State Enforcers Take the Lead in Consumer Finance
For decades, consumer finance enforcement was largely centralized in Washington, D.C. However, the balance is now shifting. State attorneys general, banking departments, and legislatures are seizing a greater role in regulating lending, payments, and embedded finance. This emerging trend marks the most significant state-level activity since the formation of the Consumer Financial Protection Bureau (CFPB).
These shifts are not temporary. The coordinated actions of states are rapidly redefining the regulatory landscape, creating a system that is more agile and expansive. State regulators are launching joint investigations, building new enforcement infrastructures, and reaching across jurisdictions to address fintech and traditional financial services alike.
Why States Are Becoming More Active
Several factors contribute to the growing state involvement. First, the CFPB has recently narrowed its interpretation of federal laws, giving states more room to enforce their own consumer protection statutes. Blue state attorneys general are also increasing their coordination efforts, sometimes even consulting with CFPB leadership to inform their strategies.
Moreover, political motivations align with regulatory ambitions. State AGs now frame fintech oversight as a matter of competition, wage fairness, or consumer privacy—issues that resonate with a wide range of constituents. This framing allows them to justify broader regulatory actions, particularly when federal rules are delayed or legal uncertainties arise.
AG Coalitions Target Emerging Products
Buy Now, Pay Later (BNPL) products are under intense scrutiny. A coalition of state AGs recently demanded comprehensive data from major BNPL providers, including underwriting practices, fee structures, complaint metrics, and data usage. These investigations are prompting even smaller BNPL operators and retailers to reassess their compliance strategies.
Earned Wage Access (EWA) products are also drawing attention. Regulators are beginning to treat these offerings as credit products, particularly when they include fees or employer integrations that mirror traditional lending. In New York, the Attorney General has initiated enforcement actions against EWA firms, arguing that tips and expedited access fees effectively serve as interest under state law.
These coalitions extend beyond financial products. A bipartisan group of AGs has formed a national task force to address risks associated with artificial intelligence in consumer finance. Additionally, 39 states have jointly urged Congress to preserve local authority over AI legislation, highlighting the growing trend of multistate cooperation on broader consumer protection issues.
States Build Enforcement Infrastructure
Some states are not just enforcing existing laws but creating new institutions to strengthen oversight. Pennsylvania, for example, has established a centralized consumer protection office within the Attorney General’s office to tackle digital finance issues. Meanwhile, New York has proposed legislation to regulate EWA programs with licensing requirements, rate caps, and transparency mandates.
Legacy areas are also seeing renewed attention. Regulators in Hawaii, Idaho, Oregon, and Texas recently reached a multistate settlement with a mortgage lender over allegations of unlicensed operations and supervisory failures, demonstrating that traditional finance channels remain under scrutiny as well.
The DIDMCA Ruling and Its Implications
Perhaps the most consequential development is the Tenth Circuit’s decision regarding Colorado’s opt-out from the Depository Institutions Deregulation and Monetary Control Act (DIDMCA). The appellate court permitted Colorado to apply its rate caps to loans made by out-of-state state-chartered banks, provided either the lender or borrower is located in the state.
This ruling challenges longstanding preemption principles and introduces a dual regulatory framework: one for national banks, which retain rate exportation rights under the National Bank Act, and another for state-chartered institutions, which may now face state-specific rate limits. This change is especially impactful for fintech companies that rely on state bank partnerships.
Industry groups argue that the decision could distort competition and reduce credit availability. The Office of the Comptroller of the Currency (OCC) has also voiced concerns, suggesting the ruling may require legislative intervention to preserve the dual banking system.
Fintech Faces Expanding State Oversight
States are applying traditional consumer protection laws to modern fintech models. Regulators are increasingly invoking licensing and supervisory frameworks originally designed for brick-and-mortar institutions. Payment and payroll platforms are under scrutiny through money transmission laws, with a focus on who controls the flow and timing of funds.
Similarly, statutes governing loan brokering, servicing, and debt collection are being extended to fintech firms that influence underwriting or customer interactions. Some states are also imposing anti-money laundering (AML) expectations typically reserved for banks. For instance, money transfer company Wise agreed to enhance its AML program as part of a multistate consent order, underscoring the rising expectations for nonbank entities.
Strategic Compliance for Companies
Given these developments, companies can no longer view state enforcement as an occasional risk. Instead, they must embed state-level compliance into their core strategies. Key actions include:
- Mapping Regulatory Exposure: Understand which jurisdictions impose specific caps, disclosures, or refund rules.
- Preparing for Investigations: Develop internal systems to respond to detailed AG inquiries.
- Reviewing Bank Partnerships: Reevaluate models in light of the DIDMCA ruling and borrower location factors.
- Revising Product Designs: Update customer communications and fee structures to avoid regulatory classification as interest or finance charges.
- Enhancing Controls: Apply AML and consumer protection standards comparable to those in banking.
- Engaging Regulators: Proactively reach out to state officials before launching new offerings.
- Aligning Strategy: Adjust product and investor messaging to reflect the growing role of state law.
The New Regulatory Era
The consumer finance industry is entering a transformative period where state regulators are not just participants but central architects. Through enforcement actions, legislation, and court decisions, they are redefining the rules of engagement for financial services. Companies that adapt to this new reality will thrive, while those that ignore it may face significant operational and legal challenges.
This article is inspired by content from Original Source. It has been rephrased for originality. Images are credited to the original source.