Cooperation, Competition or Confusion—Federal and State Regulators Seek to Enforce the Dodd‐Frank Act and State Consumer Banking Laws in Close Alliance Contributed by Carla R. Walworth, V. Gerard Comizio, Kevin L. Petrasic, and Sunayna Ramdeo, Paul Hastings Consumer Enforcement and Banking Class Actions Practice Group Dodd Frank Act Joint Enforcement Framework An important development of the new enforcement scheme established by the Dodd‐Frank Wall Street Reform and Consumer Protection Act (Dodd‐Frank Act)1 is state and federal enforcement of consumer banking regulations. State enforcement is a radical change from the traditional enforcement scheme, which has been almost exclusively federal. However, state enforcement of federal regulations creates numerous challenges. For example, while the Dodd‐Frank Act establishes a framework for a certain level of state‐federal cooperation, ambiguities in the enforcement scheme may actually restrict collaboration. Further limiting the consumer protection and enforcement scheme envisioned by its drafters is the controversy surrounding the agency created to enforce it, the Consumer Financial Protection Bureau (CFPB). Among the most significant issues that the CFPB must overcome are its leadership and the scope and limits of its powers. Finally, because the Dodd‐Frank Act reduces the impact of federal preemption on some state banking laws, the CFPB, in adopting its own consumer protection rules, may be at the forefront of a regulatory “pile‐on” with states following suit to pass and enforce their laws even more broadly, rather than cooperating with federal regulators to enforce the CFPB’s rules under the Dodd‐Frank Act. Title X of the Dodd‐Frank Act establishes a mechanism for states to enforce the law directly against national banks and federal savings associations.2 Section 1042(a)(2)(B) states: The attorney general . . .of any State may bring a civil action in the name of such State against a national bank or Federal savings association in any district court of the United States in the State or in State court that is located in that State and that has jurisdiction over the defendant to enforce a regulation . . .and to secure remedies under provisions of this title or remedies otherwise provided under other law.3 Thus, the Dodd‐Frank Act gives state attorneys general (AGs) broad discretion to enforce federal consumer banking regulations. By working in close collaboration with the CFPB, state AGs may also take advantage of federal enforcement resources. Because most state budgets are stretched to the limit, generous CFPB funding will be a significant incentive for state and federal cooperation. State Consultation Requirement ________________
© 2011 Bloomberg Finance L.P. All rights reserved. Originally published by Bloomberg Finance L.P. in the Vol. 4, No. 8 edition of the Bloomberg Law Reports—Banking & Finance . Reprinted with permission. Bloomberg Law Reports® is a registered trademark and service mark of Bloomberg Finance L.P. This document and any discussions set forth herein are for informational purposes only, and should not be construed as legal advice, which has to be addressed to particular facts and circumstances involved in any given situation. Review or use of the document and any discussions does not create an attorney‐client relationship with the author or publisher. To the extent that this document may contain suggested provisions, they will require modification to suit a particular transaction, jurisdiction or situation. Please consult with an attorney with the appropriate level of experience if you have any questions. Any tax information contained in the document or discussions is not intended to be used, and cannot be used, for purposes of avoiding penalties imposed under the United States Internal Revenue Code. Any opinions expressed are those of the author. Bloomberg Finance L.P. and its affiliated entities do not take responsibility for the content in this document or discussions and do not make any representation or warranty as to their completeness or accuracy. Pursuant to section 1042(b) of the Dodd‐Frank Act, state officials must consult with the CFPB prior to filing suit to enforce the consumer protection provisions of the Dodd‐Frank Act, including rules issued by the CFPB, against any bank by providing timely notice of the suit to the CFPB. Before initiating any action in a court or other administrative or regulatory proceeding against any covered person