Melanie Brody and Anjali Garg of K&L Gates warned us last week about a new trend in perils for those who wish to provide financial services to consumers.
At the end of 2014, the New York Department of Financial Services (“DFS”) became the first state regulator to settle a case using its authority to enforce the federal Consumer Financial Protection Act (“CFPA”). In Benjamin M. Lawsky, Superintendent of Financial Services of the State of New York v. Condor Capital Corporation and Stephen Baron, the DFS claimed that indirect auto lender Condor Capital Corporation (“Condor”) and its sole shareholder, Stephen Baron, violated both New York State law and the CFPA’s prohibition on unfair, deceptive, or abusive acts or practices (“UDAAP”) by, among other matters, overcharging consumers and deceptively retaining credit balances due to them. The settlement requires Condor and Baron to admit to New York and federal violations, pay an estimated $8-9 million in restitution and pay a $3 million penalty, and surrender all of Condor’s state lending licenses.
Although several state attorneys general have leveraged Dodd-Frank’s state action provisions to enforce and seek remedies under the CFPA, the Condor case marks the first time a state regulator has used them, and it will likely prompt other state regulators to do the same. In his press release announcing the settlement, Superintendent Lawsky said, “This case demonstrates that the Dodd-Frank Act provides a powerful new tool for state regulators to pursue wrongdoing and obtain who were abused. We hope other regulators across the country will consider taking similar actions when warranted."
Not content to destroy financial service business in New York, Gentle Ben Lawsky wants other states to join in the fun. An added attraction for state regulators is the press this type of unprecedented action achieves, which is useful in establishing your bona fides as the logical successor to Eliot Mess as "The New Sheriff of [Insert Name of Street Here].
The entire client alert is worth reading and I encourage you to do so. It explains concisely the types of claims that state regulators and attorneys general can bring under Franken Dodd and the remedies (pain) that they can pursue against financial institutions. For those with shorter attention spans, here are Ms. Brody's and Garg's take-aways (with footnote references omitted):
First, subject to the limitations applicable to national banks and federal savings associations, the provisions bestow much of the CFPB’s enforcement powers on every “state attorney general” and “state regulator” in the United States. A pessimistic person might think of this as the creation of hundreds of mini-CFPBs. As if this were not alarming enough, the state action provisions do not contain language limit ing state actors’ authority to residents of their own states, and a number of state actors, including the New York DFI, have already used the provisions to seek remedies for out-of-state consumers as well as their own residents.
Equally or maybe even more concerning is that the CFPA’s UDAAP prohibitions are broadly defined and could potentially be used to challenge a wide range of conduct that, in many cases, is not expressly prohibited by state law. Although most states have a statutes prohibiting unfair and deceptive acts and practices (“UDAP”), few, if any, expressly prohibit “abusive” conduct. Further, in many cases, state regulators do not have authority to bring state UDAP claims. Moreover, whether or not a practice is viewed as a UDAAP is often influenced by subjectivity. Ideally, state actors will align their UDAAP interpretations and enforcement policies with those of the CFPB and Federal Trade Commission, thus giving institutions a more uniform view of the types of conduct that could be challenged; theoretically, however, the state actor provisions could open institutions up to hundreds of subjective interpretations.
Finally, the CFPA’s remedies are considerably stronger than the remedies most state actors can seek under state law, providing a means for state actors to both recover very large monetary awards as well as severely disrupt an institution’s business. In the Condor case, for example, in addition to the financial restitution and penalties, the New York DFS obtained a temporary restraining order that stopped Condor from obtaining new business in any state, froze the company’s assets, enabled the DFS to inspect Condor’s documents and access Condor’s business premises and storage facilities, and allowed the DFS to secure and take control of the business’s premises. Ultimately, the DFS achieved a settlement that will completely shut Condor down and obtain penalties and restitution for the company’s consumers.
Bad actors need to exit the stage. The problem with Franken Dodd is that it puts a lot of power in the hands of true believers, with inadequate checks and balances on the natural consequences of the truth of Lord Acton's assertion that power corrupts. While the author's of the article rightly advise financial institutions to take a close look at their compliance capabilities, I also think that banks and other financial institutions that don't have the resources to devote to a "robust" compliance infrastructure (which will be trying to sail the fog-shrouded waters of "abusive" and "unfair" without running aground) might also be advised to take a step back and reconsider the extent of their involvement in providing consumers with financial services. These mine fields are becoming increasingly dangerous.