The creation of the Consumer Financial Protection Bureau (Bureau) has been one of the most controversial aspects of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank). The agency’s independence and its potential to impose costs and compliance obligations on a wide range of banking and nonbanking companies have been the source of many critics’ concerns. Emblematic of the Bureau’s contentiousness, its first director was not installed until January 2012, nearly six months after the agency formally commenced doing business, and he was a recess appointment made without the advice and consent of the U.S. Senate. The legality of the appointment has been challenged in court and by some members of Congress.
The Bureau’s jurisdiction, based on the definition of “consumer financial product or service” in Dodd-Frank, is expansive. With certain exceptions, a company engaged in any line of business that happens to offer or provide a consumer financial product or service is a “covered person” subject to regulation and, in some cases, direct supervision and examination, of its consumer financial activities by the Bureau.
The Bureau will have an offshore impact as well. For example, the first substantive final rule adopted by the agency implemented an amendment to the Electronic Fund Transfer Act, pursuant to Dodd-Frank, to require disclosures to U.S. consumers making international remittances.
On July 21, 2012, the Bureau reached its first anniversary, making this an appropriate time to assess what the Bureau has been doing and what type of agency is taking form.
Broad Agency Responsibilities and Ambitious Agency Goals
The Bureau came into operation on July 21, 2011 with a full agenda and, as its staffing has grown to an operational level, it has begun to exert its authority over consumer financial matters. Under Dodd-Frank, the Bureau has a fourfold mission: (i) ensure that consumers receive timely and understandable information when they consider and enter into consumer financial transactions; (ii) protect consumers from unfair, deceptive or abusive acts and practices in the offer, sale and administration or servicing of consumer financial products and services; (iii) review and streamline consumer financial regulations; and (iv) ensure that the markets for consumer financial products and services function transparently and efficiently.
The Bureau also has undertaken to build a new institution. It inherited from seven federal financial agencies the responsibility to administer and, in some cases, enforce 18 federal consumer financial laws. These include laws that apply quite broadly, such as the Equal Credit Opportunity Act, the Truth in Lending Act and the privacy provisions of the Gramm-Leach- Bliley Act. The Bureau also has been charged with new federal responsibilities, such as the oversight of nonbanking providers of consumer financial products and services. As of June 30, 2012, the Bureau had grown to 889 employees. Its funding is provided by the Board of Governors of the Federal Reserve System (FRB), of which it is a nominal part, and, as required by Dodd-Frank, it is substantial. For fiscal year 2012, the Bureau has been allocated 11% of the FRB’s total operating expenses, or $548 million, and, for fiscal year 2013 and after, it will be allocated 12% of the FRB’s total operating expenses. The Bureau clearly has the opportunity and the means to create a significant role for itself.
A New Approach to Consumer Protection
The Bureau has undertaken to do certain things differently than did its predecessors. In particular, it has indicated a determination to go beyond the role that consumer protection divisions have served within those federal agencies that have responsibility for the prudential supervision of banking organizations and to become more of an advocate for consumers. Among its innovations, the Bureau has established a complaints website, which is initially focused on credit card-related issues, where the agency has posted unverified as well as verified complaint information, including the identities of the providers of the products and services. It has studied consumer decision-making through the use of focus groups, field testing and academic research, to help it to understand how consumers perceive and process the financial information provided to them and to guide the drafting of disclosure guidelines and model disclosure forms. The Bureau also has worked to support state-level enforcement efforts through information-sharing and collaboration with state attorneys general and other state officials responsible for enforcing federal consumer financial laws, and it has supported private enforcement efforts by soliciting requests for and filing amicus briefs.
Policy-Making through Rulemaking and Enforcement
Since the beginning of 2012, the Bureau has issued formal rules and informal guidance at a brisk pace. See DechertOnPoint “U.S. Consumer Financial Protection Bureau: A New Frontier for Cost-Benefit Analysis.” It has issued a final rule regarding international remittances and a final rule that extends the agency’s supervision, examination and enforcement authority to certain consumer reporting agencies. It also has issued significant procedural final rules addressing the confidential treatment of privileged information, the conduct of investigations and the notification by state officials to the Bureau of actions brought under delegated authority. The Bureau has issued a proposed rule setting forth procedures for designating particular nonbank covered persons for supervision and examination and several proposed rules that address mortgage-related issues. See DechertOnPoints “U.S. Consumer Financial Protection Bureau Proposes Mortgage Servicing Reforms” and “U.S. Consumer Financial Protection Bureau in Process of Restructuring Regulation of the Residential Mortgage Market: Qualified Mortgage Rule Emerges as Critical Issue.”