as authorized by subsection (a) to enforce any provision of this title, including any regulation prescribed by the [CFPB] under this title, a State attorney general or State regulator shall timely provide a copy of the complete complaint to be filed and written notice describing such action or proceeding to the [CFPB] and the prudential regulator, if any, or the designee thereof. If prior notice is not practicable, the State attorney general or State regulator shall provide a copy of the complete complaint and the notice to the [CFPB] and the prudential regulator, if any, immediately upon instituting the action or proceeding.4 The state's notice must describe “the identity of the parties," "the alleged facts underlying the proceeding," and "whether there may be a need to coordinate the prosecution of the proceeding so as not to interfere with any action, including any rulemaking, undertaken by the [CFPB], a prudential regulator, or another Federal agency.”5 Significantly, the CFPB may respond to the notice by intervening in the action as a party. Upon intervening, the CFPB may remove the action to a U.S. District Court, if the action was not originally brought there. The CFPB also can assert its right be heard on all matters arising in the action and may appeal any order or judgment, with the potential of effectively taking over a state‐initiated case.6 This consultation requirement does not explicitly oblige states to obtain permission from the CFPB to file suit. As the Dodd‐Frank Act is currently written, a state AG could proceed with an enforcement action regardless of the CFPB’s position, as long as the CFPB is provided with appropriate notice. While a state AG could pursue an action to which the CFPB is strongly opposed, the more likely scenario is that a state AG will not pursue enforcement actions to which the CFPB is opposed. Of course, the interests of state and federal enforcement officials will not always coincide. Interestingly, in giving states the power to enforce federal regulations, but requiring CFPB coordination, the Dodd‐Frank Act may effectively limit joint enforcement initiatives, particularly where state and federal interests diverge. Further, the states must apparently play by the CFPB’s rules because the Dodd‐Frank Act grants the CFPB the power to clarify the consultation requirement through regulation. In particular, the CFPB has the authority to “prescribe regulations to implement the requirements of [the consumer financial protection provisions of the Dodd‐Frank Act] and, from time to time, provide guidance in order to further coordinate actions with the State attorneys general and other regulators.”7 The CFPB may refine the consultation requirement to compel states to cooperate with the agency, although that will depend largely on the CFPB’s leadership. Ultimately, a CFPB regulation interfering with a state’s ability to file suit under the Dodd‐Frank Act may be subject to judicial scrutiny, given the grant of such authority in the statute. This may portend future problems for the CFPB and present difficult policy and political problems due to differing consumer philosophies and ideologies among the states and the CFPB down the road. Most problematic could be differing interpretations of federal consumer protection standards that not only undermine effective state and federal enforcement actions, but could potentially draw judicial scrutiny to entire sections of the law and/or CFPB regulations. The Roadmap for State‐Federal Cooperation © 2011 Bloomberg Finance L.P. All rights reserved. Originally published by Bloomberg Finance L.P. in the Vol. 4, No. 8 edition of the Bloomberg Law Reports—Banking & Finance . Reprinted with permission. Bloomberg Law Reports® is a registered trademark and service mark of Bloomberg Finance L.P. The current functional head of the CFPB, Elizabeth Warren, has repeatedly demonstrated her interest in cooperating with state AGs in the enforcement of consumer banking protections. Under Warren’s guidance, the CFPB recently announced its partnership with the National Association of Attorneys General (NAAG). The two groups have created a Joint Statement of Principles, which the CFPB characterized as “the first step in forging a new partnership between federal and state officials to protect consumers of financial products and services.”8 In the Joint Statement, the parties agree: •
•
•
•
