On July 21, 2010, President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Reform Act"). Title X of the Reform Act creates a new regulator: the Bureau of Consumer Financial Protection (the "Bureau"). Given the broad mandate conferred upon the Bureau by the Reform Act, the Bureau can be expected to exercise considerable authority over a broad range of consumer financial products and practices. Financial institutions should familiarize themselves with the Bureau's objectives and prepare for additional follow-on rulemakings as the Bureau begins to carry out its mandate.
A. The New Bureau of Consumer Financial Protection
The Reform Act established the Bureau of Consumer Financial Protection to regulate the offering and provision of financial products and services for personal, family, or household (collectively, "consumer") purposes. The new executive agency has been delegated broad powers over financial activities including the authority to promulgate, implement, and enforce federal consumer financial protection laws. In addition to assuming most of the consumer financial protection functions exercised by federal regulators under certain enumerated financial protection statutes, such as the Truth-in-Lending Act, the Real Estate Settlement Procedures Act and the Fair Credit Reporting Act, the Bureau has been granted broad rulemaking authority to protect consumers from unfair, deceptive, or abusive practices. Further, the Bureau will act as a primary regulator for depository institutions with assets in excess of $10 billion, and act as a secondary regulator for those institutions under the $10 billion asset threshold. Thus, the Bureau is positioned to exercise broad authority and discretion throughout the financial services industry.
The Bureau will exercise extraordinary broad rulemaking, examination and enforcement authority over "any person that engages in offering or providing a consumer financial product or service," a definition that explicitly encompasses any parties that extend credit, service loans, or engage in deposit-taking activities. As a result, banks and thrifts will fit squarely within the ambit of this expansive definition. Under Section 1022 of the legislation, the Bureau is authorized to administer, enforce and otherwise implement the enumerated Federal consumer protection statutes as well as the other laws that are transferred to the Bureau and the de novo regulations promulgated by the Bureau.
1.Bureau Structure & Governance
The Bureau will reside within, and be funded by, the Federal Reserve System (the "Federal Reserve"). Despite technically being housed within the Federal Reserve, the Bureau will be an independent body with the full status of an autonomous Executive Agency. The Bureau will be led by a Director, appointed by the President and confirmed by the Senate, who shall serve for a five year term terminable only for cause. The Director must appear before both Houses of Congress to present required reports on a semi-annual basis. Until the first Bureau Director is confirmed, the Secretary of the Treasury is authorized to perform the Director's functions.
The Bureau's Director shall have the power to appoint subordinate officers, and will be supported by a number of functional divisions, including:
- a Research division responsible for researching, analyzing, and reporting on the markets for consumer financial products and services;
- a Community Affairs division tasked with providing assistances regarding the provision of consumer financial products to traditionally underserved consumers;
- ◦a department responsible for the collecting, monitoring, and responding to consumer complaints;
- ◦an Office of Fair Lending and Equal Opportunity that will oversee "fair lending" law compliance;
- ◦an Office of Financial Education charged with developing consumer financial education initiatives;
- ◦an Office of Service Member Affairs that will provide financial education to military members and their families;
- ◦an Office of Financial Protection for Older Americans tasked with facilitating financial literacy for seniors; and
- ◦a Consumer Advisory Board responsible for keeping the Bureau updated on emerging practices in the consumer financial product industry.
The Bureau will initially be staffed by transferring personnel from those agencies that currently house the consumer financial protection functions that will be assumed by the Bureau. In practice, this will mean that the initial makeup of the Bureau will be composed of staff from an alphabet soup of seven regulators, including the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the Federal Reserve, the Office of Thrift Supervision, and the National Credit Union Association as well as the Federal Trade Commission and the Department of Housing and Urban Development.
The Bureau has been tasked with implementing and enforcing existing consumer financial laws and regulations as well as promulgating new rules to enable the Bureau to carry out its consumer protection mandate. On or before September 20, 2010, a deadline will be set for the transfer of all consumer financial protection functions of various federal agencies to the Bureau as well as for the transfer of authority under a laundry list of "enumerated" consumer laws.1
In addition, the Bureau has authority to promulgate new regulations. However, the Bureau must specifically consider the potential benefits and costs to consumers and regulated financial entities of such regulations, including the potential that such regulation may reduce consumer access to consumer financial products or services. The Bureau also has the power to exempt financial services or providers from any existing or new rules or regulations if the Bureau determines that the size of the service or entity, the volume of the transactions, and existing laws provide adequate protection. Despite its broad authority over consumer financial protection, the Bureau's powers are limited in one unusual way: in response to concerns that the Bureau would pursue its consumer protection mandate at the expense of safety and soundness concerns of the financial marketplace as a whole, the Reform Act provides that any of the Bureau's rules may be set aside by the newly-established Financial Stability Oversight Council upon a determination that such a rule poses a risk to the safety or stability of the U.S. financial system.
