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The Underappreciated Impact of Dodd-Frank: The Rise of Federal and State Regulatory Cooperation

There are multiple levels of regulation in the financial services industry with federal, state, and even local officials supervising companies within the industry. These regulators often cooperate, but also sometimes act in conflict with one another in their pursuit of consumer protection and enforcement of laws.

By Maria Moskver & Neal Doherty

Dodd-Frank Increases Cooperation between Federal and State Regulators

When it was passed in 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank") was the most sweeping piece of financial regulation enacted since the 1930s. Before legislators approved Dodd-Frank, consumer protection functions were dispersed among the alphabet soup of federal regulators. But the new law changed that, introducing a single agency - the Consumer Financial Protection Bureau - that would increase coordination and ensure more consistent enforcement.

Before Dodd-Frank, states often passed laws which attempted to regulate the activity of national banks. In the context of mortgage lending, for example, states like New York and North Carolina passed foreclosure-related legislation early in the financial crisis.  But enforcement of these laws was often curtailed by federal regulators, who asserted that the state laws were preempted by federal law. Consumer protection advocates long argued that this inconsistency in the laws was hurting consumers. These advocates wanted states to have the ability to act independently to achieve their own policy goals based on local conditions. Dodd-Frank ushered in a new level of coordination and cooperation among state and federal regulators, explicitly empowering states by raising the standards that must be met before federal regulators can assert preemption.

The relationship between the states and the CFPB, as the single federal consumer protection regulator, is central to this new era of cooperation, which has been especially important in the supervision of non-bank financial service companies. Regulatory authority over non-banks, who were typically supervised exclusively at the state level, changed with the creation of the CFPB.

The collision of regulatory spheres since Dodd-Frank could have deteriorated into a turf battle between the Bureau and its state-level counterparts. However, soon after the enactment of Dodd-Frank, the CFPB entered into agreements with state regulators to help foster cooperation. Tracing the development of these state-federal relationships helps explain the tenor of financial services regulation as it stands today, as well as where the industry is headed.

Conference of State Bank Supervisors

The first of these major agreements was signed in early 2011 between the Conference of State Bank Supervisors (CSBS) and the CFPB. In this agreement, the parties established the foundation for state and federal coordination for supervision of providers of consumer financial products and services. In May 2013, the CSBS and the CFPB built on this agreement by signing a Supervisory Coordination Framework, which established a process for coordinated federal/state consumer protection supervision and enforcement. The intent of the agreement was to have the parties work together to achieve examination efficiencies and to avoid duplication of time and resources.

National Association of Attorneys General

Also in 2011, the CFPB and National Association of Attorneys Generals agreed to a Joint Statement of Principles, establishing a framework for regulation of financial products and services. In the Joint Statement, the parties agreed to several areas where they would cooperate, including: i) engaging in regular consultation to identify mutual enforcement priorities; ii) supporting each other through joint or coordinated investigations of wrongdoing and coordinated enforcement actions; and iii) sharing of consumer complaint information. The last item - sharing and analysis of customer complaint information - has been a hallmark of the CFPB as it has engaged in the unprecedented collection of consumer complaint data as a knowledge gathering method to support its enforcement agenda.

National Mortgage Settlement

In February 2012, in one of the first major examples of this increased cooperation, federal regulators and 49 state attorneys general (excluding Oklahoma) announced a settlement with the country’s five largest mortgage servicers. This settlement was meant to resolve mortgage servicing irregularities stemming from the foreclosure crisis. As part of the settlement, the five companies agreed to a set of comprehensive Servicing Standards which would reform various servicing processes and procedures. The companies also agreed to provide $25 billion in financial relief to consumers. Joseph A. Smith, Jr., a former state banking commissioner, serves as the independent monitor, enforcing compliance with the settlement.

Non-Bank Servicer Consent Order

The cooperation continued in December 2013 when the CFPB and state Attorneys General brought an enforcement action against a large non-bank servicer. Under the consent order, the servicer agreed to provide $2 billion in relief to homeowners.The order stemmed from examinations, in early 2012, by the Multistate Mortgage Committee, which is comprised of state financial regulators. The Bureau coordinated with the state regulators to investigate the issues and bring the enforcement action. This is an example of coordination which we expect will continue, not only for mortgage servicers, but also in other areas of the financial services industry.

