New Financial Reform Law Gives States Larger Consumer Protection Role

The Dodd-Frank financial reform law passed in the last session of Congress will result in creation of a national Consumer Financial Protection Bureau (CFPB), looking out for consumers in their dealings with banks and other financial services firms.

While the emphasis in the bill is on a revamp of deficient federal protections, the Dodd-Frank Act also restores the partnership with states. Various provisions of the Act enhance states’ ability to protect consumers in their financial lives, according to an analysis by the National Consumer Law Center.

More state muscle

Over the last few years, while federal agencies have been slow to react, some state attorneys general have been among the most vigorous defenders of consumer rights. Under the Dodd-Frank Act, state attorneys general and -- to a lesser extent -- state regulators can directly enforce several aspects of federal law.

For example, they will be able enforce the generic ban on on unfair, deceptive or abusive conduct against consumers, though national banks, federal thrifts and certain merchants who offer credit will still fall outside their jurisdiction.

They will have the power to enforce the rules of the CFPB, against covered persons, including banks and thrifts, except for certain merchants who offer credit. They will also be able to enforce new mortgage provisions regarding ability to repay, steering, prepayment penalties, escrows, appraisals, prompt crediting of payments and payoff amount requests -- including against banks and thrifts.

The states will also have standing when it comes to federal statutes like the Truth in Lending Act and the Fair Credit Reporting Act. Dodd-Frank also limits the ability of banks and others to ignore state consumer protection laws through the doctrine of preemption.

Preemption

Preemption is the favoring of federal law over state statutes, allowing companies to conduct business that might violate some state's laws. For example, a state might have a law capping interest rates at 25 percent. But a national credit card company charging 30 percent would not be subject to the state law because it is regulated by a federal entity.

“The partnership with the states is vital part of our system of federalism and our consumer protection system,” NCLC said in its analysis. “States will have no need to duplicate federal efforts. But the Dodd-Frank Act appropriately recognizes that states have a crucial role to play in protecting consumers. States can help ensure that everyone complies with federal law, can prevent gaps in federal protections from being exploited, and can act as first responders when new problems arise that have not yet reached the national level.”

The analysis concludes that the new financial regulations give important power to the states that can supplement and support the efforts of the CFPB. The attorneys general and regulators will have the ability to use CFPB rules as a basis for arguing that a merchant, retailer or seller has violated the state law ban on unfair or deceptive practices.