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The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) created the Consumer Financial Protection Bureau (CFPB) and delegated to CFPB the combined rulemaking and enforcement authorities of seven federal agencies that previously were responsible for protecting consumers of financial services. Congress decided to establish a single federal authority dedicated to consumer financial protection after federal banking agencies failed to protect American homeowners from unsound and predatory lending practices during the housing boom that occurred between 2001 and 2006. Federal regulators allowed lenders to make more than 10 million high-risk mortgages during those years. When the housing bubble burst in 2007, unsound mortgages triggered millions of foreclosures, caused widespread bank failures and forced the federal government to adopt an unprecedented bailout program to stabilize the financial system.

Congress recognized that many states tried to stop predatory lending by enacting and enforcing consumer protection laws during the housing boom. However, two federal banking agencies – the Office of the Comptroller of the Currency (OCC) and the Office of Thrift Supervision (OTS) – issued preemptive regulations that barred the states from enforcing their consumer protection laws against national banks, federal savings associations, and their subsidiaries and agents. Preemption enabled large national banks and federal thrifts to become leading providers of high-risk mortgage loans, with devastating consequences.

In response to the problems created by federal preemption, Dodd-Frank expands the lawmaking and law enforcement authority of the states in the field of consumer financial protection. Title X of Dodd-Frank empowers CFPB to issue regulations that establish a federal “floor” of consumer protection and authorizes the states to provide additional substantive safeguards to consumers. Dodd-Frank also permits state officials to enforce the statutory provisions of Title X as well as CFPB’s regulations and applicable state laws.

Dodd-Frank abolishes the OTS, limits the preemptive authority of the OCC and clarifies the states’ authority to enforce their consumer financial protection laws against national banks and federal thrifts. Under Title X’s new preemption standards, (i) state consumer financial laws apply to national banks unless they prevent or significantly interfere with the exercise of national bank powers; (ii) the OCC has authority to preempt state laws only on a case-by-case basis and only if its preemption determinations are supported by substantial evidence; (iii) state laws generally apply to the subsidiaries, affiliates and agents of national banks; and (iv) state attorneys general are authorized to enforce non-preempted laws against national banks through judicial enforcement proceedings.

By enabling states to construct additional safety measures on top of the federal “floor” of consumer financial protection, Title X of Dodd-Frank affirms the longstanding role of states as “laboratories of regulatory experimentation” in identifying emerging threats to consumer welfare and designing new legal rules to counteract those threats. In addition, the supplemental enforcement authority granted to states under Title X allows state officials to act as “normative entrepreneurs” by protecting their citizens from unfair, deceptive or abusive financial practices in situations where CFPB or other federal agencies might fail to act. Finally, the independent lawmaking and law enforcement powers delegated to the states by Title X provides important safeguards against the potential risk that CFPB could be “captured” over time by the financial services industry.

GW Paper Series

GWU Law School Public Law Research Paper No. 572; GWU Legal Studies Research Paper No. 572

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