States and the Coming Scam-Apocalypse

Reduced federal consumer protections will leave state governments in the lurch.

Photo credit: CafeCredit

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The Trump administration effectively shuttered the Consumer Financial Protection Bureau (CFPB) last weekend, with acting director Russel Vought ordering the bureau to cease all substantive work. Since its inception, the Bureau has been targeted by large banks and other dominant corporations, such as Big Tech firms, for its work reining in the excesses of the financial system. It seems those corporations finally found an administration willing to kneecap the Bureau for them.

Even if the CFPB officially re-opens, it appears unlikely that it will return to anything like its pre-Trump vigor. The president himself even said he wants to eliminate the Bureau entirely, though he did then nominate a permanent director afterward, so who knows.

But whether it’s eliminated or simply rendered incapable of doing real work, neutering the CFPB is going to unleash a wave of scams, fraud and financial loss on the American populace, creating a Wild banking West and allowing the consolidation of the financial system into even fewer hands.

It could be a scam-apocalypse, if you will, of epic proportions.

State legislators, regulators, and antitrust enforcers are definitely concerned, with the Minnesota Senate already announcing it will hold a hearing into what the reduction of CFPB oversight means for their state. And they’re right to be worried: State and local lawmakers have some powers to step in and replace what the Bureau has been doing, but it’s the areas in which states can’t act that are instructive and most troubling, as I’ll explain below.

But first, it’s worth noting that the CFPB — created as part of the 2010 Dodd-Frank financial reform law, signed by President Obama in response to the 2008 financial crisis and ensuing Great Recession — has been quite successful, especially under former Chair Rohit Chopra. It returned $21 billion to consumers that had been lost to scams, fraud, deception, and other abusive tactics. It set new rules for credit reporting, eliminated unfair and deceptive banking fees, and instituted new regulations for data brokers, among many other items. You can read a fuller accounting from some of my colleagues here.

And lest my more conservative readers think the Bureau is just a liberal darling doing things liberals like, since it is the brainchild of Sen. Elizabeth Warren, I’ll note that the CFPB has also been the most prominent government opponent of what’s known as “debanking,” which is the practice of restricting access to the financial system based on political views, something that has fallen disproportionately on conservative actors.

The Bureau was created to eliminate a tension in traditional bank regulation, which tasked banking regulators with both maintaining banks’ bottom lines and protecting consumers — two goals that often conflicted because scamming customers can be quite lucrative. When push came to shove, bank regulators almost always put the banks’ interests first.

To clear that up, the CFPB received the consumer protection mandates of a host of existing bank regulators, as well as supervisory powers over non-bank financial players, such as mortgage lenders. With the CFPB out of the picture, there is now no entity enforcing consumer protection rules in the financial system. As the Consumer Federation of America noted, “Unless Congress passes legislation, the suspension of supervisory work by the CFPB will not result in those responsibilities being returned to the agencies that formerly had them.”

Now, as I said, states can fill some of the void. For example, state legislatures could create a state version of a CFPB rule requiring that medical debt be excluded from credit reports, as Colorado, New York, Virginia, Illinois, Minnesota, Rhode Island, and California have already done. States could take up the CFPB’s work reining in abusive short-term installment loans. States can adopt a CFPB rule ensuring data brokers are not selling personal data willy-nilly to anyone and everyone, as proposed by a bill introduced in Connecticut. States could perhaps get into some of the non-bank supervision for which the CFPB had been responsible.

State attorneys general can also enforce some federal consumer protection rules and existing CFPB rules over some entities.

But states can’t regulate or enforce consumer protection law against national banks, thanks to something known as preemption, which I’ve written about in other contexts. The theory behind preemption is that states shouldn’t be able to interfere with the workings of a national banking system, or other national systems, as they are a desirable and necessary part of knitting the U.S. economy together.

Here’s where the worry sets in: Prior to the 2008 financial crisis that led to the creation of the CFPB, many states tried to regulate the predatory lending and shady financial products that wound up dragging the economy down when they tanked the big national banks. Those states, though, were preempted by federal bank regulators under the George W. Bush administration.

In fact, Bush administration regulators argued states weren’t even allowed to investigate national banks for wrongdoing (a position that was overturned by the Supreme Court after it was too late to matter).

Had state policymakers been allowed to react to some of the abuses they were seeing on the ground, some of the worst of the 2008 crisis could have been avoided. And the same dynamic could take hold today, if the CFPB remains neutered — states simply can’t fully replace a national regulator watching over the whole financial system, thanks to their lack of reach and federal preemption. The seeds of the next financial crisis may be planted where the shadow of the CFPB used to reach.

This will be especially problematic as tech and finance merge and as public bodies become more entangled with the crypto industry, two trends that will likely accelerate given the current regulatory environment.

Even in those areas where the CFPB was active over the years, it often pushed states to go further, a sort of anti-preemption doctrine, allowing consumers to have the best of both worlds — a dedicated consumer financial regulator at the national level, and active state oversight. Now, it seems the opposite will be the case, and we will all be poorer for it.

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SHAMELESS SELF-PROMOTION: My colleague Kelsea Pym and I co-wrote a piece in Governing explaining why banning junk fees is a political winner for state legislators. Read it here.

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SIMPLY STATED: Here are links to a few items that caught my eye this week.

• Why anti-monopoly is the path forward for Democrats.

• Bills to ban algorithmic price-coordination in rental housing have been introduced in 16 states so far this year. Check out our map here.

• Washington State Gov. Bob Ferguson initiated a study of the impact data centers are having on the state’s economy.

• Connecticut is the latest state to consider limiting the ways in which social media platforms can use algorithms to push content to children.

• Nevada state legislators are working on actions that would supposedly reduce egg prices.

• Ohio Gov. Mike DeWine proposed raising taxes on sports betting in order to fund the construction of sports facilities, including pro sports stadiums.

• Corporate tax breaks cost South Carolina schools $3.2 billion between 2017 and 2023.

• Rhode Island Gov. Dan McKee proposed taxing digital ads as part of his 2026 budget.

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— Pat Garofalo