Cozen Currents: The Shifting State(s) of Regulation

“Republicans’ deregulatory agenda in Washington is already having ripple effects at the state level, in both red and blue ones alike, giving states a lane to step up and become de facto national regulators.” — Howard Schweitzer, CEO, Cozen O’Connor Public Strategies

The Cozen Lens

• Amid President Trump’s deregulatory agenda and congressional inaction on tech issues, states are stepping into the void.
• States are moving quickly to fill the regulatory void left by the Trump administration’s dismantling of the Consumer Financial Protection Bureau, but a number of regulatory gaps are poised to remain in place.
• Both the Trump administration and the states are competing to open the floodgates for autonomous vehicles, colloquially known as self-driving cars, to hit the roads.

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The Rise of the States

States’ Role in Regulating Tech. States are at the lead in crafting new rules for Silicon Valley.

• Amid the Trump administration’s deregulatory agenda and a history of congressional inaction on tech issues, the states are stepping into the void to propose tech regulations.
• States can generally move more quickly than Congress. Legislatures are smaller, lawmakers represent fewer people, and state senates generally lack the same filibuster rules as the US Senate. Former Supreme Court Justice Louis Brandeis famously referred to the states as “laboratories of democracy” for their role in innovating policies.
• State-level policies can have an impact beyond their borders, particularly for tech companies that have a nationwide presence. The states with the biggest markets can exert the most influence by virtue of their economic power. California, for example, passed Japan last month to become the fourth-largest economy in the world. States can also inspire copycat policies in other states across the country, developing de facto national standards.

New Rules for AI. As President Trump takes a light-touch approach to AI regulation, states are considering their own rules.

• The California Privacy Protection Agency (CPPA) has proposed notable regulations for automated decision-making technology. Though the agency’s board recently decided to weaken its draft rules, the CPPA remains the tip of the spear in regulating AI given Trump’s departure from his predecessor’s policy. The proposal is currently open for public comments.
• A Republican Texas state lawmaker has introduced legislation that, if passed, could provide an alternative red-state approach to AI regulation. Recently scaled back from its original version, state Rep. Giovanni Capriglione’s bill would prohibit the use of AI systems that discriminate against protected classes or encourage criminal behavior. The Texas House passed the bill late last month and it is pending in the state Senate.

Privacy and Children’s Online Safety. States are also at the forefront of efforts to enhance online protections.

• The CPPA, the only state privacy regulator in the country, is flexing its enforcement muscles and took two actions last week. The agency ordered a clothing retailer to pay a $345,178 fine and change its consumer privacy practices to settle alleged violations of state privacy law. The CPPA also levied a $46,000 fine against a Florida data broker for not registering and paying a fee under California’s Delete Act.
• App store age verification legislation has some momentum on the state level. Earlier this year, Utah became the first state in the nation to pass such a law, and lawmakers in both red and blue states alike have proposed bills. The California Assembly Judiciary Committee voted unanimously to advance an app store age verification bill and a Texas state Senate committee recently advanced a proposal.

Consumer Protection Beyond the CFPB

The Waning Days of the CFPB. The Trump administration is going well beyond a reversal of Biden-era rulemakings at the Consumer Financial Protection Bureau (CFPB), dramatically reducing the agency’s headcount and scaling back its regulatory responsibilities.

• By appointing Office of Management and Budget Director Russell Vought as acting CFPB chair in February, President Trump put to bed any speculation that his populist tendencies would lead him to maintain a strong CFPB. Vought, a long-time critic of the administrative state, moved quickly to fire 1,500 of the CFPB’s 1,700 employees, an order that includes the dismissal of every member of the agency’s rulemaking department. While Vought’s tenure at the CFPB was expected to be temporary, the Trump administration withdrew its permanent nominee for CFPB director, Jonathan McKernan, from consideration last week. That move will leave Vought and his team atop the CFPB for the foreseeable future.
• Although the legality of Vought’s firings remains tied up in a court battle, the acting director has moved similarly quickly to limit the agency’s regulatory footprint. In April, CFPB Chief Legal Officer Mark Paoletta announced that the agency would cut its supervision activities in half, a move that includes a deprioritization of the CFPB’s oversight of nonbanks, student lending, bank mergers, and medical debt. The agency also plans to withdraw roughly 70 guidance documents dating back to 2011 used by state attorneys general to interpret consumer protection laws. Among the documents listed for withdrawal is guidance to debt collectors on medical debt collection practices and an interpretive rule placing credit card-like requirements on Buy Now, Pay Later (BNPL) products.
• Although some of Vought’s actions could be undone by a future administration, the GOP majority in Congress is poised to place some permanency around a scaled back CFPB. The party’s budget reconciliation bill expected to pass this summer includes a policy provision that reduces the CFPB’s future annual funding cap from 12 percent of the Federal Reserve’s operating budget to five percent.

