Attorney General Patrick C. Lynch announced today that he and the attorneys general of 39 other states and territories have sent a letter urging Congress to uphold the role of the states in enforcing consumer protection laws should Congress create the Consumer Financial Protection Agency (CFPA), which President Obama proposed in June and for which Rep. Barney Frank (D-MA) has introduced enabling legislation in the US House of Representatives.

The CFPA has been billed by both supporters and opponents as a sort of “super-agency” whose “powers and oversight would extend far beyond mortgages and real estate —— into all credit cards, debit cards, consumer loans, payday loans, credit reporting agencies, debt collection, stored-value cards and even investment advisory and financial advisory services, to name only part of the list,” according to an Aug. 2, 2009, Los Angeles Times summary of the proposal.

Although Lynch and his fellow attorneys general do not address the merits of creating such an agency, they do offer reasons for not “preempting,” or usurping, state laws and for supporting state enforcement of new CFPA regulations.

“Although some have advocated limiting the states’ role in consumer financial protection, we believe Congress should encourage an active and effective partnership between states and federal financial regulatory agencies to the ultimate benefit of all consumers,” Lynch said, quoting the AGs’ letter to the chairmen and ranking members of the House and Senate panels that will consider the CFPA’s creation.

“The states have always been well-positioned to address consumer protection issues, and we’ve got a lot to offer in a state-federal partnership,” Lynch added.

“We have a nationwide network of experienced consumer protection enforcers ready to go to work immediately. Our close connection to our citizens often provides us with an early warning about what is happening ‘on the ground’ in our communities,” the AGs’ letter states. “Early state action can prevent a local problem from becoming a national one.”

Preemption is the AGs’ top issue for the federal government. Lynch, in his capacity as president of the National Association of Attorneys General (NAAG) last January, called on the Obama Administration and the 111th Congress to resist federal preemption of state laws, particularly in the enforcement of state banking and mortgage foreclosure laws. Lynch delivered a NAAG briefing paper explaining the AGs’ priority issues for the federal government with members of the Obama Transition Team and members of Congress last December.

The AGs’ letter requests that states be permitted to enforce the new agency’s regulations. In the letter, the attorneys general write, “Allowing the states to enforce federal standards will maximize government resources, promote honest competition and deter potential violators. We seek not to challenge federal authority but to enhance it and make it more efficient and effective.”

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AG Lynch urges state-federal partnership in context of consideration of creation of new federal agency

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The letter also cites the states’ involvement in protecting consumers from financial fraud.

“The landmark predatory lending settlements against Household International, Ameriquest and Countrywide returned hundreds of millions of dollars to victimized borrowers while forcing changes to lending practices,” the AGs write. “This experience uniquely suits us to assist federal regulatory agencies with their enforcement burden.”

According to the Aug. 2 Los Angeles Times article cited above, the proposed Consumer Financial Protection Agency would:

q “Have the authority to alter long-common practices that nettle consumers, such as mandatory arbitration clauses in the fine print of contracts that automatically send business-consumer disputes to arbitrators rather than to courts. The agency could ban or limit such clauses in specific products if they are shown to tilt against consumers’ interests.”

q “Write the user-safety rules for practically all consumer financial products and would have the legal firepower to levy huge fines —— tens of thousands of dollars a day per violation in some cases —— and prosecute lenders, brokers and others who break the rules.”

q “Be the dominant federal consumer protector in all home real estate settlements. It would regulate “affiliated” title, escrow and financing businesses connected with realty firms and builders. It would oversee equal credit opportunity and fair housing, and would set standards for all mortgage offerings, whether from the biggest national banks or the smallest local brokers. Generally, it wouldn’t seek outright bans on mortgage products that carry elevated risks —— interest-only loans, for instance —— but would require that lenders restrict such mortgages to well-informed applicants who can document that they understand the risks and can afford the payments.”

q “Be tasked, within its first year, with creating consumer-friendly, uniform disclosures for all home purchase and financing transactions, starting with a combined “good-faith estimates” and truth-in-lending statement.”

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Please note: A PDF copy of the AGs’ letter to Congressional leaders is attached to this press release

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