The Dodd-Frank Act responded to public criticism that the federal consumer credit protection laws were not vigorously enforced by the banking regulators, by creating a new independent watchdog for that purpose housed within the Federal Reserve. It was widely believed that the banking regulators had not provided sufficiently vigorous enforcement of consumer credit protection laws, and that it was this lack of oversight that led to the explosion of subprime mortgages and ultimately to the collapse of the housing market. With the goal of eliminating risk in the financial system and improving consumer protection, the Consumer Financial Protection Bureau is charged with oversight of financial products and services providers, including banks and non-banks, as well as mortgage and student loan lenders, captive finance companies, payday lenders, and credit card companies. Notably excluded from the CFPB’s oversight responsibility are auto dealers, real estate brokers, and financial institutions with assets of less than $10 billion.

The CPFB will have supervisory powers as well as broad rule-making powers with the responsibility to protect consumers against unfair, deceptive, or abusive financial products, acts or practices, and to enforce compliance with existing consumer protection laws such as TILA, ECOA, RESPA, EFTA, GLBA, HMDA, the SAFE Act, and others. Its responsibility extends to data privacy and information security issues in connection with financial products and services. It was Congress’ intent for the CFPB to act swiftly to curb emerging practices it believes may be harmful to consumers. It has been charged with closely monitoring the financial services markets, and has been given broad rulemaking authority to regulate and prohibit products and services before they spread throughout the country or become large enough to adversely impact the economy.

The concept of “unfair and deceptive acts and practices” mirrors Section 5 of the Federal Trade Commission Act, and the CFPB will likely look to the FTC’s precedent for rulemaking and enforcement activity. However, the additional concept of “abusive” acts is new and has no actual precedent in the realm of financial products and services regulation. One point of guidance may be the FTC’s Telemarketing Sales Rule which prohibits not only deceptive telemarketing practices but also those that are “abusive.” The Rule describes particular practices it deems abusive, such as requesting or receiving payment of any fee in advance of obtaining a loan or other extension of credit when the seller or telemarketer has guaranteed or represented a high likelihood of success in obtaining the loan.

It is expected that the CPFB will closely mirror the FTC’s use of its Section 5 authority to regulate the consumer finance market. The CPFB will not interfere with state consumer protection efforts, and individuals, state Attorneys General, and state legislatures may still pursue measures to provide protection in the area of financial products and services.

As with any legislation of this magnitude, the devil is in the details. The regulations as ultimately finalized will establish the extent to which the CFPB will control the future development and delivery of financial products and services. It is incumbent upon large and small institutions, nonbank financial services providers, and consumers to engage in the rulemaking process to be certain that the views of all constituencies are aired as this national debate on the future of the financial services industry takes place.