Prepare to be Regulated Financially. By That, We Mean Sued

A major section of S. 3217, the Restoring American Financial Stability Act, establishes the Bureau of Consumer Financial Protection with the broad authority to enforce violations of whatever strikes its fancy. At the same time, the financial regulation bill empowers state attorneys general to embark on their own exciting adventures of enforcement.

The Section is Title X, entitled the Consumer Financial Protection Act of 2010. As the title’s Section 1031 lays out, the law gives the Bureau the authority to act against “a covered person or service provider” that commits “an unfair, deceptive, or abusive act or practice under Federal law in connection with any transaction with a consumer for a consumer financial product or service…”

So now “unfair” is going to be a crime? That’s a vague standard, as are all the terms used in the list of offenses. The Bureau is supposed to develop the rules that further define its authority, and one hopes those rules clarify and limit the offenses. But it wouldn’t surprise us that enough ambiguity remains to invite arbitrary enforcement based on subjective standards.

Even more worrisome is that the bill also authorizes the 50 states and their attorneys general to enforce the same provisions. From Section 1042, “Preservation of Enforcement Powers of States”:

1) ACTION BY STATE- The attorney general (or the equivalent thereof) of any State may bring a civil action in the name of such State, as parens patriae on behalf of natural persons residing in such State, in any district court of the United States in that State or in State court having jurisdiction over the defendant, to enforce provisions of this title or regulations issued thereunder and to secure remedies under provisions of this title or remedies otherwise provided under other law. A State regulator may bring a civil action or other appropriate proceeding to enforce the provisions of this title or regulations issued thereunder with respect to any entity that is State-chartered, incorporated, licensed, or otherwise authorized to do business under State law, and to secure remedies under provisions of this title or remedies otherwise provided under other provisions of law with respect to a State-chartered entity.

Alarmingly, there’s nothing in the legislation that would require the state AGs to stick to the same standards the Bureau of Consumer Financial Protection will promulgate. The state AGs will enjoy free rein to sue whomever they want in state court for a violation of this new consumer financial protection statute.

Some state attorneys general also engage in the dubious practice of hiring private law firms to carry out the state’s litigation. As Victor Schwartz, who chairs the Public Policy Group at Shook, Hardy & Bacon, explains it to us:

The primary motivation of these private attorneys is to maximize an award or settlement amount; motivations which may directly conflict with the public’s interest in ensuring that justice is achieved. This profit-seeking objective is particularly problematic when the private attorney works on a contingency basis.

It’s not hard to imagine: An ambitious attorney general deciding to file a civil suit on behalf of all the state’s citizens against some company that did something “unfair,” and then hand over the litigation to a private law firm interested in the biggest payout possible. It could be good politics, but it would be hell on the rule of law.

The Senate this afternoon again failed to invoke cloture on a motion to proceed on S. 3217, the financial regulation bill, by a vote of 57-41. The vote will undoubtedly elicit media coverage about the politics of the votes, the partisan positioning and who could be hurt for the 2010 elections. All worthy topics, but it would sure be nice if the delays were used by journalists and the public to look more closely at what’s in the bill. We shouldn’t have to wait until after the bill is passed to identify its invitations to litigation and political abuse.

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