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
SUMMARY

Congress employed multiple strategies in the wake of the Great Recession to provide greater protections for consumers in the financial marketplace. One strategy aimed at agency design and resulted in creation of the Consumer Financial Protection Bureau. Another strategy created new substantive prohibitions and corresponding rulemaking powers. A third strategy channeled the forces of federalism,... (see full summary)

 
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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 DoddFrank Wall Street Reform and Consumer
Protection Act of 2010 (DoddFrank Act or Act). 1 Among other reforms,
the Act secures important powers for the states.
The reach of the DoddFrank 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 agencythe 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. DoddFrank 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 POLY 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, 55356 (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, 897919 (2011) (raising the role of states as co-enforcers,
but focusing on preemption).

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