Increased [Tense] Cooperation

While we are certainly in a time of increased cooperation, tension remains between federal agencies and state regulators. For example, in June 2014, Massachusetts Attorney General Martha Coakley sued the Federal Housing Finance Agency, conservator/regulator of Fannie Mae and Freddie Mac, alleging that the GSEs were violating a 2012 state law by having policies that forbid the sale of homes in foreclosure to non-profit organizations if the property will be resold or leased by the non-profit to the former homeowner. In October 2014, a federal judge dismissed the lawsuit, stating that federal law expressly prohibits courts from taking any action to restrain the functions of the FHFA as conservator for the GSEs. This case, however, illustrates that state and federal agencies often have conflicting policy goals which, in turn, can lead to regulatory tension.

Local Preemption Continues

It’s also worth pointing out that this new era of cooperation has been confined to the states and federal government, with local regulators largely left out of the mix. For example, over the past several years, four cities in Massachusetts - Lawrence, Lynn, Springfield, and Worcester - enacted virtually identical foreclosure mediation ordinances which required lenders to send to the respective cities copies of the Notice of Right to Cure (35A Notices) that are sent to borrowers.  The cities were sued by various banks who argued that the ordinances were preempted by state law.

In the lead case, Easthampton Savings Bank v. City of Springfield, the Federal Court of Appeals hearing the case determined that it involved novel questions of state law. As a result, the Federal Court of Appeals certified the question of whether the ordinances were constitutional under state law to the Massachusetts Supreme Judicial Court. On December 19, 2014, the Massachusetts Supreme Judicial Court announced its decision in the Easthampton case. The Court determined that the foreclosure mediation ordinances enacted by the four cities are preempted by state law. According to the Court, “mortgage foreclosure regulation traditionally has been a matter of State, and not local, concern.” This case highlights the ongoing conflict among regulators in balancing the desire for a single coordinated approach while allowing for the flexibility of passing regulations in response to local policy concerns.

State Regulators Using Dodd-Frank

Of course, even in the absence of uniform cooperation, state regulators will use the powers they have been given. Specifically, under Section 1042 of Dodd-Frank, a “State regulator may bring a civil action or other appropriate proceeding to enforce the provisions of this title or regulations issued under this title with respect to any entity that is State-chartered, incorporated, licensed, or otherwise authorized to do business under State law….” We have seen increasing examples of state regulators using these new powers which are derived from federal law.

In March 2014, Illinois Attorney General Lisa Madigan sued a Chicago lender alleging that the lender was marketing and selling a new short-term predatory loan product. Specifically, the lawsuit alleges that the loan product evades the state’s 36 percent interest-rate cap by offering a short-term loan product that acts like a revolving line of credit, but offers none of the protections of a credit card. This was the attorney general’s first action under the powers granted to her by Dodd-Frank.

In addition, in April 2014, Benjamin Lawsky, the superintendent of New York’s Department of Financial Services, sued a subprime auto lender for unfair, deceptive or abusive acts or practices, specifically alleging that the lender essentially stole money from consumers by not disclosing to them the existence of refundable credit balances. Under New York General Business Law § 349, the attorney general is the only state official empowered to bring an action for an unfair or deceptive act or practice. Section 1042 of Dodd-Frank, however, extends this power such that other state regulators can bring these types of actions.

There have been other examples of state regulators using their authority under Dodd-Frank, including in Connecticut and Florida (joint lawsuit against a mortgage rescue company), and Mississippi (lawsuit against a credit reporting agency). We expect other state regulators will also begin to utilize this new authority in their supervision of the financial services industry.

Dodd-Frank has ushered in a new era of cooperation among state and federal regulators, especially the CFPB. The regulators are sharing information and coordinating investigation and enforcement actions. This coordination means there are more resources available in the investigation of financial services companies. We expect additional coordination among the regulators in the future. This will lead to even more regulatory scrutiny, increased examinations and enforcement actions throughout the financial services industry. Companies should take steps now to bolster their compliance functions in response to this new age of regulatory cooperation.

Editor's Note: An earlier version of this article incorrectly identified the author. The piece was written by Maria Moskver & Neal Doherty, both of Walz Group and appeared in the February 2015 edition of DS News Magazine.

About Author: Maria Moskver

Maria Moskver is the Chief Compliance Officer at WALZ, with over 16 years of experience in the consumer finance industry—including loss mitigation, bankruptcy and operations—bringing extensive knowledge of TILA, RESPA, FCRA, FDCPA, Dodd-Frank and other regulatory issues.

About Author: Neal Doherty

Neal Doherty is the Managing Director of Compliance Solutions at WALZ, analyzing new regulations to determine their potential impact, assisting clients in complying with state and federal laws, and reviewing client notices to ensure compliance. Walz Group is a leading provider of regulatory compliance solutions and critical document management to the nation’s premier mortgage servicers, law firms, trustees and others in highly regulated industries.
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