by Mark Totten, Associate Professor of Law, Michigan State University College of Law
Last week Illinois Attorney General Lisa Madigan filed a lawsuit against a short-term lender for abusive practices, likely making Illinois the first state to exercise its new powers under the Dodd-Frank Act to enforce the law’s ban on “unfair, deceptive, or abusive” acts or practices (UDAAP). (If readers know of other state attorneys general who previously enforced UDAAP, I would welcome hearing from you.)
The case, Illinois v. All Credit Lenders, alleges that the lender sold a financial loan product intended to evade new state laws governing short-term lending. Illinois law places a 36 percent interest-rate cap on such loans. According to Madigan’s complaint, All Credit Lenders sought to circumvent this requirement by imposing a mandatory “account protection fee.” Factoring in this monthly fee, the effective interest rate on the loans soared to more than 500 percent in some cases.
Moreover, the lender instructed borrowers to make a monthly minimum payment, but did not apply any of that minimum payment toward the principal. The complaint alleges borrowers were led to believe they were on a schedule to pay off their loans when in fact they were stuck in an endless cycle of debt.
Although Congress’s attempt to strengthen consumer protections in the Dodd-Frank Act has mostly focused on creation of the Consumer Financial Protection Bureau, Congress also responded by empowering state attorneys general to enforce federal law, as I have explored elsewhere. At the center of these new powers is the broad prohibition against UDAAP. this provision is similar to the long-existing UDAP-ban under Section 5 of the FTCA and related provisions in state consumer protection laws, but extends further to prohibit “abusive” acts or practices, as well.
Although this concurrent enforcement power will often overlap with existing state laws, the creation of a dual enforcement regime is important in two ways. First, it covers loopholes in existing state laws. Madigan’s case is representative. Although her complaint alleges violations of the state consumer protection law, the success of that claim will depend in part on how the court classifies the “account protection fee.” As Madigan recognizes, the financial product at issue appears designed to “thwart” Illinois law.
Second, in a few cases the new federal powers may be the only means for a state attorney general to stop predatory practices. My home state, Michigan, is perhaps the best example. As a co-author and I recently explained, the Michigan Consumer Protection Act was effectively killed several years ago by the state supreme court. With passage of the Dodd-Frank Act in 2010, suddenly the state attorney general has expansive new enforcement tools in the area of consumer financial protection. I suspect a few cases like Madigan’s to prime the pump will bring more actions as the states learn about their new powers.