The prevailing winds seem to indicate that we are well into President Trump's era of deregulation, which means certain activity will slow down at federal regulatory and enforcement agencies, such as the Consumer Financial Protection Bureau (CFPB). However, some of this slowdown—at least on the enforcement side—will be picked up by state attorneys general and other state regulators. While a number of states from New York to California have expressed their willingness to fill in for anything left out of the reprioritized CFPB, the Trump administration may put up some roadblocks. In some instances the states may be able to step into the federal government's shoes, but in others the states may encounter arguments about federal preemption.
In an ongoing Massachusetts Attorney General lawsuit against a federal student loan servicer, the U.S. Department of Justice (DOJ) has argued that federal preemption prevents the state from taking action. Massachusetts v. Pennsylvania Higher Education Assistance Agency, No. 1784-cv-02682 (Mass. Super. Ct.). While the federal government has routinely protected companies that service its loans, it is uncertain how far the Trump administration will go to constrain state consumer financial protection efforts by asserting federal authority.
Summary of the Massachusetts Case
On August 23, 2017, Massachusetts Attorney General Maura Healey (Massachusetts AG) filed an enforcement action in Massachusetts state court alleging that a Pennsylvania-based student loan servicer was overcharging borrowers, in violation of both state and federal law. The allegations are generally that the company failed to timely and properly process paperwork submitted for income-driven repayment and teachers' annual certification forms, overcharged borrowers, and wrongfully allocated overpayments to interest and fees. The servicer moved to dismiss all claims.
On January 8, 2018, DOJ took the rare step of filing a "Statement of Interest" in the case, in defense of the servicer. DOJ argues that the servicer's practices are either required or authorized by federal statutes, federal regulations, or the servicer's contract with the Department of Education (DOE), and, thus, the Massachusetts AG's state-law claims violate the Supremacy Clause of the United States Constitution and are preempted. (DOJ leveraged a federal law allowing it to file a statement of interest, but did not intervene; see 28 U.S.C. § 517.) DOJ notes "the important federal interests in cost-effectively and uniformly administering and streamlining the federal student loan programs." While consumer advocates may not like the DOJ interest in this case, other industry participants clearly support federal intervention to preempt state action and have submitted comment letters requesting it, which can be influential.
DOJ describes three different times preemption can be used by the federal government: (1) federal law expressly states that state law is preempted; (2) federal law occupies an entire field; and (3) federal and state law conflict. DOJ focuses only on that third type, "conflict preemption," which exists where it is "impossible for a private party to comply with both state and federal requirements," or where "state law stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress." DOJ acknowledges that consumer protection is within states' traditional police powers and has a presumption against preemption. However, DOJ asserts that that presumption, "if applicable, would be rebutted here" because, among other things, state laws can be preempted by both federal statutes and regulations. In this case, DOJ argues that the state law claims conflict with the federal Higher Education Act (HEA), its implementing regulations issued by DOE, the overall purposes of the HEA, and the servicer's contract with the DOE. Thus, DOJ invoked both "impossibility" and "obstacle" conflict preemption. The Court has not yet ruled on the preemption or motion to dismiss issues.
Does DOJ's Statement of Interest Have Further Implications for Consumer Protection?
It is highly unlikely that this federal quasi-intervention in the Massachusetts AG case means the Trump administration and Acting CFPB Director Mick Mulvaney are forgoing federalism and a "states' rights" approach to consumer financial protection regulation and enforcement for a heavy-handed federal government-led approach. Rather, it is likely an attempt to ensure that federal programs and consumer protection are undertaken at the administration's direction and in accordance with its goals. Although preemption was widely used during the mortgage market bubble of the mid-2000s (e.g., Office of the Comptroller of the Currency (OCC) preempted certain state regulations with its own, see 69 Fed. Reg. 1904, 1908, 1916-17 (January 13, 2004), and New York Attorney General's request regarding national banks' compliance with New York fair lending laws, see Cuomo v. Clearing House Ass'n, 557 U.S. 519, 535-36 (2009)), principles of federalism would seem to dictate that the administration would side with the Dodd-Frank Consumer Financial Protection Act of 2010 and its reining in of preemption. See Sec. 1041(a) (preemption only if state law is inconsistent with federal law, and it is not inconsistent if state law provides greater protection to consumers), Sec. 1044 (restricting OCC's ability to preempt state consumer financial protection laws).
While Acting Director Mulvaney reprioritizes the CFPB from pushing novel legal theories at the federal level through enforcement to an agency that uses enforcement as a last resort, it is unclear what the CFPB will do if states decide to assert their ability to use the Dodd-Frank Act to bring federal lawsuits that may not align with the administration's goals. State enforcement and regulatory authorities have broad authority to bring cases under the Dodd-Frank Act's 19 enumerated consumer laws (ECOA, FDCPA, TILA, RESPA, and others) and the prohibition against unfair, deceptive, and abusive acts or practices (UDAAP). See 12 U.S.C. § 5552(a)(1). State regulators and attorneys general are familiar with this authority and have already been using it. See, e.g., Illinois v. Alta Colleges, Inc., 2014 WL 4377579, at *3 (N.D. Ill. Sept. 4, 2014). Indeed, the Massachusetts AG in the case above invoked this Dodd-Frank Act authority to sue.
That said, the CFPB is authorized to intervene in any such action and could oppose states' interpretations of federal law or attempt to settle certain claims. See 12 U.S.C. § 5552(b)(2). On the one hand, doing so could potentially ease the regulatory burden on financial services companies by preventing states from inconsistently (or incorrectly) enforcing federal law. On the other hand, if the administration tries to impede states' ability to bring federal claims under the Dodd-Frank Act, that may cause states to more aggressively enforce their own state laws. Either way, there ends up being a need for multi-state compliance.
How to Prepare for a New Regulatory Rubric
The recent DOJ filing suggests three main takeaways for the road ahead:
- Invoking federal assistance to constrain state enforcement and regulation is a tool that can potentially be leveraged, not just in litigation and investigations, but also in supervisory exams and rulemaking.
- Successful invocation of preemption will depend on and requires careful consideration of the particular conduct, statutes and regulations, and type(s) of preemption at issue.
- From a compliance and risk management perspective, it is important to stay abreast of how legal requirements and risks may change as the landscape of preemption and CFPB intervention unfolds.