The New Cops on the Beat. With the CFPB’s regulatory footprint scaled back, state regulators and state attorneys general are stepping in to fill the void.

• A number of states including Colorado, Illinois, Minnesota, California, and Rhode Island, have banned the practice of reporting medical debt on consumers’ credit reports over the last several years. Yet others have imposed strict requirements around the process of doing so. Pennsylvania has separately opened a consumer protection hotline and website to expand its ability to track and crackdown on breaches of consumer finance law while California is moving to hire fired CFPB employees.
• New York and its Department of Financial Services (NYDFS) has taken the most comprehensive effort to pick up the slack, moving to resurrect overdraft fee limits and BNPL regulations formerly pursued by the Biden-era CFPB. In January, NYDFS proposed overdraft and nonsufficient funds fee regulations for state-chartered banks that would limit the fees to the overdrawn amount or transaction, limit the number of allowable fees, and ban the fees altogether in certain situations. Last week, the state legislature passed its FY25 budget which also included legislation that would impose a state-level licensing regime for BNPL operators partnering with state-chartered banks.
• Still, despite the efforts by some of the largest states to bolster their consumer protection regimes, not all of the CFPB’s regulations can be replicated at the state level. The GOP majorities in Congress have already passed legislation vacating a CFPB rule allowing the agency to supervise the digital wallets of the likes of Apple’s Apple Pay, Alphabet’s Google Pay, Block’s CashApp, and PayPal, something states haven’t historically had the authority to do. Bloomberg reports that the agency will also vacate its so-called “open banking” rule which cannot be resurrected by any one state given its scope.

Feds and States Hit the Gas on AVs

Trump Administration Gives AVs Green Light. Autonomous vehicles (AVs) are in many ways analogous to the Trump administration’s stance on AI, viewing it as a technological innovation of economic and national security importance to be encouraged.

• Being an avid cheerleader for the industry starts with removing regulations constraining it. The Department of Transportation (DOT) unveiled changes last month relaxing reporting requirements for crashes and creating a path to limit some required information reporting under claims of business confidentiality.
• However, what AV firms want more than anything else is a national, federal regulatory framework. Transportation Secretary Sean Duffy and Elon Musk have both declared they intend to work towards this goal. The current regulatory scheme exists under mandatory federal motor vehicle safety standards, almost all of which were created without the thought of computer-driven cars in mind. As part of last month’s suite of changes, DOT announced an expansion of an existing exemption program for foreign vehicles that don’t fully comply with the standards to domestic AVs as well, which the industry’s trade group hailed as a “bold and necessary step.” Further movement on this front will come from finishing the Framework for Automated Driving System Safety initiated during President Trump’s first term but was placed on the backburner under former President Biden.
• While help to expand the current series of exemption programs can and will be coming from the executive branch, real systemic change to the existing framework will have to come from Congress. While there is an appetite to pass a new federal framework, the necessity of beating the filibuster in the Senate means any solution will have to be bipartisan. Getting something Democrats, Republicans, and both chambers can all agree on is easier said than done.

States Compete to Fill the Gap. In the absence of clearer instructions from Congress, states have stepped in, even competing against each other, in a bid to become hubs for AV testing and deployment.

• Since 2017, 43 states and DC have collectively enacted 154 bills relating to AV technology; South Dakota, Kentucky, and Alabama each opened the door to testing on public roads last year. Yet another swath of bills on autonomous cars and trucks are making their way through state capitals again this year.
• California released a new proposal last month that would allow heavy self-driving vehicles on its streets for the first time. In lifting an existing 10,000 pound vehicle limit, the Golden State opens the door to the flurry of interest in autonomous trucks. Part of the reason for the update is in order to maintain its place as a leader in deployment as other states are making their own moves. The firm Aurora announced it began commercial service for the first long-haul autonomous truck routes in the nation last month, running frozen pastries between Dallas and Houston. California had four million self-driven vehicle miles last year, down from 9 million the year prior. Two bills that passed the Californian legislature with strong backing from labor unions creating more stringent reporting requirements were vetoed by Governor Gavin Newsom (D-CA).

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