The Reform Act grants the Bureau supervisory authority over depository institutions that exceed $10 billion in assets ("Large Banks"), while the Bureau's supervisory authority over banks, thrifts and credit unions with under $10 billion in assets ("Community Banks") is much more limited. With regard to Large Banks, the Bureau has exclusive authority to require reports and conduct examinations in order to assess compliance with the Bureau's laws and regulations, gather information regarding the activities and compliance systems covered by the Bureau's laws, and detect risks posed to consumers and markets by consumer financial products. In the case of Community Banks, the Bureau has limited supervisory powers. While the Bureau may not independently examine Community Banks, the Bureau may include Bureau staff in examinations of Community Banks by that institution's primary regulatory in order to assess compliance with consumer financial law. Bureau examinations of Community Banks are to occur only on a sampling basis. While Community Banks will answer to their primary regulator regarding consumer financial laws, the Bureau may recommend that the primary regulator act to enforce federal consumer financial laws and regulations. The Bureau is authorized to require reports of Community Banks regarding consumer finance issues in order to assess and detect risks to consumers and consumer financial markets and in order to support the Bureau's examination activities. Aside from banking institutions, the Reform Act grants the Bureau authority to enforce consumer financial law against other institutions and business that offer or provide consumer financial products and services, such as extending credit or servicing loans.
iii.One-time Studies & Ongoing Reports
The Reform Act requires the Bureau to conduct a series of studies on particular financial issues as well as to report regularly to Congress on a number of issues within its mandate. The Bureau is required to conduct studies on (i) reverse mortgage transactions, including publishing any regulations needed to protect borrowers contemplating such a transaction; (ii) credit score dissemination practices; (iii) like-kind exchange practices; and (iv) mandatory arbitration provisions in consumer financial products and services. Each of these reports could spur additional regulation by the Bureau or new legislation.
In addition to the Director's required semi-annual appearances before the House and the Senate and associated reports, the Bureau is also required to present Congress with annual reports regarding consumer complaints collected by the Bureau, fair lending matters, financial literacy efforts, private education loan issues, and pre-paid cards, as well as a general annual report of significant findings regarding risks posed to consumers. Finally, the Bureau is required to publish an assessment of the effectiveness of each "significant" rule or order adopted by the Bureau within five years of the effective date of such regulation, taking account of public comment on such regulation.
iv.Specific Grants of Authority
The Bureau has also been granted the power to prescribe rules in certain, clearly delineated areas of interest to Congress. These rather strong "suggested" regulations may well comprise a road map for the Bureau's early rulemaking proceedings. First, the Bureau is authorized to mandate certain model disclosure forms, validated through consumer testing, that permit consumers to easily understand the costs, benefits, and risks associated with a given financial product or service. Indeed, in the Bureau's first year in existence it is required to propose just such a model disclosure combining the disclosures required under the Truth in Lending Act and the Real Estate Settlement Procedures Act into a single, integrated disclosure. Second, the Bureau is authorized to prescribe rules requiring covered financial service providers to make information available to consumers, upon request, regarding any transaction or series of transactions, or accounts obtained by the consumer from the provider. The Bureau is expected to create standardized formats for such information. Third, in consultation with other Federal regulators, the Bureau is authorized to establish procedures to provide timely responses to consumer complaints or inquiries. Procedures shall be established governing the contents and timeliness of regulators' responses to consumers complaints as well as the responses by the complained-about consumer financial service provider to its regulators. Finally, as noted above, the Reform Act requires the Bureau to conduct a study concerning the use of mandatory arbitration provisions in consumer financial contracts and issue a report to Congress on its findings, as well as impose regulations prohibiting or imposing limitations on the use of such provisions.
3.Preemption Rolled Back
The Reform Act dealt a significant blow to federal preemption of state consumer laws with regard to financial services. The Reform Act explicitly provides that it does not preempt any state law except to the extent that the state law is inconsistent with the provisions of the Reform Act. If a state law is inconsistent with the provisions of the Reform Act, it is only preempted to the extent of the inconsistency. Thus, the Reform Act acts as a "floor" for consumer financial product and service regulation, and the states retain the authority to enact "greater protections" for their citizens. In addition, if a majority of states enact a resolution supporting a consumer protection regulation, the Bureau is required to issue a notice of proposed rulemaking on the topic, but is not required to codify such a regulation.
