The Dodd-Frank Act's Expansion of State Authority to Protect Consumers of Financial Services

Article excerpt

I. INTRODUCTION

On July 21, 2010, President Barack Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank).1 The statute's preamble states that one of Dodd-Frank's purposes is "to protect consumers from abusive financial services practices."2 When President Obama signed Dodd-Frank into law, he declared that the statute would create "the strongest consumer financial protections in history."3

In order to implement and enforce Dodd-Frank's new protections for consumers, Congress created the Bureau of Consumer Financial Protection (CFPB) as an "independent bureau" within the Federal Reserve System (Fed).4 President Obama explained that CFPB will operate as "a new consumer watchdog with just one job: looking out for people-not big banks, not lenders, not investment houses-looking out for people as they interact with the financial system."5 Similarly, the Senate committee report on Dodd-Frank explained that CFPB's mission is to "help protect consumers from unfair, deceptive, and abusive acts that so often trap them in unaffordable financial products."6

Thus, Congress gave CFPB "the Herculean task of regulating the financial services industry to protect consumers."7 Congress sought to increase CFPB's "accountability" for that mission by delegating to CFPB the combined authority of seven federal agencies that were previously responsible for protecting consumers of financial services.8 Congress determined that a single federal authority dedicated to protecting consumers of financial services was needed in light of "the spectacular failure of the [federal] prudential regulators to protect average American homeowners from risky, unaffordable" mortgages during the housing boom that led to the financial crisis of 2007 to 2009.9 As stated in the Senate report, and as further explained in Part II of this Article, federal banking agencies "routinely sacrificed consumer protection" while adopting policies that promoted the "short-term profitability" of large banks, nonbank mortgage lenders and Wall Street securities firms.10 The Senate report concluded that "the failure by the prudential regulators to give sufficient consideration to consumer protection . . . helped bring the financial system down."11

To provide additional safeguards to consumers, Dodd-Frank enables the states to supplement CFPB's rulemaking and enforcement efforts. Congress realized that many states attempted to stop abusive mortgage lending practices during the housing boom by adopting and enforcing state laws.12 However, "rather than supporting these anti-predatory lending laws, federal regulators preempted them."13 As explained in the Senate report and as further discussed in Part II.E of this Article, two federal banking agencies-the Office of the Comptroller of the Currency (OCC) and the Office of Thrift Supervision (OTS)-"actively created an environment where abusive mortgage lending could flourish without State control."14

To correct the problems created by federal preemption, Dodd-Frank enlarges both the lawmaking and law enforcement functions of the states in the area of consumer financial protection. As described in Part III of this article, Title X of Dodd-Frank empowers CFPB to issue regulations that establish a federal "floor" of consumer protection and authorizes the states to adopt additional substantive rules that provide greater safeguards to consumers. Dodd-Frank also allows state officials to enforce the statutory provisions of Title X as well as CFPB's regulations and applicable state laws. The Senate report endorsed these grants of enhanced authority to the states, noting that "States are much closer to [financial] abuses and are able to move more quickly when necessary to address them."15

Moreover, Dodd-Frank abolishes the OTS, limits the preemptive authority of the OCC, and clarifies the states' authority to apply and enforce their consumer financial protection laws against national banks and federally-chartered savings associations (federal thrifts). …