Joint Legal Training. To “develop joint training programs and share information about developments in federal consumer financial law and state consumer protection laws that apply to consumer financial products or services”; Share Market Practice Data. To “share information, data, and analysis about conduct and practices in the markets for consumer financial products or services to inform enforcement policies and priorities”; Joint Enforcement Goals. To “engage in regular consultation to identify mutual enforcement priorities that will ensure effective and consistent enforcement of the laws that protect consumers of financial products or services”; Joint Investigation and Enforcement Actions. To “support each other, to the fullest extent permitted by law as warranted by the circumstances, in the enforcement of the laws that protect consumers of financial products or services, including by joint or coordinated investigations of wrongdoing and coordinated enforcement actions”; •
Transparency and Consistency. To “pursue legal remedies to foster transparency, competition, and fairness in the markets for consumer financial products or services across state lines and without regard to corporate forms or charter choice for those providers who compete directly with one another in the same markets”; •
On‐Going Framework for Cooperation. To “develop a consistent and enduring framework to share investigatory information and to coordinate enforcement activities to the extent practicable and consistent with governing law”; •
Referrals and Sharing. To “share, refer, and route complaints and consumer complaint information between the CFPB and the state attorneys general”; •
Leverage Consumer Input. To “analyze and leverage the input they receive from consumers and the public in order to advance their mutual goal of protecting consumers of financial products or services”; and •
Shared Technology Platforms. To “create and support technologies to enable data sharing and procedures that will support complaint cooperation”. This plan for joint enforcement between the CFPB and the NAAG appears to be broader and more comprehensive than the text of the Dodd‐Frank Act. Yet, it is not supported by any enabling regulation authorized under the Dodd‐Frank Act. Indeed, the CFPB has not begun the notice and comment process for its regulations. Instead, the CFPB and the NAAG appear to rely upon ambiguous language in the statute requiring notice to the CFPB to establish a much broader working relationship © 2011 Bloomberg Finance L.P. All rights reserved. Originally published by Bloomberg Finance L.P. in the Vol. 4, No. 8 edition of the Bloomberg Law Reports—Banking & Finance . Reprinted with permission. Bloomberg Law Reports® is a registered trademark and service mark of Bloomberg Finance L.P. between state and federal officials that fully embraces joint enforcement. By putting its resources behind the states, the CFPB may shift the historic balance towards state action, significantly altering the enforcement landscape. Controversy Over the Mission and Future Role of the CFPB Certainly, Elizabeth Warren deserves the most credit for the creation of the CFPB, but ultimately she may end up being its first casualty to avoid the continual politicization and upending of the new agency’s mission and future regulatory agenda. Regardless of who is at its helm, the CFPB clearly has the tools to move full steam towards joint enforcement, and it appears that even the new agency’s most ardent critics may not be able to slow that effort. While the political struggle rages behind the scenes as well as on the front pages regarding Warren’s prospects for a controversial appointment to head the new agency, the CFPB continues to ready itself to shift into operations regardless of who its new leader may be. advocated for increased cooperation between states and federal regulators, and her ideals have shaped the nascent organization into its current form. Having said that, the CFPB must also find a way to survive its creation. Strong political forces continue to lap at the agency’s mandate and, in this environment, it is difficult to imagine that any nominee as the CFPB’s first Director will survive scrutiny over an activist agenda. Strong opposition from conservative politicians will likely significantly influence who will ultimately run the CFPB, and recent declarations by some congressional conservatives that they will oppose any nominee unless stronger limits are put on the CFPB’s power suggest an ongoing and potentially bigger power struggle.9 In this regard, in a recent letter to President Obama, some Republican lawmakers called for a panel to head the agency, rather than a single leader.10 In addition to the disputes about leadership, there is a general lack of clarity about the proper scope and limits of the CFPB’s powers. The CFPB currently has no regulatory or enforcement authority and it will not receive such authority until July 21, 2011. The House Financial Services Committee already has voted to limit its power.11 An important consideration in choosing any nominee as the first Director of the CFPB will be whether the CFPB can achieve the goal of state‐