Further, States' Attorneys General are empowered to bring civil actions in Federal District Court or State court to enforce the consumer protection provisions of Title X and associated Bureau regulations and may seek any remedy available under state or federal law. Similarly, State regulators other than the State's Attorney General may also enforce Title X and the Bureau's regulations against state-chartered, incorporated, or licensed entities. National banks and federal savings associations may be sued by such state regulators, but only to enforce the regulations issued by the Bureau, not to enforce the underlying statute itself. While there are no private rights of action specifically authorized under the Reform Act, it can be anticipated that plaintiffs' attorneys will utilize state unfair and deceptive practice statutes and similar state laws with private rights of action.
The Reform Act limits federal preemption with regard to national banks and federal savings associations, stating that state consumer protection law is preempted as to these types of chartered institutions only if: (i) the applications of the law would have a discriminatory effect on national banks or federal savings associations; (ii) the law is preempted by another provision of federal law, other than the National Bank Act; or (iii) if the state law "prevents or significantly interferes" with the bank's exercise of its powers. As a further limitation, the Office of the Comptroller of the Currency is authorized to make these preemption decisions only on a case by case basis, subject to de novo judicial review.
The Bureau is authorized to conduct investigations and to undertake actions to enforce federal consumer financial protection laws and their promulgating regulations. These investigations may be conducted jointly with other regulators or solely by the Bureau. In exercising investigative authority, the Bureau may issue subpoenas, requests for production of documents, or demands for written reports or answers. The Bureau may also conduct hearings and institute adjudication proceedings to enforce those "enumerated" consumer laws, discussed above,2 or any regulations or orders prescribed thereunder. In addition, the Bureau is empowered to seek cease and desist orders for violations of its regulations, and may issue temporary cease and desist orders itself if it believes that the continuance of such activity during an ongoing cease and desist proceeding would cause the party to become insolvent or would otherwise prejudice consumers' interests.
The Bureau is also authorized to bring civil actions in Federal District Court against financial institutions subject to its jurisdiction to impose civil penalties or injunctive relief. The relief granted by a court may include civil money penalties ranging from $5,000 per day per violation for "any violation" of the Bureau's laws or rules; $25,000 per day per violation for "reckless" violations of federal consumer financial law; and up to $1,000,000 per day per violation for any person who "knowingly" violates a federal consumer financial law. These penalties are subject to mitigating factors, and the Bureau may not collect exemplary or punitive damages. In certain instances, the Bureau may refer potential violations of federal criminal law to the U.S. Attorney General. The Reform Act also grants whistleblower protections to consumer financial firm employees who report violations.
B. Analysis & Next Steps
The creation of a new consumer finance agency constitutes a major development within the regulatory framework of the financial system. Depending on the Bureau's aggressiveness in pursuing its mandate, its regulations could greatly restrict the ability of banks, thrifts, and other financial firms to continue to offer their current range of services and products. Industry members will play a vital role in the development of the Bureau's regulations and should ensure that the Bureau properly weighs the potential benefits of regulation against the risk of reduced access to consumer financial products and services.
For banks and thrifts with over $10 billion in assets, the Bureau will wield significant supervisory authority over the bank's business practices and consumer interactions and will significantly increase these institutions' compliance costs and litigation risk. Depository institutions with under $10 billion in assets will also be affected, as the Bureau undertakes joint examinations of banks alongside those institutions' primary regulators and requires banks to report on consumer financial issues. Both categories of institutions will also face increased litigation risk, as State Attorneys General are empowered to pursue claims under the Reform Act and its related regulations against both state-chartered and nationally chartered banks. The erosion of federal preemption protection for most depository institutions will also force institutions to reexamine their compliance control systems and remain alert to developments in state consumer laws.
The primary challenge for the Bureau in the near term is constructing the necessary bureaucracy to properly exercise its comprehensive authority. In addition to assuming responsibility over a lengthy list of federal consumer protection statutes, the Bureau must create and staff nearly ten subdivisions, begin a series of required studies, and begin to formulate an overall regulatory strategy.
Once the Bureau is established and operational, it will embark on an ambitious rulemaking agenda that could pose ongoing compliance challenges for depository institutions and other financial service providers. The many new financial regulations that are expected to be proposed, amended, and finally adopted by the new Bureau will require careful review and analysis as they are likely to have a significant impact on the way that financial institutions must conduct their business. The process for the consideration of these regulations will provide important opportunities for financial institutions, including banks and thrifts that may be adversely impacted, to influence the substance of these regulations by offering comments and suggesting more attractive alternatives. Finally, as consumer finance regulations are considered and ultimately adopted to implement the Reform Act, financial institutions should review whether changes are required in their operations or in their regulatory compliance programs to ensure that they can comply with their new obligations under the new regulatory regime.