Bloomberg News

Republican State AGs Resisting Cooperation With CFPB

September 19, 2012

A group of Republican state attorneys general has declined to sign cooperation agreements with the Consumer Financial Protection Bureau, part of an escalating Republican revolt against the agency that began in the U.S. Congress.

Richard Cordray, the agency’s director, asked all 50 states in March to sign a memorandum of understanding designed to protect confidential information shared among states and the bureau. To date, only 12 states -- all but one with Democratic attorneys general -- have signed, according to the bureau and documents obtained in a public records request.

Oklahoma Attorney General Scott Pruitt said in an interview that he is declining to sign the agreement because of legal objections to the law that created the consumer bureau, the 2010 Dodd-Frank Act.

“There are misgivings I have about the authority and scope and power of the CFPB and the power granted to the director,” Pruitt said in an interview. “Frankly, until some of those issues are fleshed out, it is very premature for a state to enter into an MOU.”

Four attorneys general, led by Pruitt, plan to join an existing lawsuit that challenges the constitutionality of Dodd- Frank and the CFPB, according to a person briefed on the decision. Pruitt and attorneys general from South Carolina, Michigan and Kansas may become plaintiffs in the suit as soon as tomorrow, said the person, who spoke on condition of anonymity because the decision wasn’t public.

Separation of Powers

The lawsuit in federal court in Washington was filed June 21 by State National Bank of Big Spring, Texas. The bank argues that the structure of the consumer bureau violates the constitutional principle of separation of powers because Congress does not appropriate its budget, the president has limited ability to remove its director and courts face restrictions in reviewing its actions.

South Carolina Attorney General Alan Wilson, told a campaign rally last week in Greenville, South Carolina, of plans for legal action.

“We’re going to challenge that law,” Wilson said on Sept. 14, in remarks reported by Fox News. “We’re going take the battle back to Washington, D.C., because community banks on Main Street shouldn’t be choked to death so that big banks on Wall Street can take our money.”

The CFPB was created by Dodd-Frank to consolidate federal financial consumer protection authority in a single agency. Since starting work in July 2011, it has set up a complaint system for consumer services, proposed regulations on housing finance and is studying areas including mandatory arbitration, payday lending and overdraft protection.

State Cooperation

Cooperation with state attorneys general has been a signature effort of the consumer bureau since Harvard professor Elizabeth Warren began setting it up in late 2010. Warren, who is now running for the Senate as a Democrat from Massachusetts, touted state law enforcers as “natural partners” for the agency because of their focus on consumer protection.

Republicans opposed creation of the bureau, and Senate Republicans refused to confirm anyone to the position of CFPB director. That standoff led President Barack Obama to install Cordray as director on Jan. 4 using a process known as a recess appointment.

Republican opposition to CFPB and Cordray hasn’t been absolute.

Republican state attorneys general including Rob McKenna of Washington, John Suthers of Colorado and Mark Shurtleff of Utah signed an Oct. 18, 2011 letter supporting Cordray as CFPB director. Cordray, in response to a personal request from Suthers, publicly promised to help AGs combat payday lenders who dodge state laws by affiliating with Native American tribes.

Constitutionality Challenged

Pruitt of Oklahoma has spearheaded the work among attorneys general on challenging the constitutionality of Dodd-Frank, according to the person briefed on the lawsuit. Diane Clay, a spokeswoman for Pruitt, declined to comment on the lawsuit.

“General Pruitt has been leading the discussion on legal challenges to the unconstitutional provisions in Dodd-Frank for more than a year, and will work with South Carolina to lead the state litigation once plans are announced,” she said.

Michigan attorney general Bill Schuette and his counterpart in Kansas, Derek Schmidt, will also join the lawsuit, the person said. Schuette’s spokeswoman Joy Yearout declined to comment. Schmidt spokesman Jeff Wagaman did not return an e-mail or phone call seeking comment.

‘Disdain’ for States

Pruitt, Wilson and Schuette all signed a March 5 memo from the Republican State Leadership Committee, an association of Republican state officials, that criticizes the Obama administration’s “disdain for states, federal laws it finds inconvenient, the Constitution and the courts.” The memo includes Cordray’s recess appointment on a list of Obama’s objectionable actions.

Pruitt has opposed other initiatives backed by the Obama administration. In February, he declined to join a 49-state settlement with five large mortgage servicers over foreclosure practices, preferring to cut his own deal instead.

The CFPB and the National Association of Attorneys General signed a “joint statement of principles” in April 2011. In a March 6 speech, Cordray, a former Ohio attorney general, asked states to also sign individual MOUs, and asked for a “quick turnaround.”

“We want to expand on what you already do so well -- and we want you to take advantage of new resources we bring to the arena,” Cordray said in an address to NAAG in Washington.

Agreements Tallied

More than five months later, only 10 states had signed the memorandum: New Hampshire, New Mexico, Montana, New York, Vermont, North Carolina, Hawaii, Iowa, Mississippi and Nevada, according to copies obtained on Aug. 22 under a Freedom of Information Act request.

Since then, the District of Columbia, Wyoming and North Dakota have signed such memorandums with the consumer bureau, agency spokeswoman Moira Vahey said in an e-mail.

“We are pleased that we have a dozen agreements and additional agreements in the works. However, this is a state-by- state process and will take time,” Vahey said.

The purpose of the memorandum is to “preserve the confidentiality of information the parties share,” according to the documents. It states that any non-public “written or oral information exchanged between the parties will be deemed confidential.”

North Dakota attorney general Wayne Stenehjem is the only Republican among state officials who have signed the memorandum. Those who have declined gave differing reasons.

Greg Zoeller, the Republican attorney general of Indiana, said the pact was “unnecessary” because his office can sign confidentiality agreements that cover specific enforcement cases they work on with CFPB.

Not ‘Caught On’

“I never quite understood why they wanted a common memorandum of understanding,” Zoeller said in an interview. “It has not really caught on well.”

At the same time, Zoeller downplayed the need for broader challenges to the CFPB. He called potential lawsuits evidence that the country is in a “silly season” before the election, and said that a Republican-only lawsuit “hurts our credibility in challenging federal laws.”

For instance, no Democratic attorneys general joined lawsuits against the Obama health care law, Zoeller said. The Supreme Court eventually ruled against them.

Other Republicans involved with state issues took a harder line on the Obama administration and Cordray’s work.

“This effort for bipartisan cooperation with the states has clearly failed at this point,” Chris Jankowski, president of the Republican State Leadership Committee, said in an interview.

The bank’s case is State National Bank of Big Spring v. Geithner, 1:12-cv-01032, U.S. District Court, District of Columbia (Washington).

To contact the reporter on this story: Carter Dougherty in Washington at cdougherty6@bloomberg.net

To contact the editor responsible for this story: Maura Reynolds at mreynolds34@bloomberg.net


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