Trump Implementing Relaxation of Federal Financial Regulations Prompts Increased Action from Regulators in Democratic States
In the face of the Trump Administration's plans to dismantle the Consumer Financial Protection Bureau (CFPB) and reduce federal regulations, state financial regulators have taken a proactive stance. Rather than allowing deregulation to weaken consumer protections, they have been maintaining their own enforcement actions and advocating for continued cooperation with the CFPB.
Last month, Atur Desai, a former deputy chief technologist for law and strategy at the CFPB, left his position to take up a deputy superintendent role at the New York Department of Financial Services. This move underscores the growing importance of state-level regulation in the financial sector. Gabriel O'Malley, another former deputy enforcement director of policy and strategy at the CFPB, also left in March to become an executive deputy superintendent at New York's Department of Financial Services.
One of the most significant developments in this regard is the CFPB's decision to withdraw a planned rule rescinding Section 1082.1 of the Consumer Financial Protection Act. This section requires state attorneys general and officials to notify the CFPB at least ten days before initiating enforcement actions related to the Dodd-Frank Act. The decision to withdraw this rule came after significant adverse comments from various groups, some of which represent state interests, indicating resistance to reducing collaboration or transparency with state regulators.
The CFPB's continued pursuit of updated rulemaking priorities also reflects this commitment. For example, it is seeking input on open banking rules under Section 1033, which reflects ongoing regulatory activity affecting financial data transparency and consumer rights, despite prior attempts to reduce federal rules.
Notably, the CFPB under the Biden Administration has pulled back on plans that would have limited state regulators' notification requirements before enforcement actions, signaling a recognition of states’ roles in consumer financial protection.
Meanwhile, states, particularly Democratic-controlled ones, are rushing to fill the regulatory gap left by the federal government. For instance, New York Attorney General Letitia James has announced a lawsuit against Early Warning Services, the company behind the popular money transfer app Zelle. The lawsuit alleges that Early Warning allowed fraud to proliferate on Zelle for several years and didn't do enough to stop it, resulting in consumers losing "hundreds of millions of dollars".
Similarly, Earnest, a student loan company, was accused of making unfair, manual adjustments to risk assessments and creating disparate impact in loan approval rates, with Black and Hispanic applicants more likely to be penalized than White applicants. As a result, Earnest entered into a regulatory consent order with Massachusetts regarding its student loans, agreeing to pay a $2.5 million fine and to develop a fair lending testing system.
In another case, the Maryland Supreme Court ruled on July 28 that an apartment complex owner may have discriminated against a rental applicant, Katrina Hare, based on her use of a housing voucher. The Maryland Supreme Court opinion concluded that more analysis will be needed to decide if the landlord's minimum-income rule disproportionately (and illegally) hurts voucher holders under the state's Housing Opportunities Made Equal Act.
Kareem Saleh, a former attorney and State Department official, has pointed out two other examples of states ramping up regulatory actions related to the concept of disparate impact. He expects increased state regulatory activity to continue, citing the examples of Earnest and the Maryland Supreme Court ruling as likely indicators of a widespread initiative by states over the next several years.
In conclusion, while the Trump Administration's push aimed to roll back federal oversight through the CFPB, state regulators have responded by insisting on preserving their enforcement notification rights and remaining key players in consumer financial protection, often working alongside or pushing back against federal deregulatory moves. The CFPB's recent regulatory reversals and active rulemaking demonstrate a partial rebalancing in favor of maintaining more robust regulation and coordination with the states.
[1] Consumer Financial Protection Bureau. (2025). CFPB Announces Withdrawal of Planned Rule Rescinding Section 1082.1 of the Consumer Financial Protection Act. Retrieved from https://www.consumerfinance.gov/about-us/newsroom/cfpb-announces-withdrawal-planned-rule-rescinding-section-1082-1-consumer-financial-protection-act/
[2] Consumer Financial Protection Bureau. (2025). CFPB Seeks Input on Open Banking Rules Under Section 1033. Retrieved from https://www.consumerfinance.gov/about-us/newsroom/cfpb-seeks-input-open-banking-rules-under-section-1033/
[3] Consumer Financial Protection Bureau. (n.d.). State and Federal Partnerships. Retrieved from https://www.consumerfinance.gov/policy-compliance/state-and-federal-partnerships/
[4] Consumer Financial Protection Bureau. (n.d.). Section 1033 - Consumer Access to Financial Records. Retrieved from https://www.consumerfinance.gov/policy-compliance/rules/section-1033/
[5] Consumer Financial Protection Bureau. (n.d.). Open Banking. Retrieved from https://www.consumerfinance.gov/policy-compliance/consumer-financial-protection-act/open-banking/
- The growing importance of state-level regulation in the financial sector is evident as former CFPB officials, such as Atur Desai and Gabriel O'Malley, have joined state financial regulators like the New York Department of Financial Services.
- Amidst federal deregulation, state regulators have taken a proactive stance, including filing lawsuits against companies such as Early Warning Services for allowing fraud to proliferate on the Zelle money transfer app.
