Can state AGs really serve as 'mini-CFPBs'?

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Late last year, 17 state attorneys general pledged to fill the gap if Consumer Financial Protection Bureau slowed its enforcement activity under acting Director Mick Mulvaney. But their efforts to compensate for a less aggressive CFPB have so far been a mixed bag.

Only a handful of states, such as Pennsylvania and New Jersey, have announced plans to create so-called "mini-CFPBs" to focus on consumer issues in their respective jurisdictions.

In other states, budgets have been too constrained to expand enforcement operations beyond what AGs were already doing to assist the CFPB under former Director Richard Cordray.

Meanwhile, with the CFPB actually accelerating enforcement actions of late, some argue that the void left for states to fill may not be that big. Indeed, many observers say not much has changed in how states and the CFPB investigate financial firms for potential wrongdoing.

The creation of mini-CFPBs "hasn't been as necessary as some would have thought," said Richard Gottlieb, a partner at Manatt, Phelps & Phillips.

The AGs sent Mulvaney a letter in December warning the Trump administration appointee that they stood ready to ramp up efforts if the CFPB let down its guard.

"If incoming CFPB leadership prevents the agency's professional staff from aggressively pursuing consumer abuse and financial misconduct, we will redouble our efforts at the state level to root out such misconduct and hold those responsible to account," they said.

In the time since, the agency has certainly shown signs of a less aggressive approach. After Mulvaney decried the agency's enforcement apparatus as overaggressive, it took months before the agency revived public actions against companies. But since mid-June, enforcement actions have accelerated.

Observers say state AG offices that had participated most willingly in Cordray-led investigations have continued to operate at full tilt in the Mulvaney era, pursuing fraud allegations and other claims as if nothing had changed.

To be sure, there have been state officials that have tried to go even further. But with no general drop-off in investigatory activities, state budgets in some cases are too tight to establish mini-CFPBs around the country more broadly.

“All the states were already at capacity in terms of their ability to ramp up their enforcement activity,” said Christopher Willis, a consumer finance practice leader at the law firm Ballard Spahr. “The states are doing as much as they can with constrained budgets and staff, and those constraints have not changed.”

However, in some states, the Trump administration's pro-business, deregulatory posture has been seen as an opportunity for AGs to cast themselves as more aggressive consumer watchdogs.

“The states are asking, how do I maximize my deterrence effect, if I'm a state AG with limited resources?“ said Allyson Baker, a partner at Venable and a former CFPB enforcement attorney. “Since this administration came into power there has been a collective concern among attorneys general across the country that there would be receding enforcement power and one of the things the AGs have tried to do is compensate for that or address that.”

Pennsylvania announced its initiative before Mulvaney took the reins of the CFPB, with state Attorney General Josh Shapiro creating the Consumer Financial Unit to field consumer complaints and target predatory lenders. He tapped Nicholas Smyth, a former CFPB enforcement attorney, to head the new unit.

Earlier this year, New Jersey picked Paul R. Rodriguez, a lawyer in New York City Mayor Bill de Blasio’s office, as director of the division of consumer affairs.

Other states have eyed similar moves, but it is unclear whether they can devote enough resources to really compensate for any perceived slowdown in CFPB activity.

Maryland has created a new Financial Consumer Protection Commission chaired by Gary Gensler, a former Goldman Sachs executive and head of the Commodity Futures Trading Commission in the Obama administration. The state legislature is expected to set aside $1.2 million to create 10 positions for the unit.

Some states, meanwhile, already ramped up their financial consumer protection efforts before President Trump came to office. In 2015, Virginia Attorney General Mark Herring created a special unit targeting predatory lenders. Virginia has doubled the number of attorneys focused specifically on consumer protection to 10 from five, and added 18 additional personnel including dispute resolution specialists and paralegals.

Some states also are reassessing how best to deploy their resources in reaction to what the CFPB does.

The added funds allow states to conduct more investigations against bad actors, typically involving fraud. Attorneys generally also hope to get a political boost by broadcasting their aggressive stance to fill in the void.

“Prior to the election of Trump, it was a way for the states to follow on with what the CFPB was doing,” said Catherine Brennan, an attorney at Hudson Cook. “With the election of Trump, I think those state mini-CFPBs have taken on more importance at the state level — and for those attorneys general organizing these mini-CFPBs, it's a good issue if you are planning on running for higher office.”

Brennan has specifically advised online lenders to be cautious about doing business in Virginia, claiming that a company can "do everything right and still find [themselves] on the receiving end" of an inquiry or enforcement action.

Other observers note that, even where budgets are constrained, state-backed efforts in the Trump era should not be dismissed.

“We all have capacity issues and there’s plenty for us to be doing and there always has been,” said John Ryan, the president and CEO of the Conference of State Bank Supervisors.

He said efforts at the federal level always draw "greater attention." But even a state like Maryland allotting roughly $1 million for its initiative should be applauded.

“That’s real money and the states have been very effective at leveraging resources and taking action,” Ryan said.

On the legal front, however, little has changed for the states.

Every AG's office has a consumer protection division with express statutory authority to enforce federal consumer protection laws including unfair, deceptive and abusive acts and practices, known as UDAAP.

States are trying to respond to the changes at the CFPB with Mulvaney focused more on confidential supervisory resolutions while issuing fewer consent orders and enforcement actions.

Though the CFPB is still investigating UDAAP violations, fewer actions are being referred to enforcement, lawyers said, which has left an opening for states to fill.

Mulvaney also has put a priority on criminal actions and fraud, as opposed to going after big pots of money or providing restitution to borrowers, areas where states might fill the void as well, lawyers said.

But the states also are less likely to take action against companies for violations of fair-lending laws or disparate impact, which are resource-intensive, require expensive statistical analysis and could lead to more litigation.

Many observers say the dynamic between states and the CFPB has not changed much since the agency's new leadership took the helm.

"It's not like enforcement went away," said Gottlieb.

Still, the high bar for coordination between state AGs and the federal government came in the first term of the Obama administration, when 49 states coordinated with the Department of Justice and several regulatory agencies, including the CFPB, on the $49 billion national mortgage settlement in 2012 that set out detailed mortgage servicing standards.

States have often argued that they are a better venue for enforcement of consumer protection laws, claiming that federal preemption and regulatory authority handed to agencies like the Office of the Comptroller of the Currency and the now-defunct Office of Thrift Supervision helped lead to industry abuses that were a major cause of the financial crisis.

In addition to state AGs, banks and financial firms moving forward also have to contend with reinvigorated state banking regulators, who continue to flex their muscles.

New York’s Department of Financial institutions and California's Department of Business Oversight have stepped into the breach on several fronts, including signing a consent order against Equifax with six other states.

New York also is creating data security rules. California is seeking information from a dozen unlicensed student loan servicers and is cracking down on lenders trying to avoid state interest rate caps.

“There's an endless supply of real bad actors for [the states] to go after," said Willis. "For financial institutions, in terms of the level of compliance scrutiny and risk from the changeover at the CFPB, the world is not that different today than it was two years ago."

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