Dynamic Federalism and Consumer Financial Protection: How the Dodd-Frank Act Changes the Preemption Debate
In the fall of 2008, at the peak of the financial crisis, Oren Bar-Gill and Elizabeth Warren published a law review article proposing the creation of a new federal agency charged with protecting consumers from dangerous lending practices. Fewer than two years later, in response to the most serious challenge to the United States financial system since the Great Depression, Congress enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”). Adopting the idea of Bar-Gill and Warren, Dodd-Frank created the Consumer Financial Protection Bureau (“CFPB” or “Bureau”), whose mission is to ensure “that markets for consumer financial products and services are fair, transparent, and competitive.” Its architects have argued that if the CFPB had been in place in the mid-2000s, it could have prevented the recent financial crisis.
In their 2008 article, Bar-Gill and Warren argued that a new consumer financial protection agency was needed because, among other reasons, existing federal financial regulators were insufficiently motivated to focus on consumer protection. Bar-Gill and Warren also alleged that the aggressive preemption of state consumer financial protection laws by the Office of the Comptroller of the Currency (“OCC”) in the 2000s weakened consumer financial protection at the state level. Throughout the past decade, consumer advocates, attorneys general, and academics have agreed, criticizing the OCC and the Office of Thrift Supervision (“OTS”) for their use of preemption to prevent states from cracking down on predatory lending. For their part, the OCC and other federal regulators have defended their use of preemption, arguing that the U.S. Constitution requires preemption where state law conflicts with federal law, and that preemption is an important tool for promoting the efficient operation of credit markets. As developed more fully below, both sides of the debate make a compelling argument, creating a preemption dilemma: preemption of state consumer financial protection laws could both harm and benefit consumers.
This Recent Development examines how Dodd-Frank changes the relationship between state and federal consumer financial protection authority and helps resolve the preemption dilemma. It argues that Dodd-Frank promotes “dynamic federalism,” an arrangement of governance whereby overlapping authority and competition between state and federal regulators in the area of consumer financial protection has the potential to make the preemption dilemma much less problematic. By creating a powerful new agency in the CFPB while simultaneously weakening the ability of federal regulators to preempt state consumer protection laws, Dodd-Frank creates a new framework for state and federal consumer protection authorities. This innovation in consumer financial protection should satisfy both those arguing for greater state powers to protect their citizens and those emphasizing the need for consistent, nationwide regulations in order to promote efficient credit markets. Part I examines the recent history of preemption before Dodd-Frank, and it explains how, over the past decade, federal regulators have had broad power to preempt state consumer financial protection laws. Part II highlights how both sides of the preemption debate have well-founded positions and that admitting this creates a preemption dilemma for policymakers. Part III suggests that the creation of the CFPB by Dodd-Frank is one key component that will reorient the preemption dilemma. Part IV argues that Dodd-Frank further resolves this dilemma by weakening federal preemption while empowering state regulators, thereby promoting dynamic federalism.