Credit Reform and the States: The Vital Role of Attorneys General After Dodd-Frank

• Author: Mark Totten
• Position: Associate Professor of Law, Michigan State University College of Law
• Pages: 115-174

Credit Reform and the States:

The Vital Role of Attorneys General

After Dodd–Frank

Mark Totten∗

ABSTRACT: Congress employed mult iple strategies in the wa ke of the Great

Recession to provide gr eater protections for cons umers in the financial

marketplace. One strategy aimed at ag ency design and resulted in c reation of

the Consumer Financial P rotection Bureau. Anoth er strategy created new

substantive prohibitio ns and corresponding r ulemaking powers. A third

strategy channeled the fo rces of federalism, placi ng a limit on agency

preemption and empowe ring state attorneys g eneral to enforce federa l law.

Scholars have focused on the f irst two strategies, plus th e new constraints on

preemption, but so far h ave not given sustained attention to the role of states

as co-enforcers of federa l consumer financial prot ection law. This Article seeks

to fill that void, focusing on implementation and ch arting a path for

normative assessment.

I begin by placing this dual-enforcement scheme within the cont ext of recent

history and the evolving infra structure for consumer fina ncial protection in

the United States. I th en consider several i nterpretive issues to acc ount for the

substantive, procedura l, and remedial powers Cong ress placed in the hands of

state attorneys genera l. Recognizing that the success of this co ncurrent-

enforcement regime will depend in part on earl y coordination, I next id entify

several implementatio n priorities necessary to c reate a scheme that is both

effective and efficie nt. Finally, I identify key questions and offer p reliminary

observations toward a norm ative assessment of this sch eme and its

implications both for co nsumer finance and America n federalism.

∗ Associate Professor of Law, Michigan State University College of Law. Thanks to

Prentiss Cox, Jennifer Epperson, Glen Staszewski, James Sullivan, Jim Tierney, Art Wilmarth,

workshop participants at the University of Maryland Francis King Carey School of Law Junior

Faculty Exchange, and my colleagues who participated in the Michigan State University Co llege

of Law Summer Workshop Series. In addition, I am grateful for several senior officials in state

and federal government who agreed to interviews and provided critical insight on inter pretive

and implementation issues.

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116 IOWA LAW REVIEW [Vol. 99:115

INTRODUCTION .................................................................................... 117

I. INFRASTRUCTURE ................................................................................. 119

A. THE STRUCTURE OF CONSUMER FINANCIAL PROTECTION PRE-2010 .. 119

B. CRACKS IN THE FOUNDATION ........................................................... 122

C. THE DODD–FRANK RECONSTRUCTION .............................................. 125

II. INNOVATION ........................................................................................ 128

A. SUBSTANTIVE POWERS ..................................................................... 129

1. UDAAP Ban .......................................................................... 131

2. Other Federal Consumer Financial Protection Laws .......... 136

3. New Substantive Limits on Mortgage Terms ....................... 141

B. PROCEDURAL AND REMEDIAL POWERS .............................................. 142

1. Investigation ......................................................................... 142

2. Forum Selection and Multi-State Litigation ........................ 145

3. Outside Counsel ................................................................... 149

4. Remedies ............................................................................... 150

III. IMPLEMENTATION ................................................................................ 154

A. ASSESSMENT ................................................................................... 156

B. AUTHORIZATION ............................................................................ 156

C. COOPERATION ................................................................................ 157

1. Information Systems ............................................................. 158

2. Investigation and Enforcement Actions .............................. 161

3. Rulemaking ........................................................................... 165

IV. IMPLICATIONS ...................................................................................... 165

A. CONSUMER FINANCE ....................................................................... 165

B. FEDERALISM ................................................................................... 168

1. Recurrent Claims .................................................................. 168

2. New Insights .......................................................................... 171

CONCLUSION ....................................................................................... 174

2013] CREDIT REFORM AND THE STATES 117

INTRODUCTION

States are once again poised to play a vital role protecting consumers in

the financial marketplace. For decades, state common law was the only

means of redress. As states began to craft safeguards for the law books, so

did Congress. At times the states were cooperators. At other times they were

competitors. Beginning in the mid-1990s, and over the next de cade,

however, federal banking agencies preempted state actions against federally

chartered depositories and their subsidiaries. In the shadow of federal

inaction, the states were often helpless to stop the most egregious abuses

leading to the 2008 economic cris is. Congress’s primary response to the

Great Recession was the Dodd–Frank Wall Street Reform and Consumer

Protection Act of 2010 (Dodd–Frank Act or Act). 1 Among other reforms,

the Act secures important powers for the states.

The reach of the Dodd–Frank Act is broad. It covers not only financial

markets and the institutions that participate in those markets, but also

individual consumer products such as mort gages, credit cards, student loans,

gift cards, and personal banking. From Wall Street to Main Street, the

legislation re-defines the landscape. In particular, the Act employs three

strategies to strengthen consumer financial protection. First, it addresses

root failures through institutional design. Most important, Congress created

one agency—the new Consumer Financial Protection Bureau (“CFPB”)—

that possesses both the authority and motivation to protect consumers.2

Second, the Act creates new substantive rules that shape how businesses and

consumers participate in the market. And third, Congress harnessed the

forces of federalism by placing li mits on agency preemption and

empowering states to enforce federal law.

To this point in time, attention has focused on the first two strategies

and the limits on agency preemption.3 While scholars have recently begun

1. Dodd–Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203,

124 Stat. 1376 (2010).

2. I borrow the language of “authority and motivation” from Warren and Bar-Gill. See

Oren Bar-Gill & Elizabeth Warren, Making Credit Safer, 157 U. PA. L. REV. 1, 85 (2008). By

empowering one agency to protect consumers, Congress aimed to overcome past hindrances:

motivated administrative actors that lacked the legal authority to protect consumers, or

authorized actors that lacked the motivation to act because of conflicting incentive s.

3. See, e.g., KATHLEEN C. ENGEL & PATRICIA A. MCCOY, THE SUBPRIME VIRUS: RECKLESS

CREDIT, REGULATORY FAILURE, AND NEXT STEPS (2011); Bar-Gill & Warren, supra note 2;

Kathleen C. Engel & Patricia A. McCoy, Federal Preempti on and Consumer Financial Protection: Past

and Future, 3 BANKING & FIN. SERVICES POL’Y REP. 25 (2012); Patricia A. McCoy et al., Systemic

Risk Through Securitization: The Result of Deregulation and Regulatory Failure, 41 CONN. L. REV. 1327

(2009); Catherine M. Sharkey, Inside Agency Preemption, 110 MICH. L. REV. 521, 553–56 (2012);

Arthur E. Wilmarth, Jr., The Dodd –Frank Act’s Expansion of State Authority to Protect Consumers of

Financial Services, 36 J. CORP. L. 893, 897–919 (2011) (raising the role of states as co-enforcers,

but focusing on preemption).