Will State-Level Consumer Protection Activity Increase Amid CFPB Shakeup?

On Saturday, February 1, Rohit Chopra was dismissed as Director of the Consumer Financial Protection Bureau (CFPB), with Secretary Scott Bessent appointed as Acting Director that same day. The following weekend, Office of Management and Budget director Russell Vought was named the Acting Director and quickly sent an email to CFPB staff, ordering the Bureau to “cease all supervision and examination activity,” stop work on proposed rules, suspend the effective dates on any rules that were finalized but not yet effective, stop investigative work, and not begin any new investigations. In short, the CFPB has halted virtually all supervisory, enforcement and litigation activity while new leadership reevaluates the Bureau’s priorities.

It remains to be seen who the permanent head of the CFPB will be and what their priorities will be. The Trump administration and the Republican-led Congress have said numerous times they want to curtail the Bureau’s efforts. To that end, Acting Director Vought has stated that the Bureau will not be drawing additional funds from the Federal Reserve because it is not “reasonably necessary” and that its current reserves of $711.6 million are “excessive,” signaling that leadership intends to reduce the agency’s funding and thus its activities.

As the CFPB undergoes a significant transition, certain state financial regulators and attorneys general appear poised to step into the Bureau’s shoes. States have a number of powers at their disposal, including the statutory ability to enforce federal consumer protection law. In fact, just a few days before President Trump’s second inauguration, the CFPB under now-former Director Chopra published a roadmap for recommended state priorities. Below we explore what powers the states have, how they could look to use them and what their priorities could be.

State Powers Under Dodd-Frank

While every state has an unfair trade practices act statute, the Dodd-Frank Wall Street Reform and Consumer Protection Act also gave the states certain additional powers to enforce certain federal financial consumer protection laws. Here’s how it works:

• Enforcement of Federal Consumer Financial Law: Under the Dodd-Frank Act, specifically 12 U.S.C. § 5552, states (both the attorneys general and the financial regulators) have the authority to enforce federal consumer financial law, specifically, the Consumer Financial Protection Act and 18 enumerated consumer laws such as TILA, EFTA, FDCPA, GLBA, and regulations issued by the CFPB under those statutes, by bringing suit in federal or state courts or other appropriate proceedings against any “covered person or service provider” (other than certain federally-chartered institutions, as discussed below).
• Dodd-Frank Does Not Modify States’ Preexisting Authority to Enforce Federal Consumer Protection Laws: Dodd-Frank also made clear that it does not modify what authority states may already have had to enforce federal consumer protection laws. For example, the FCRA allows states to bring enforcement actions against any person violating the statute and is not limited to covered persons or service providers.
• Limitations in Statute: Despite this authority, there are notable limitations. For instance, states are not authorized to bring suits against national banks and federal savings associations to enforce the CFPA (but they can still bring suits for violations of regulations issued under the CFPA, including the 1033 rule or the Payday Rule). This restriction can limit the scope of state enforcement efforts against federally-chartered financial institutions.
• Consultation Requirement: 12 U.S.C. § 5552(b) also requires states to consult with the CFPB and an institution’s prudential regulator before initiating certain enforcement actions (except when “prior notice is not practicable”). This consultation process is intended to ensure coordination and avoid conflicts between state and federal enforcement efforts, but it could also slow down state actions.

The CFPB’s Roadmap for State Priorities

In January, likely in anticipation of the change in administration and expected change in CFPB enforcement priorities, the CFPB released a report titled “Strengthening State-Level Consumer Protections.” The report includes various proposals aimed at enhancing state-level consumer protection laws. These proposals include:

1. Incorporate “Abusive” into State Law: The report suggests that states should adopt the prohibition of “abusive” practices, similar to the Consumer Financial Protection Act. This would add explicit liability for activity seen as exploiting power imbalances with consumers.
2. Stronger Remedies and Tools for Investigation and Enforcement: The CFPB’s report recommends that states enhance their existing investigatory powers and remedies.
3. Eliminate Requirement to Prove Monetary Injuries: By removing the need to prove monetary harm, states could more easily pursue claims against companies that cause non-monetary harm, such as loss of privacy or security.
4. Exercise Authority to Ensure Consumer Protections Also Protect Businesses: The report encourages states to extend consumer protection laws to business-to-business transactions.
5. Revitalize Private Enforcement: The CFPB report suggests enhancing private enforcement mechanisms, providing consumers with private rights of actions to enforce consumer protection laws. This could include adding “public” injunctive relief as a remedy and creating representational or qui tam cases of action on behalf of the state.
6. Provide Strong and Enforceable Consumer Data and Privacy Rights: The report advocates for robust data privacy protections by imposing stricter data handling and privacy requirements. Many of the recommendations here mirror the state privacy laws that have been enacted over the last few years.
7. Create Bright-Line Prohibitions of “Junk Fees”: The report proposes adding language to state law banning so-called junk fees, such as hidden or misleading fees, or price gouging captive consumers. This already is happening in practice as the New York Department of Financial Services recently unveiled proposed regulations which would impose new limits on overdraft and NSF fees.

These proposals, if adopted by states, could significantly alter the regulatory landscape for financial service providers, necessitating adjustments in compliance strategies and operational practices to align with strengthened consumer protection laws.

How States Will Move Into the CFPB’s Space

Given the competing priorities at the state level and their more limited resources, individual states on their own may not have the resources (and/or the interest) to cover all of the areas on which the CFPB focused. However, there are several tools available to states that could help overcome some of these challenges.

States are Staffing Up

• State regulators appear to be expanding their staff in anticipation of increasing their regulatory and enforcement activity.
• For example, the California DFPI has two new postings for Regional Deputy Commissioners, who would be in charge of digital assets, and has several openings for examiners and managers involved with financial institutions.
• Similarly, the New York Department of Financial Services (NYDFS) has openings for Deputy Superintendents, senior attorneys, investigators, and other positions.

State Coordination and Multistate Efforts:

• Increased Collaboration: State attorneys general and state financial regulators are increasingly coordinating their efforts, forming working groups, and initiating joint investigations and examinations. This collaboration allows states to pool resources and expertise, enhancing their ability to tackle complex, multistate consumer protection issues.
• Multistate Litigation: States are also filing litigation together, leveraging their collective power to address alleged consumer protection violations. This approach could minimize some of the barriers to individual states acting alone, such as lack of resources or an insufficient number of affected consumers in a single state.

State Consumer Protection Laws:

• Incorporation of ‘Abusive’ Practices: Many states have their own consumer protection laws, which they can enforce independently of federal regulations. These laws vary in scope, but all generally have prohibitions on unfair and deceptive acts, requirements for financial disclosures and other items similar to federal law. States like California and New York either have or are considering expanding these laws. California, for instance, has already integrated “abusive” practices into its financial code, and New York is considering similar legislation. These states could serve as models for others, setting higher standards for consumer protection.
• Enforcement Beyond State Licensees: In 2021, California established the Department of Financial Protection and Innovation (DFPI), which some have referred to as a “mini-CFPB.” The DFPI is charged with overseeing financial products and services in California and can conduct investigations, issue fines, bring actions against companies and issue regulations, among other things. And the DFPI’s scope isn’t limited to entities licensed in California: according to its implementing law, it has oversight over any entity that offers or provides a consumer financial product or service in California, with the exception of banking institutions.

CFPB Information Sharing

• The CFPB has had information sharing agreements with many entities, including the states. It has had a goal of sharing investigative information with its partners within 30 days of approval to do so, and it has achieved that goal in the large majority of instances (see CFPB Performance Plan and Report at 19-20).
• This means that, at least until new leadership took over, the CFPB was sharing its investigative information with states. Thus, it is likely that many states currently have information regarding CFPB investigations that were underway when new leadership put the pause in place and can leverage that information to move forward with their own investigatory and enforcement actions.

Where From Here?

The current pause in CFPB activities and uncertainty surrounding the Bureau’s future priorities presents an opportunity for states to assert their authority in consumer protection, and there are many signs that states are prepared to do so. This shift could lead to a more decentralized but equally rigorous enforcement environment, with states taking the lead in safeguarding consumer rights.

Regardless of how this plays out, recent trends in multi-state enforcement actions suggest that preparing for greater state enforcement activity is a prudent approach. This begins with gaining a deeper understanding of the states in which the company is licensed and the nuances of the individual state consumer protection laws, and ensuring the company has good working relationships with the regulators and attorneys general they may be hearing from soon.