States Take Charge: A New Era in Consumer Finance Regulation

A Shift in the Regulatory Landscape

States are stepping up their game in the world of consumer finance. For a long time, Washington, D.C. was the main hub for enforcing rules in this area. But now, state attorneys general, banking departments, and legislatures are taking on more responsibility. This shift is changing the regulatory landscape, making it faster, broader, and more coordinated across different states.

Why Are States Taking the Lead?

Several factors are at play:

• The CFPB has narrowed some interpretations that previously expanded state enforcement powers.
• States still have broad authority to enforce their own consumer protection laws.
• State attorneys general, especially in blue states, are coordinating more closely and sharing information.
• This teamwork allows them to act quickly when federal rulemaking slows down or when there's uncertainty.

Fintech Oversight and Public Concerns

State attorneys general are framing fintech oversight in ways that resonate with the public, such as competition issues or privacy concerns. This helps them justify taking a closer look at new financial products and services.

Scrutiny on BNPL and EWA Programs

• Buy Now, Pay Later (BNPL) Products: A group of state attorneys general recently sent broad information requests to major BNPL providers, covering everything from underwriting criteria to complaint patterns.
• Earned Wage Access (EWA) Programs: These are being scrutinized, with some states treating certain models as credit, especially when fees resemble traditional lending.

New Structures and Regulations

States are not just enforcing existing rules; they're also creating new structures:

• Pennsylvania: Set up a centralized consumer protection office to tackle digital finance companies.
• New York: Introduced legislation to regulate EWA programs, proposing licensing frameworks and rate caps.

Significant Legal Developments

• Tenth Circuit's Ruling on Colorado's Rate Caps: The court allowed Colorado to apply its rate limits to loans made by out-of-state institutions if either the borrower or lender is located in Colorado. This ruling has big implications for marketplace lenders and fintech models that rely on state bank lending.

Regulatory Scrutiny on Fintech Models

State regulators are applying familiar consumer protection statutes to novel fintech models. They're focusing on who controls payment flows and user relationships, rather than how long funds are held. This means fintech companies should expect bank-like scrutiny, even if they operate under nonbank licenses.

Adjusting to the New Regulatory Era

In this new regulatory era, companies need to adjust their compliance and product strategies:

• Map out their regulatory exposure.
• Prepare for multistate inquiries.
• Reevaluate their bank partnership structures.
• Align product and investor strategies with state trends, as state law and enforcement now drive operational and pricing decisions more than federal guidance.