On June 30 the Obama Administration submitted the legislative text of a 152-page act establishing the Consumer Financial Protection Agency as an independent agency in the executive branch to regulate the provision of all financial products and services to all consumers by all providers. The bill would transfer the consumer protection rulemaking, examination and enforcement functions of all of the federal bank regulatory agencies to the new single purpose Agency, leaving only a contingent "backstop" authority with those agencies.
The legislative text is more sweeping and more aggressive than suggested by the consumer protection section of the White Paper released on June 17 in connection with President Obama’s speech on that topic, leaving many of the most controversial and important details up to future Agency administrative rulemaking.
The new Agency would:
- Have the power to examine, write and enforce regulations against bank and nonbank consumer lenders alike. Significant service providers to consumer lenders would also be subject to the Agency’s rules. Money transmitters, check cashiers and stored value sellers would likewise be "covered persons." Bank overdraft protection plans would also be covered.
- Have visitation authority to examine banks and nonbanks onsite.
- Build on the recent credit card legislation, predatory lending legislation and Federal Reserve regulations to regulate and ban specific terms and conditions of consumer credit transactions.
- Enforce the Community Reinvestment Act (CRA). Some observers have suggested that the CRA’s incentives and requirements to extend credit to less than well-qualified applicants contributed to the subprime mortgage problem.
- Be an independent agency with funding based upon fees and/or assessments on consumer lenders.
- Have sole national rulemaking authority for all of the major federal consumer credit protection statutes.1
- Level the consumer credit playing field by making many effectively unregulated lenders subject to the same rules as banks, thrifts and consumer finance companies. The Agency is empowered to require "reports of condition" from nonbank lenders.
- Be assisted by an outside Consumer Advisory Board.
- Enforce statutes and regulations that are a floor, not a preemptive ceiling, allowing states to enact, and state attorneys general to enforce, more stringent state rules if desired. The proposal reverses 140 years of national bank preemption and is in eerie harmony with the US Supreme Court’s June 29 preemption decision, Cuomo vs. Clearing House Assoc. LLC, addressed in a recent Squire Sanders Financial Services Alert.
- Authorize enforcement of its federal rules by state attorneys general.
- Dictate and/or approve Truth in Lending Act (TILA) and Real Estate Settlement Procedures Act (RESPA) disclosures for home mortgages.
- Require that financial service providers offer consumers plain vanilla (termed "standard") mortgage, credit card and other products before offering more complex (termed "alternative") products. Future Agency rules would specify precisely how a consumer could effectively "opt out" of a standard product and be offered an alternative one.
- Limit or restrict consumer financial services product terms and conditions and provider practices, subject to a form of cost-benefit analysis.
- Be authorized to prescribe suitability, fiduciary and similar duties on financial service providers, subject to a partial ban on private litigation (private rights of action) to enforce such new duties.
Front-page stories the day after the text was submitted in American Banker, The Wall Street Journal and The New York Times characterized the banking industry as an underdog in opposing the new Agency, citing reduced lobbying budgets resulting from failed institutions and TARP fund restrictions, as well as strong popular sentiment arising from increasing home mortgage foreclosures. A Financial Services Roundtable lobbyist identified his group’s fallback position as diluting the new Agency’s powers to make it "the least-worst way to do the wrong thing" in an Associated Press article.
With respect to timing, House Financial Services Committee Chairman Barney Frank endorsed the draft bill and confirmed his intention to vote a final bill out of the House by the end of July. The Senate’s timing appears to call for a final vote by the end of the year. By contrast, in an op-ed piece in American Banker on July 1, former FDIC Chairman William Isaac advocated a six-month to a year-long analysis of the causes of the credit crisis prior to final congressional action.
While Chairman Frank has spoken in terms of a stand-alone consumer protection act, the legislative text is "Title X" of what is presumably a draft of a comprehensive regulatory reform bill as is understood to be the preference of Senator Chris Dodd.
Substantive Highlights of the Proposed Law2
In an apparent effort to blunt criticism that banks and thrifts would be subject to conflicting consumer protection and safety and soundness rules, Section 1016 requires the Agency to coordinate with the federal banking and other agencies and state regulators to promote consistent regulatory treatment of consumer and investor products and services. This section also requires the Agency to coordinate consumer education initiatives with agency members of the existing Financial Literacy and Education Commission.
In much-awaited details on Agency funding, Section 1018 provides authority for the Agency to collect annual fees or assessments from providers of financial services, and also establishes a Victims’ Relief Fund for the collection and disbursement of civil money penalties obtained by the Agency in the use of its powerful new enforcement tools.
Section 1021 mandates the Agency to promote transparency, simplicity, fairness, accountability and access in the market for consumer financial products and services. This section also establishes the objectives of the Agency, which include ensuring that consumers have and understand information to make decisions about consumer financial products and services; that consumers are protected from abuse; that markets for consumer products and services operate fairly and efficiently with growth and innovation; and that all consumers have access to financial services.
