Recent Settlements of Joint UDAAP Enforcement Between State and Federal Regulators

The Dodd-Frank Act (“Dodd-Frank”) granted to state attorneys general and state regulators much of the Consumer Financial Protection Bureau’s (“CFPB”) UDAAP authority. In particular, Dodd-Frank gives state attorneys authority to enforce the UDAAP prohibition in the Consumer Financial Protection Act (“CFPA”) against non-banks and state-chartered financial institutions under their jurisdiction, as well as CFPB regulations that affect such institutions. Dodd-Frank also authorizes state regulators to bring UDAAP claims (and claims under CFPB-issued regulations) against any entity that is state-chartered, incorporated, licensed, or otherwise authorized to do business under state law. The remedies available under the CFPA are significantly more robust than the remedies otherwise available to many state regulators.

A series of recent settlement activity suggests an increase in state enforcement under Dodd-Frank’s state action provisions.

• On December 19, 2014, the New York Department of Financial Services (“DFS”) became the first state regulator to settle an enforcement action under its CFPA authority. DFS alleged that an indirect auto lender and its sole shareholder violated federal and state UDAAP laws by, among other things, overcharging consumers and deceptively retaining credit balances due to them. Under the settlement, the defendants will admit to the violations, pay an estimated $8-9 million in restitution and pay a $3 million civil money penalty, and surrender all state lending licenses. In a press release announcing the settlement, the DFS Superintendent said, “This case demonstrates that the Dodd-Frank Act provides a powerful new tool for state regulators to pursue wrongdoing and obtain restitution for consumers who were abused. We hope other regulators across the country will consider taking similar actions when warranted.” Benjamin M. Lawsky, Superintendent of Financial Services of the State of New York v. Condor Capital Corporation and Stephen Baron, United States District Court for the Southern District of New York.
• On December 18, 2014, the Attorneys General of Virginia and North Carolina joined the CFPB in filing a federal complaint alleging illegal debt collection activity primarily directed at service members, along with a consent order to resolve those allegations. The complaint alleges unfair and abusive practices under the CFPA and violations of other federal and state consumer laws that govern conduct in connection with providing credit to and collecting debts, and cited the States’ independent UDAAP authority. As part of the consent order, which is subject to court approval, the defendants neither admitted nor denied the allegations but agreed to pay approximately $2.5 million in monetary relief to consumers, as well as a $100,000 civil money penalty. Consumer Financial Protection Bureau v. Freedom Stores, Inc., United States District Court for the Eastern District of Virginia.
• On February 10, 2015, the North Carolina Department of Justice, along with United States  Department of Justice and the United States Attorney’s Office for the Western District of North Carolina, announced a settlement of claims against two automobile dealerships alleging racial discrimination in violation of the federal Equal Credit Opportunity Act and unfair and deceptive practices under North Carolina state law. As part of the settlement, which is subject to court approval, the defendants denied the complaint’s allegations but agreed to a general injunction and specific changes to their business practices, agreed to provide monetary relief to affected consumers, and agreed to certain compliance monitoring.  United States and State of North Carolina v. Auto Fare, Inc., United States District Court for the Western District of North Carolina.

Other state enforcement actions are pending, including (1) a federal lawsuit by the Illinois Attorney General involving allegations that a lender offered an unfair revolving line of credit and engages in unfair, abusive, and deceptive practices in connection with that product; and (2) a federal lawsuit brought by the Florida and Connecticut Attorneys General under their authority to enforce the federal Mortgage Assistance Relief Services Rule and Florida and Connecticut laws prohibiting deceptive and unfair trade practices, based on an alleged mortgage rescue scam. State of Illinois v. CMK Investments, All Credit Lenders, United States District Court for the Northern District of Illinois; State of Florida, State of Connecticut v. Berger Law Group, United States District Court for the Middle District of Florida.