Bank regulators have long kept state officials at arm's length, but the Consumer Financial Protection Bureau (CFPB) is forging a close relationship with state attorneys general to enforce consumer banking laws.
The Dodd-Frank Act opened the door for information-sharing and consultation between state and federal officials, encouraging the two to work together to pursue banks and nonbanks that engaged in abusive practices.
In April, the CFPB and state AGs made it official, releasing a joint statement of principles that said they would coordinate investigations and identify mutual enforcement priorities.
Their efforts to work together were also underscored by the nomination of Richard Cordray, a former Ohio attorney general and the bureau's enforcement chief, to be the CFPB's first director.
Though the agency is just getting off the ground, observers say they expect a much closer working relationship between the CFPB and state AGs than bank regulators ever had.
"There's every indication that the bureau plans to take a holistic approach, a coordinated approach, that would have more nationwide impact on top priorities," says Jo Ann Barefoot, a co-chairman of Treliant Risk Advisors. "And with Rich Cordray as the director, you would expect it to be even more so."
Senate Republicans have vowed to block Cordray's nomination until changes are made to the bureau's structure and governance, but observers said the foundation for a close relationship with the AGs was already laid by Elizabeth Warren.
Speaking in April at a meeting of the National Association of Attorneys General, Warren said state AGs are natural, indispensable partners for the CFPB. She faulted federal regulators for failing to spot problems during the crisis, even when AGs were sounding the alarm.
"While the value of shared law enforcement goals between federal and state officials is obvious to many of us in this room, we also know that federal banking regulators often have acted at cross-purposes with the attorneys general and state regulators in the past," she said. "Moving forward, consistent and effective enforcement of consumer financial laws will require our sustained collaboration."
Observers say it's no accident that Cordray was chosen as the bureau's first enforcement chief. He's regarded as one of the most aggressive AGs in recent memory, and he made his name going after large mortgage servicers for their foreclosure practices well before the robo-signing scandal vaulted the issue to a national stage.
He also has the experience and the connections to build a relationship with the state AGs.
"I think that on a number of levels," Cordray's nomination "sends a pretty important message … that it's going to be a meaningful partnership," says Kevin Petrasic, a partner with Paul Hastings Janofsky & Walker.
The earliest evidence of that partnership is the bureau's involvement in the mortgage servicer settlement negotiations.
Critics have complained that the bureau, and Warren in particular, improperly influenced the negotiations by offering their own analysis and opinions on the settlement terms and amount. The bureau has maintained that it provided advice only when asked.
Appropriate or not, the interactions — revealed through documents and emails between the bureau and state officials — show the two sides wasted no time joining forces to leverage their power, industry observers say.
"One could argue that you can't move any faster than warp speed, and the relationship between the bureau and the state attorneys general was warp speed," says L. Richard Fischer, a partner with the law firm Morrison & Foerster. "You can't have any more aggressive or active partner in an enforcement action, despite all the denials from the bureau. I think everything that has come out has demonstrated that it was a very, very active involvement."
After years of tension between state officials and federal bank regulators, Democratic lawmakers sought to restore the balance of power in the Dodd-Frank Act, particularly when it comes to federal preemption.
Under Dodd-Frank, the Office of the Comptroller of the Currency must consult on questions of federal preemption with the CFPB, which is expected to take a more sympathetic view of states' rights.
"Dodd-Frank itself suggests a shift in which state AGs are going to play a bigger role in this," said Stacie McGinn, a partner with Simpson Thacher & Bartlett.
The law also allows any state AG to bring an enforcement action in the name of their state in federal district court to enforce the consumer protection provisions in Dodd-Frank or any of the CFPB's new regulations.
"With respect to federal consumer financial laws, the state AGs would effectively be deputies of the CFPB," Petrasic said.
Those activities would presumably be coordinated at the federal level, but it's still unclear, he added. The relationship between the two groups is critical to restoring the authority states feel they've lost in the past decade, but the CFPB's most difficult job may be ensuring that states don't go too far, Petrasic said, a former official at the Office of Thrift Supervision.
"If the pendulum starts to swing too far in the other direction, not only will it undermine the CFPB, I think it will potentially poison the relationship between the states and the bureau, if the CFPB views the state actions as being too aggressive or too problematic in terms of the ability of nationwide lenders to operate," he said.
The bureau and the National Association of Attorneys General outlined their plans to work together in a joint statement of principles released in April. In addition to sharing information and developing joint training programs, the two groups plan to regularly consult with one another to identify mutual enforcement priorities, and conduct joint or coordinated investigations and enforcement actions.
Under Dodd-Frank, states also have greater rights to various forms of confidential business information, including exam data and consumer complaints. The bureau and the AGs plan to share, refer and route consumer complaints to one another.
North Carolina Attorney General Roy Cooper, who led the efforts to collaborate with the CFPB, said the relationship isn't just about leveraging resources; it's about fair and efficient enforcement for banks.
"No. 1, we did not want duplication, and No. 2, we did not want to be inconsistent in enforcement actions," Cooper said. "That's not fair to the businesses that come under the [jurisdiction] of the CFPB."
Coordinating investigations and enforcement could even benefit banks, he says. But the industry isn't convinced.
McGinn said the most troubling question is what kind of due process will be afforded to institutions that are subject to these joint investigations and enforcement actions.
She said the bureau ought to conduct investigations confidentially, as other regulators do, and give institutions an opportunity to respond to the charges in a confidential setting.
"To fail to do that risks inflicting significant reputational damage on institutions that can't be undone, even if the institution was later found to not be at fault," she said. "You can't unscramble the egg."
Fischer said bank exams have long been conducted in secret, and exam records have been exempt from disclosure in order to foster cooperation among regulators and financial institutions. But he says an interim rule issued by the bureau indicates that it may use its discretionary powers to disclose that information to state officials.
"Information like this is juicy and it's the basis for lawsuits," Fischer says. "The mere fact that an agency shares information with state AGs doesn't mean that it's public. … [But] if information is provided from the bureau to the AGs, and the AGs make statements about their investigations, private plaintiffs and trial lawyers bring lawsuits."
Consumer advocates say those concerns are unfounded.
The attorneys general have long been required to protect information collected in the supervisory process, and nothing about those processes has changed, said Ed Mierzwinski, the consumer program director for U.S. Public Interest Research Group.
"The CFPB should work with the state AGs and ideally get value-added synergy out of the relationship," Mierzwinski said. "Whereas I think the OCC got frustration and anger out of their relationship, because they essentially tried to take the state AGs off the beat. But look where that left us."