. Nonetheless, when Congress empowered state attorneys general to enforce federal law, it created a fail-stop for such a time as this. Now the states must act.
Mark Totten served as a federal prosecutor and is a member of the law faculty at Michigan State University College of Law.