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State-level CFPBs could fill void left by federal watchdog rollbacks

A recent Supreme Court ruling has left the CFPB with less authority


Various states, including California, have set up their own consumer protection agencies as they see a lack of CFPB enforcement, and the pandemic could accentuate the trend.

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With the recent Supreme Court ruling saying that the president can fire the director of the CFPB without cause, it seems there is more scope to provide state-level consumer protections.

Various states have engaged in such initiatives since 2017. Maryland, New Jersey, New York and Pennsylvania, notably, have their own state-level consumer financial protection agencies, akin to the CFPB, based on their perception that the federal watchdog agency has been less willing to stand up for consumers in recent years.

Need for state-level consumer financial protection

Ed Mierzwinski, senior director of the Federal Consumer Program at the U.S. Public Interest Research Group, noted, “Consumers need multi-layered protection from tricks and traps in the financial marketplace. We need a strong federal law enforced by a strong federal agency, buttressed by strong state laws.”

The consumer advocate added that some states, led by Pennsylvania, have established well-funded “mini-CFPBs” inside their attorney general offices. New York has a strong financial regulator in its Department of Financial Services, which was established after the Dodd-Frank law’s enactment. And California has also set up a consumer protection financial agency.

“Let a thousand flowers bloom,” Mierzwinski declared.

The 2010 Dodd-Frank Act created the CFPB to better protect consumers from the abuses and predation of the financial sector. The agency filled a void that came into prominence after the housing market downturn that began in 2006 – which highlighted predatory mortgage lending – eventually led to the great recession that upended the global economy. The legislation empowered this agency to fight any unfair, deceptive or abusive acts practices by the financial sector.

The act also empowered state attorneys general to take action against such practices. In an opinion piece for The Hill, Mark Totten, an associate professor at the Michigan State University College of Law, notes that while all states have consumer protection laws that empower their attorneys general to pursue wrongdoing in the financial marketplace, many of these laws don’t come with much enforcement teeth.

However, “The federal prohibition on any ‘unfair, deceptive or abusive act or practice,’ and the remedies that follow, are as strong as they come,” according to Totten.

See related: Consumer groups say CFPB rules for abusive practices will limit enforcement

What states are doing

The states that have taken the initiative have adopted various approaches. New York’s Consumer Protection Task Force, formed in early 2020 within its DFS, seeks to better oversee regulation of debt collectors and fight abuses against older New Yorkers, among other things. It also aims to beef up state consumer protection laws to protect its people from unfair, deceptive and abusive practices.

Linda Lacewell, DFS superintendent, noted in a media release, “With the federal government stepping down and refusing to enforce critical consumer protection laws, we must make 2020 the year of the consumer, and this task force will enable DFS to keep leading our state’s efforts to fight for the interests of individuals, families and small businesses.”

Pennsylvania’s Consumer Financial Protection Unit was set up in 2017 to guard Pennsylvanians from financial scams with Nicholas Smyth at its helm. Smyth had participated in drafting the Dodd-Frank Act provision that set up the CFPB. He had also helped set up the federal agency as an early CFPB employee.

In a media release, Pennsylvania Attorney General Josh Shapiro noted, “Protecting the public from financial scams is a key priority of mine, and Nick Smyth will help us expand our capacity to bring complex cases against financial companies that try to rip off Pennsylvanians.”

New Jersey, another early-acting state, aims for its Division of Consumer Affairs, whose authority was beefed up by Governor Phil Murphy after he took office in 2018, to enforce laws geared to fairness in the state’s investment and commercial marketplace and also to help consumers who have concerns or questions about professionals or businesses.

In emailed comments, Gema de las Heras, a spokesperson for the DCA, noted, “From the beginning of Gov. Murphy’s term, New Jersey has sought to fill the void left by rollbacks at the Consumer Financial Protection Bureau by turning the New Jersey Division of Consumer Affairs into a state-level CFPB.”

The DCA is “proposing a new fiduciary rule” to protect investors and is focused on ending “predatory lending practices.”

De las Heras said, “States will never have all the resources they would need to fill the shoes of a strong federal regulator, but if the federal government is not doing its part for consumers, it is the states’ responsibility to do what they can to protect their residents, using the tools available to them under both state and federal law.”

And in Maryland, the state’s Consumer Protection Division, under the state’s Office of the Attorney General, enforces the state laws against usurious lending, debt settlement and debt collection. The state passed a Financial Consumer Protection Act in 2018 that expanded the Maryland Consumer Protection Act’s purview to include “abusive practices.”

According to Aleithea Warmack, a spokesperson for the CPD, states are more likely to hear about and prosecute local and regional companies that engage in abusive, unfair or deceptive practices. And even with nationwide companies, the state-level enforcement can complement the work of the federal CFPB.

“Having more resources will help protect consumers from being victimized by unfair, abusive or deceptive practices and will help provide redress to consumers when they are subject to those types of practices,” Warmack said.

See related: CFPB’s fair debt collection update proposal elicits negative feedback

COVID fallout likely to accentuate need for state efforts

Although the Supreme Court ruling that cuts into CFPB’s authority would seem to pave the way for more state-level consumer protection action on the financial front, especially considering the consumer financial fallout from the COVID-19 crisis, it seems that in today’s economic environment such plans might not take off for a while.

California for one had put its plans for a state-level consumer financial protection on hold for a while, due to other priorities in these cash-strapped times. The state finally enacted legislation to set up its Department of Financial Protection and Innovation at the end of 2020, citing a rise in predatory financial lending and scams during the pandemic.

The agency aims “to restore financial protections that have been scaled back at the federal level.” It will also protect consumers from “predatory businesses” and “spur innovation in financial services by clarifying regulatory expectations for emerging products and services.” And it will extend the reach of the state to cover certain financial services providers that the state’s tentacles did not touch previously. There’s also going to be an effort at public education, especially for “vulnerable populations.”

U.S. PIRG’s Mierzwinski sees the trend of establishing state-level agencies as likely “accelerating.” With the coronavirus pandemic raging, more consumers are likely to be financially strapped, causing debt collection efforts to be hiked up, which may create more of a need for state-level efforts on the consumer protection front.

“I would say that state consumer protection is a key complement to federal consumer protection as state agencies are closer to the ground, can act more quickly and are a backstop when the will to protect consumers flags in Washington,” said Michael Best, staff attorney at the National Consumer Law Center. “This is also a moment when reforms to the underlying state laws that protect consumers are important.”

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