No readers of this blog would disagree that the Dodd-Frank Wall Street Reform and Consumer Protection Act transformed the legal landscape for banks and consumer finance companies. In the area of enforcement, two of the Act’s most significant changes were (1) the creation of the Consumer Financial Protection Bureau and (2) its statutory prohibitions against unfair, deceptive, and abusive practices (UDAAP). 12 U.S.C. § 5536. These are the provisions that everyone in our industry is always talking about, but a lesser known provision of the Act, Section 1042, authorizes state attorneys general and state agencies and regulators to enforce Dodd-Frank’s provisions and regulations issued by the CFPB. Over the past two years, states have increasingly become aware of their ability to enforce federal law against consumer finance companies under Section 1042. New York, Illinois, Mississippi, New Mexico, Connecticut and Florida have all brought claims against consumer finance companies for violations of Dodd-Frank’s UDAAP provision.
Section 1042 effectively deputizes states as enforcers of federal consumer finance law, and states are increasingly using this power for several reasons. First, Dodd-Frank’s UDAAP provision allows for enforcement of abusive practices, unlike most analogous state laws that only prohibit unfair and deceptive acts or practices. Second, Section 1042 allows enforcement by either states attorneys general or state agencies or regulators, whereas under analogous state consumer protection laws the agency or regulator may lack enforcement powers. Earlier this year the New York Department of Financial Services (NYDFS) became the first state agency to use its Dodd-Frank powers. Third, many state consumer finance laws lack the broad and sweeping remedies provisions under Dodd-Frank. For instance, in the NYDFS suit against an auto lender, the department was able to appoint a receiver under federal law to manage and liquidate the assets of the lender, a power that it lacked under state law. Finally, Dodd-Frank allows states to sue on behalf of out-of-state consumers.
While it remains to be seen if the enforcement of federal law by states will continue, with increasing coordination among states over consumer financial protection laws, and increased information sharing between states and the CFPB, it is likely that more states will “discover” their federal powers under Dodd-Frank. LenderLaw Watch is keeping tabs on such actions and will be bringing you updates on trends.