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CFPB Expansion of States’ Enforcement Authority May Be Illegal

  • Written by Joe Lynyak

The Consumer Financial Protection Bureau recently released a rule outlining the powers of states to enforce federal consumer financial laws. Dorsey & Whitney partner Joe Lynyak says the rule, which allows state attorneys general to bring simultaneous independent enforcement actions, sidesteps the importance of federal agencies interpreting federal law and may violate the notice-and-comments requirements of the Administrative Procedures Act.

Since Rohit Chopra’s confirmation as director of the Consumer Financial Protection Bureau in 2021, he has aggressively moved the CFPB back to the policy positions formerly employed during the Obama administration.

Oftentimes based upon supposition without actual support (even though the CFPB claims to be a “data- driven” agency), Chopra has identified a host of potential industry consumer violations, ranging from deposit issues to endemic redlining. These concerns have been expressed through high-visibility statements that have included congressional testimony and speeches before trade associations and consumer advocacy groups—all of which have raised the alarm by financial intermediaries of the threat of imminent and severe federal enforcement actions.

The CFPB on May 19, 2022, expanded this public relations strategy by issuing an interpretative rule that expands the authority of state attorneys general to directly enforce the federal consumer laws under the jurisdiction of the CFPB. Not only does the rule appear to waive important industry protections prior to allowing an AG to bring a direct federal consumer claim, it also states that AGs may now take enforcement action against certain industry participants who were successful in obtaining specific exemptions from enforcement during the negotiations of the Dodd-Frank Act.

The enforcement of federal consumer laws is partially shared between federal agencies such as the CFPB and state AGs. In the case of the AGs, however, Section 1042(b) of the Dodd-Frank Act (now 12 USC §5552) imposes an important condition precedent to an AG bringing a federal enforcement action.

Specifically, an AG must make a prior comprehensive filing with the CFPB justifying the proposed enforcement action, which must include: (a) information regarding the proposed action; (b) the identification of the parties; (c) the alleged facts justifying the proposed action; (d) information regarding coordination with (or possible interference with) the CFPB; and (e) other related litigation-related materials.

Upon receipt, the CFPB must consider the filing and determine whether to allow the AG action to proceed.

Concern has been expressed that the rule either is a waiver of these statutory jurisdictional requirements, or it is a first step in creating a regulatory history that eventually will support a waiver. Contrary to Chopra’s view that these filing and notice requirements are merely procedural, they are jurisdictional because, in the absence of compliance, an AG lacks the statutory authority to proceed with a direct enforcement action.

Perhaps more importantly, the rule also states that statutory prohibitions against enforcement are not applicable to AGs bringing actions against exempted entities and “covered persons” engaging in certain activities, including: (a) merchants, retailers, and other sellers of nonfinancial goods; (b) real estate brokers and brokerage activity; (c) retailers of manufactured or modular homes; (d) accountants and tax preparers; (e) attorneys engaged in the practice of law; (f) persons regulated by a state insurance regulator; (g) products or services that relate to certain employee benefit and compensation plans; (h) persons regulated by a state securities commission; (i) persons regulated by the SEC; (j) persons regulated by the CFTC; (k) persons regulated by the Farm Credit Administration; (l) car dealers; and (m) activities related to charitable contributions.

The rule argues that the prohibition on enforcement actions directed against these exempted categories contained in the Dodd-Frank Act only applies to the CFPB directly and not to AGs—meaning that the statutory exemptions are at best watered down significantly. Particularly if the pre-approval notice to the CFPB discussed above can be legally waived, these hard-fought exemptions are substantially nullified.

Observations

First, the CFPB states in a conclusory manner that compliance with the public notice and comment requirements of the Administrative Procedures Act (APA) is not required because the rule is not substantive in nature. However, merely calling something non-substantive does not make it so. In that regard, the above-referenced provisions of Dodd-Frank are jurisdictional in nature and were intended to protect against agency overreach. To read more click here.