Federalism to the Rescue

State regulators can and should examine for violations of federal consumer financial law

The SBPC is releasing new research developed as part of its Student Loan Justice Fellowship Program examining what tools states can leverage to respond to the needs of their residents who must now deal with the economic fallout from coronavirus. 

The report, written by SBPC fellow Brian Shearer, builds a case for how states can oversee the nonbank companies at the center of the $1.6 trillion student loan market. The report also offers a path forward for states to oversee other critical financial institutions that play large roles in our consumer financial markets.

Read the Full Report: Federalism to the Rescue: State Regulators Can and Should Examine for Violations of Federal Consumer Financial Law

This article argues that state regulators should use the authority granted to them in § 1042 of the Dodd-Frank Wall Street Reform and Consumer Financial Protection Act to supervise some financial institutions—including, most notably, student loan servicers—for compliance with federal consumer financial law.

“Supervision” is a type of government oversight typically used by banking regulators. It is a fast, confidential, and non-adversarial process that state and federal governments use to ensure sound business practices and to continually search for and remedy violations of consumer law.

At a time when oversight of the student loan market is more important than ever, the federal government has shied away from overseeing student loan servicers for consumer protection violations. This paper argues that state regulators can and should fill the supervision void left by the federal government.

In addition, this paper proposes that states should use a specific authority granted to it in the Dodd-Frank Act to make its supervision effective. Typically, state regulators supervise for compliance with state law and federal regulators supervise for compliance with federal law. But § 1042 of the Dodd-Frank Act gives state regulators the authority to supervise for violations of federal consumer financial law. State attorneys general have been using § 1042 to bring lawsuits for violations of federal consumer financial law for several years now. State regulators should start using § 1042 in their supervisory exams as well. By doing so, state regulators seeking to take action in response to the student loan crisis can sidestep the debate on whether the Higher Education Act preempts state laws and use the powerful federal prohibition against unfair, deceptive, and abusive acts or practices found in the Dodd-Frank Act to improve the business practices of student loan servicers.