State-level Changes that Will Impact Financial Services
During the midterms, Democrats not only flipped enough seats to gain control of the U.S. House of Representatives, but also made substantial gains at the state level, flipping 300 legislative seats across the country. Even more importantly for financial services, Democrats also took control of a majority of the state attorney general (AG) offices.
Reports indicate that Democrats flipped four AG offices from Republican control in Colorado, Michigan, Nevada, and Wisconsin. The Democratic party maintained control of the AG offices in twelve other states, including New York and California. Combine these wins with the eight states that are Democratically-controlled yet did not have elections this year means that Democrats will now run a majority of the nation’s state-level AG offices.
State AGs play an important role in the financial services sector, but political affiliation does not always correlate with the number of enforcement actions taken by regulators. During the first half of 2018 for instance, state AGs initiated 19 enforcement actions, relative to the 42 actions taken in the first half of 2017. New York, with a Democrat AG, and Florida, with a Republican AG, saw some of the sharpest declines in enforcement actions over the past year.
Nevertheless, some experts believe that the newly elected AGs may portend rough times ahead for financial services. Joe Jacquot, a former chief deputy attorney general of Florida, thinks that state AGs may go after small-dollar, short-term lenders if Congress fails to pass meaningful legislation.
“I think those AGs — not only the ones that won in significant states, like Michigan, Wisconsin and Nevada, but also as a whole — feel a new motivation, and I think you’re going to see them press that in enforcement actions,” said Jacquot. “Where they are attempting to push an agenda that may never be accepted and passed as legislation on the Senate side, you’ll see AGs picking up on those issues and acting unilaterally where Congress has to act by consensus.”
Mick Mulvaney, the acting director of the Consumer Financial Protection Bureau (CFPB), stated earlier this year that he would look to “state regulators and state attorneys general for a lot more leadership when it comes to enforcement.” It is unclear, however, whether Kathy Kraninger, who is expected over the next month to obtain Senate confirmation to head the CFPB, shares Mulvaney’s sentiments.
The interconnected relationship between Congress, federal regulators, state AG offices, and the courts may come to a turning point when the CFPB revisits certain portions of the small-dollar rule in January. A federal judge recently stayed the compliance date of the rule, which originated under Obama-appointee Richard Cordray.