With the future of the Consumer Financial Protection Bureau (CFPB) mired in legal and political uncertainty, state governments are increasingly stepping in to fill the regulatory vacuum. State legislators, attorneys general, and local officials are introducing new laws and enforcement actions that were once the domain of federal regulators, creating a more fragmented—and complex—compliance landscape for financial service providers.
While the CFPB continues to face challenges to its funding and authority in federal courts, including constitutional challenges from companies it has sought to regulate, state officials have been ramping up efforts to safeguard consumers. The result is a surge in state-level consumer protection initiatives, lawsuits, and legislative proposals, particularly in states like New York, Illinois, and Pennsylvania.
In New York, the attorney general recently filed lawsuits against two earned wage access providers, accusing them of engaging in deceptive lending practices that resemble high-interest payday loans. The state argues that fees associated with these short-term advances can lead to annual percentage rates as high as 750%. The action follows an earlier federal case against one of the same providers, which in turn prompted a legal challenge to the CFPB’s authority. A federal judge has allowed the company to question the CFPB’s funding structure—but only after addressing the charges related to service members.
City officials have also weighed in. In a recent public statement, a prominent city comptroller warned that federal consumer protections have eroded and called on local governments to step up. While acknowledging that legal limitations prevent states and cities from fully replicating the CFPB’s former oversight role, he emphasized that state and municipal governments still have significant tools to curb abusive financial practices. He also urged lawmakers to pass new legislation that would bring products like earned wage access and merchant cash advances under existing lending laws.
Illinois is considering its own set of protections, including the creation of a dedicated financial protection fund and expanded oversight powers. A proposed bill states that the absence of a comprehensive financial services regulator leaves consumers vulnerable, and seeks to establish authority over financial product providers, addressing risks such as cybersecurity and licensing requirements.
Pennsylvania has also joined the trend, expanding its enforcement authority and launching new tools to help consumers report financial misconduct.
Interestingly, the CFPB itself, before the current administration took office, issued a policy document encouraging states to take a more active role in consumer protection. The report advocated for streamlining investigative powers for state attorneys general and recommended extending consumer protection laws to cover business-to-business (B2B) transactions. It argued that businesses often face the same risks as individual consumers but lack equivalent protections, and that unfair B2B practices can have downstream effects on individuals.
As states move forward with their own frameworks, financial institutions must prepare for a more decentralized and potentially inconsistent regulatory environment. While this shift offers stronger protections for consumers in some jurisdictions, it also presents new compliance challenges for companies operating across state lines.
