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CFPB Deferment of Enforcement Authority to States Will Lead to Increased Scrutiny

March 22, 2018

At a recent gathering of states attorneys general, Mike Mulvaney, Acting Director of the Consumer Financial Protection Bureau (“CFPB” or “Bureau”) indicated his preference that they take the lead on the enforcement of consumer protection laws along with state regulators. According to Acting Director Mulvaney, “States know best how to protect their own consumers”. This approach marks a stark contrast from the previous regime at the CFPB. Historically, under the CFPB’s previous director, Richard Cordray, states often took a back seat to the CFPB on enforcement actions. This aggressive enforcement policy was often criticized as many believed this authority was used solely to set new industry standards independent of the rulemaking process. Mulvaney is determined to change the narrative. However, such a shift in the CFPB’s enforcement philosophy should not be interpreted as a loosening of the proverbial “oversight belt”. Rather, the “oversight belt” is still tight and will continue to get tighter; as now, it is being worn by a new, more politically charged and unpredictable source: states and cities.

States—and cities thanks to a recent Supreme Court decision—are already taking Acting Director Mulvaney’s deferment to task, suggesting enforcement of consumer protection laws will soon become a priority among their state attorneys general and regulators as well as city and municipal officials. Several states and the District of Columbia have either filed suit alleging or begun investigating potential discriminatory lending practices by some of the nation’s largest financial institutions. In Pennsylvania, the Pennsylvania Treasurer and Bureau of Consumer Protection of the Pennsylvania Attorney General’s Office have announced separate investigations of major financial institutions for alleged discriminatory practices in mortgage lending that were unveiled by a recent report released by the Center for Investigative Reporting. A copy of the report can be found here. Other states, including Iowa and Washington, have taken similar action based on the same report. The states are not alone in this growing fight.

The Center for Investigative Reporting found evidence of discriminatory practices in mortgage lending in sixty-one metro areas, arming these cities —and the states encompassing them—with factual allegations sufficient to file suit against mortgage lenders of all sizes across the country. The City of Philadelphia recently filed suit again Wells Fargo,  the largest mortgage lender in the United States, accusing them of  discriminatory mortgage lending practices. Cities instituting enforcement actions for violations of consumer protection laws are a recent phenomenon. Less than a year ago, in Bank of America v. City of Miami, the Supreme Court ruled that a city may file suit against lenders under the Fair Housing Act (the “Act”). The city of Miami alleged that Bank of American engaged in  discriminatory lending practices based on a the theory that the city is an “aggrieved person” under the Act,  showing a direct link between the discriminatory lending practices and asserted injuries to the city (i.e., a decline in property tax revenue as a result of increased foreclosures). In the City of Philadelphia v. Wells Fargo, N.A., the city of Philadelphia is asserting the same allegations and claiming it is an aggrieved person under the Act. The City of Philadelphia is seeking to recover economic damages for lost tax revenue and noneconomic damages stemming from the alleged discriminatory lending practices. Wells Fargo, like Bank of America, vehemently denies these allegations, asserting that its goal has always been to promote fair housing and integrated communities.

It is also no coincidence that the The National Consumer Law Center (NCLC), the largest consumer advocacy association in the county, just recently published its updated report, Consumer Protection in the States, a 50-State Evaluation of Unfair and Deceptive Practices Laws.  The report can be found here. The report evaluates the strength of each state’s unfair and deceptive practices (UDAP) statute, and documents how significant gaps or weaknesses in almost all states undermine the promise of UDAP protections for consumers. This will be the playbook for many states, including their attorneys general and regulators, in terms of enforcement, regulation and advocacy. The NCLC is certainly viewing Mulvaney’s statements in real time.

In light of these recent developments, all financial institutions, no matter what the size, whether depository or non-depository, should not abandon current compliance programs. Rather it may be time for a review and audit of those programs to ensure that specific requirements of fair lending law, as well as all state consumer protection laws including UDAP are appropriately addressed.

Clark Hill's Financial Services Regulatory & Compliance Practice Group is a national leader in the field of financial services law. Our exceptional team of lawyers and government and regulatory advisors has extensive experience in — and an in-depth understanding of — the laws and regulations governing financial products and services. We can assist you in developing and implementing compliance programs, as well as defending consumer litigation and regulatory enforcement actions.

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