federal cooperation and joint enforcement under the Dodd‐Frank Act. Tone and rhetoric will be critical to the ability of the CFPB to do its work during the first several years of its operation. An extremely activist agenda will certainly draw fire from some quarters on Capitol Hill, while too lax of an agenda will bring criticism from other areas. Stability and the ability to “play well with others” will be traits critical to the success of the new agency and, of course, a deep understanding of the strengths and weaknesses of our current banking system are a must. Indeed, first efforts at collaboration have not gone well. Warren and the CFPB have come under fire for their role in the Obama administration’s negotiations among various federal regulators, the fifty state attorneys general, and mortgage servicers to settle allegations that banks mishandled consumer foreclosures. These negotiations, which were an opportunity for federal and state agencies to work together, have proven as contentious as they are ineffective. Clearly, Elizabeth Warren is not a typical federal bank regulator. Her outspoken advocacy for more stringent consumer protection regulations is considered one of the driving forces behind creation of the CFPB. Warren also has strongly Federal legislators have sharply criticized the involvement of Warren and the CFPB, claiming that they overstepped their boundaries.12 Senator Richard Shelby (R‐AL), the ranking Republican on the Senate Banking Committee, called the CFPB’s © 2011 Bloomberg Finance L.P. All rights reserved. Originally published by Bloomberg Finance L.P. in the Vol. 4, No. 8 edition of the Bloomberg Law Reports—Banking & Finance . Reprinted with permission. Bloomberg Law Reports® is a registered trademark and service mark of Bloomberg Finance L.P. involvement a “regulatory shakedown” and described the agency as “an unaccountable and unbridled bureaucracy.”13 Senator Shelby is not alone in this view. To many congressional Republicans, “the CFPB is a monstrous government creation, with a huge budget, overly broad mandate and a structure unaccountable to taxpayers.”14 Given Republican efforts to curtail the power of the CFPB, the agency is certain to face vigorous opposition in its future efforts at joint enforcement, and congressional Republicans may not be the only ones worried about this issue. Competition From State Legislatures The CFPB also may face competition from an unlikely source—the states. Prior to the passage of the Dodd‐Frank Act, national banks were able to disregard many state banking regulations because they were preempted by federal laws. Under Section 1044 of the Dodd‐Frank Act, preemption of a state consumer financial law is permissible only in certain limited circumstances. Specifically, a state law will be preempted if (1) application of the law would have a discriminatory effect on national banks as compared to state banks; (2) the state law is preempted based on a determination being made either by the OCC or by a court; or (3) the state law is preempted by another provision of federal law other than the Dodd‐Frank Act.15 Without the hindrance of preemption, states may lose the incentive to cooperate with federal regulators, particularly if they disagree on policy. Instead, state legislators may find it preferable to pass their own laws, which their AGs may enforce without help from the CFPB.16 With expanding state consumer protection laws, a preemption battle may ensue, further eroding the opportunity and incentives for joint state‐federal enforcement. and state AGs are working to join forces at every level to jointly enforce the Dodd‐Frank Act and state consumer banking laws. However, there are numerous potential pitfalls to such an alliance, with risks at both the federal and state level. Most problematic may be that the language of the Dodd‐
