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.
A Little History
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.
Hard-Fought Exemptions Nullified?
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.
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.
For example, requiring the CFPB to consider the merits of a claimed federal consumer violation prevents an AG from initiating litigation that misinterprets federal consumer laws that are the province of the CFPB and not state regulators.
Further, the elimination of the exemptions included in Dodd-Frank for enumerated industry segments effectively allows AGs to bring enforcement actions against practically any covered person providing a consumer financial service in their respective states.
Finally, even in the event that the CFPB is correct that the rule is technically exempt from the notice-and -comments requirements of the APA, the potentially expanded scope of enforcement authority for AGs justifies a more restrained and inclusive notice and comment process.
At a minimum, the CFPB might be well advised to avoid the arguably heavy-handed regulatory approach that consumer groups criticized when the leadership of the CFPB was under the control of the Trump administration (and which the CFPB is now attempting to undo).
This article does not necessarily reflect the opinion of The Bureau of National Affairs, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
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Joe Lynyak is a partner at Dorsey & Whitney in the firm’s Finance & Restructuring Group and a member of the Banking Industry Group. His practice includes providing financial intermediaries advice in the areas of regulatory and strategic planning, application and licensing, legislative strategy, commercial and consumer lending, examination, supervision and enforcement, and general corporate matters.