States and Courts Fill In Regulatory Gaps as CFPB’s Future in Flux

The Consumer Financial Protection Bureau’s funding and foundations are hotly debated on Capitol Hill and in courtrooms.

As the agency itself has been walking back, or outright canceling, its own rulemaking, there’s a flurry of activity at the state level where lawmakers and attorneys general are, in effect, stepping in for the bureau, levying lawsuits and legislation that treads ground typically covered by the consumer-focused watchdog.

For the providers, the state-by-state level actions mean there’s an increasingly fragmented regulatory terrain to navigate.

State by State

In one example, New York State Attorney General Letitia James sued earned wage access providers DailyPay and MoneyLion, alleging illegal and deceptive conduct and abusive lending practices. James said the firms’ services are payday loans and that the fees the companies charge on these short-term loans can amount to annual interest rates of as much as 750%.

The state efforts come after a 2022 lawsuit against MoneyLion lodged by the CFPB over alleged violations of the Military Lending Act. MoneyLion sued the CFPB, arguing that its funding is unconstitutional and thus the agency should not be allowed to proceed with its action.

More recently, a New York federal judge ruled that MoneyLion can indeed challenge the CFPB’s funding, but the digital financial services firm must first respond to the charges in the suit over service members.

New York City Comptroller Brad Lander said in a June 9 press release that “the federal government is no longer equipped to safeguard consumers. States and cities must step in to fill the gap. While preemption and other legal and operational barriers prevent them from replicating everything the CFPB once did, state and local governments have a range of tools to combat abusive financial practices and preserve access to safe, affordable financial services.”

Lander advocated for passing the End Loansharking Act, which would bring earned wage access and merchant cash advances under the purview of state lending and usury laws.

In Illinois, state-level legislation would create consumer financial protection laws and a financial protection fund.

“The lack of a dedicated financial services regulator with broad authority over providers of financial products and services has left the people of Illinois vulnerable,” the text of the bill said.

In many ways, the expansion of the state financial regulator mirrors some of the core oversight of the CFPB, with tenets covering risk, cybersecurity and licensing of service providers.

Last month, Pennsylvania expanded its enforcement authority and launched new consumer-facing reporting and complaints tools.

The CFPB’s Take

Just before the President Donald Trump administration came into office in January, the CFPB issued a document, “Strengthening State-Level Consumer Protections,” that in part recommended that state attorneys general “should have a relatively unimpeded process to initiate consumer protection investigations. For example, state attorneys general should not have to petition a court prior to issuing a subpoena or civil investigative demand.”

There was also a recommendation that states boost consumer protection laws to include B2B transactions.

“The products and services businesses use, and the way they interact with financial institutions, may not be any different than other consumers,” the document said. “Yet, a business may not be protected in the same way as other consumers even if they suffer the same harms. Furthermore, an unfair, deceptive, or abusive practice that is business-to-business can have follow-on effects on individuals.”