Frank Act itself does not support such a close state‐
federal alliance. Regardless of the outcome, it is relatively certain that the regulatory process—and continued political debate over the CFPB’s first Director and appropriate scope of the agency’s powers—that will unfold over the months ahead will solidify both political support and opposition to a state‐federal alliance to enforce the Dodd‐Frank Act. Carla R. Walworth is a partner in the Banking Class Actions and Enforcement and the Litigation practices at Paul Hastings along with associate Sunayna Ramdeo. V. Gerard Comizio and Kevin L. Petrasic are partners in the Washington, D.C. office and are members of the Banking Class Actions and Enforcement and the Global Banking & Payment Systems practices at Paul Hastings. 1 Dodd‐Frank Wall Street Reform and Consumer Protection Act (Dodd‐Frank Act), Pub. L. 111‐
203; 124 Stat. 1376 (July 21, 2010). 2 Section 1042(a)(1) of the Dodd‐Frank Act also empowers a state regulator to enforce Title X against any state‐chartered bank. State regulators are further authorized to secure any remedies provided by Dodd Frank with respect to such banks. 3 Dodd‐Frank Act, supra note 1, § 1042; 12 U.S.C. § 5552. 4 Id. Conclusion A great deal rides on the decision of who will take the helm at the CFPB, not the least of which is the scope of state‐federal joint enforcement of consumer banking protections. Currently, the CFPB 5 Id. 6 Id. 7 Id. © 2011 Bloomberg Finance L.P. All rights reserved. Originally published by Bloomberg Finance L.P. in the Vol. 4, No. 8 edition of the Bloomberg Law Reports—Banking & Finance . Reprinted with permission. Bloomberg Law Reports® is a registered trademark and service mark of Bloomberg Finance L.P. 8 Consumer Financial Protection Bureau and National Association of Attorneys General Presidential Initiative Working Group Release Joint Statement of Principles (April 11, 2011), available at http://www.consumerfinance.gov/pressrele
ase/consumer‐financial‐protection‐bureau‐
and‐national‐association‐of‐attorneys‐
general‐presidential‐initiative‐working‐
group‐release‐joint‐statement‐of‐
principles/. Journal, (March 9, 2011), available at http://blogs.wsj.com/washwire/2011/03/09
/sen‐shelby‐takes‐on‐elizabeth‐warren/. 14 Jim Puzzanghera, Elizabeth Warren Says the New Consumer Financial Protection Bureau Will be ‘A Little Government Agency’, The Los Angeles Times (May 27, 2011), available at http://latimesblogs.latimes.com/money_co
/2011/05/elizabeth‐warren‐consumer‐
financial‐protection‐bureau‐house‐
oversight‐hearing‐patrick‐mchenry.html. 9 Jim Puzzanghera, Senate Republicans Vow to Block Any Appointee to Head Consumer Protection Bureau, The Los Angeles Times available at (May 6, 2011), http://articles.latimes.com/2011/may/06/b
usiness/la‐fi‐consumer‐czar‐20110506; Letter from 44 Senate Republicans to President Barack Obama (May 5, 2011), available at http://www.shelby.senate.gov/public/index
.cfm/2011/5/44‐u‐s‐sens‐to‐obama‐no‐
accountability‐no‐confirmation. 10 Id.; see also S. 737, 112th Cong. (April 6, 2011); H.R. 1121, 112th Cong. (March 16, 2011) (ordered to be reported by the House Committee on Financial Services on May 13, 2011). 15 V. Gerard Comizio and Helen Y. Lee, The Dodd‐Frank Wall Street Reform and Consumer Protection Act: Impact on Federal Preemption for National Banks and Federal Thrifts, (Jan. 2011), http://paulhastings.com/assets/publication
s/1668.pdf?wt.mc_ID=1668.pdf. 16 Note: States may still choose to cooperate with federal regulators, especially because of the generous federal budget available for enforcing Dodd‐Frank Act. 11 Jim Puzzanghera, House Committee Votes to Limit Power of New Consumer Financial Protection Bureau, The Los Angeles Times available at (May 13, 2011), http://latimesblogs.latimes.com/money_co
/2011/05/consumer‐financial‐protection‐
bureau‐house‐republicans‐director‐
elizabeth‐warren.html. 12 Maya Jackson Randall, Elizabeth Warren Defends Role in Mortgage Talks, The Wall Street Journal (April 5, 2011), available at http://blogs.wsj.com/washwire/2011/04/05
/elizabeth‐warren‐defends‐role‐in‐
mortgage‐talks/. 13 Victoria McGrane and Alan Zibel, Sen. Shelby Takes on Elizabeth Warren, The Wall Street © 2011 Bloomberg Finance L.P. All rights reserved. Originally published by Bloomberg Finance L.P. in the Vol. 4, No. 8 edition of the Bloomberg Law Reports—Banking & Finance . Reprinted with permission. Bloomberg Law Reports® is a registered trademark and service mark of Bloomberg Finance L.P.