Significantly, Section 1022 requires the Agency to conduct a cost-benefit analysis in its rulemaking and prohibits it from setting fixed usury rates or limits.
In a preface to a number of provisions authorizing a more psychological approach to consumer behavior and protection, Sections 1023 and 1034 give the Agency authority to gather information for research purposes regarding individual and business behavior and also encourage pilot project disclosure tests by lenders.
Section 1024 requires the Agency to monitor for risks to consumers in the market for consumer financial products and services and to publish a report of significant risk findings at least once each year.
In a bold strike at long-standing banking industry efforts to reduce and control litigation costs and exposures, Section 1025 permits the Agency, by rule, to prohibit or impose conditions on mandatory predispute arbitration agreements between consumers and covered persons if the Agency determines doing so is in the public interest and for the protection of consumers.
Section 1031 authorizes the Agency to prescribe rules prohibiting unfair, deceptive or abusive acts and practices (UDAPs), but sets a relatively high standard for an "unfair" finding.
Section 1032 authorizes the Agency to prescribe rules to ensure appropriate and effective disclosure to consumers of the costs, benefits and risks associated with any consumer financial product or service. As noted, this section also requires the Agency to propose model disclosures that integrate TILA and RESPA disclosures within one year.
In one of a number of provisions presumably designed to win the support of the banking industry, Section 1035 authorizes the Agency to prescribe operational standards applicable to covered persons other than insured depository institutions and credit unions. This power could be used to deter and detect UDAPs in the provision of consumer financial products or services by currently unregulated competitors of banks, thrifts, credit unions and large finance companies.
Section 1037 authorizes the Agency to prescribe rules imposing duties (presumably including suitability, fiduciary or other types of duties) to "ensure fair dealing with consumers" on a covered person, an employee of a covered person, or agent or independent contractor acting for a covered person, who deals directly with consumers. As noted, the rules prescribed under this section are enforceable only by the Agency in an administrative proceeding or by a state regulator in an appropriate administrative proceeding.
Preservation of State Law: A Preemption Revolution
Section 1041 confirms that the Act and any rule adopted by the Agency will not preempt state law if state law is determined to provide greater protection for consumers (the Agency is given the preemptive right to make that determination).
Section 1042 authorizes any state attorney general to bring civil actions for violations of the Act. Before initiating any action, however, a state attorney general or appropriate state regulator must provide prior notice to the Agency where practicable.
As part of a stunning timing relationship with the US Supreme Court’s Cuomo decision of June 29, Section 1043 amends the National Bank Act to establish the state law preemption standards for national banks and their subsidiaries, while Section 1044 establishes the visitorial powers of state attorneys general under the National Bank Act.
Section 1045 provides that state law is applicable to state-chartered nondepository institution subsidiaries and affiliates of national banks, overturning recent US Supreme Court decisions shielding bank holding company subsidiaries from such regulation.
Agency Enforcement Powers
Section 1052 authorizes the Agency to issue subpoenas for documents and testimony including a type of override of the Fifth Amendment right to avoid self-incrimination normally reserved for high-stake criminal prosecutions. It authorizes demands for materials, provides for confidential treatment of demanded material, provides for the Agency to petition a US District Court for enforcement, provides for petitions to modify or set aside a demand, and provides for custodial control and US District Court jurisdiction to enforce custodial duties.
Section 1053 authorizes the Agency to conduct hearings and adjudication proceedings, with special rules for cease-and-desist proceedings, temporary cease-and-desist proceedings and enforcement of orders in a US District Court.
Section 1054 authorizes the Agency to commence a civil action against a person who violates a provision of the Act or any rule or order thereunder.
Section 1055 provides for relief through administrative proceedings and court actions.
Section 1056 authorizes the Agency to transmit evidence of conduct that may constitute a violation of federal criminal law to the Attorney General of the United States.
Section 1058 provides so-called "whistle blower protection" against firings of, or discrimination against, employees who provide information or testimony to the Agency. Reimbursement of a whistle-blowing employee’s attorney’s fees is provided for, but there is no mention of a qui tam bounty.
This extremely detailed specification of the Agency’s investigative and enforcement powers (which include the investigative powers of on-site bank examiners and the administrative enforcement powers and procedures of Section 8 of the Federal Deposit Insurance Act) raises several questions for regulated banks, thrifts and large consumer finance companies:
- Are these rules beneficial in that they will level the playing field with previously unregulated mortgage brokers, payday lenders and similar competitors?
- Are these rules more draconian than the current rules and thus undesirable?
- In a controversial bill, why didn’t the Obama Administration downplay enforcement severity by merely cross-referencing existing investigative and enforcement rules?