The Bureau has issued a substantial amount of guidance in the form of an examiner’s manual for the supervision and examination of covered persons, specialized examination procedures for mortgage origination, mortgage servicing and short-term small dollar-volume lending, interagency guidelines for small insured depository institutions under the SAFE Mortgage Licensing Act and interagency guidelines for mortgage servicers whose borrowers are members of the U.S. military. The Bureau also has released bulletins that discuss several matters, including the marketing of add-on features to credit cards, fair lending obligations and the activities of service providers.
The director of the Bureau is a former state attorney general, and his background has contributed to debate regarding the extent to which the Bureau may rely on enforcement actions rather than rulemaking to set policy. The Bureau has publicly announced two enforcement actions, the details of which provide a template for the use of enforcement as a policymaking tool.
On July 18, 2012, the Bureau announced that it had issued a consent order against Capital One Financial Corporation (Capital One) regarding the marketing of payment protection and credit monitoring features to its credit card holders. The Bureau based its claims against Capital One on the agency’s authority to take action against unfair, deceptive or abusive conduct. See DechertOnPoint “U.S. Consumer Financial Protection Bureau Couples First Enforcement Action with Warning to Financial Services Industry.” Capital One agreed to cease all marketing of such products until a compliance plan acceptable to the Bureau was put in place and to pay $140 million in reimbursement to cardholders and $25 million as a civil monetary penalty to the Bureau.
At the same time, the Bureau issued a Compliance Bulletin that set forth a list of “CFPB Expectations” applicable to the credit card industry in general, which addressed in detail such matters as the use of marketing materials and telemarketing and service center scripts, employee compensation for promoting and selling these products, employee training, compliance programs and the oversight of service providers. Subsequently, other large credit card companies announced that they were discontinuing the offering of these products. These events indicate that the agency may prefer to use high-impact, highprofile enforcement actions not merely to correct behavior but to send a clear signal regarding related policy issues.
Time will tell how often the Bureau follows this approach and how effective it will be, but “rulemaking through enforcement” can have distinct consequences. For example, it may enable the Bureau to flesh out what constitutes “unfair, deceptive or abusive” acts and practices, a controversial standard introduced in Dodd-Frank, without following the public notice and comment procedures of the Administrative Procedures Act, analyzing the costs and benefits of implementing any “CFPB Expectations” or studying their impact on small providers. The Bureau’s enforcement actions therefore are likely to receive close scrutiny in order to discern the nature and direction of the agency’s policy-making activities.
Supervision and Examination Agenda
The Bureau also has instituted an examination and investigation program. The Bureau has reportedly issued numerous civil investigative demands to, and made voluminous document requests of, nonbanking companies in connection with the Bureau’s reviews of consumer financial law compliance. The Bureau also has on occasion assigned enforcement attorneys to its bank examination teams. The Bureau has explained that the assignments were made for training purposes, but the practice differs from the approach used by bank regulatory agencies in their examinations. Some have expressed concern that an attorney’s involvement blurs the line between an examination and an investigation and can chill the atmosphere of cooperation that examination teams typically strive to establish. The direct participation of Bureau attorneys in examinations, also may raise issues regarding the permissibility of the Bureau attorneys’ contacts with officers, directors and employees who are represented by counsel, the use of Bureau attorneys as witnesses in any administrative or judicial proceedings that may arise from an examination and the effect of a switch from the role of attorney to witness on the confidentiality of the materials produced by or given to the attorney.
The complaint website, discussed above, is an example of the Bureau’s adoption of new media tools. The website may post unverified individual complaints, including the name of the providers involved and the resolution of the dispute, if any. Only narrative details and allegations of discrimination have been omitted. In its Policy Statement in June 2012 announcing the launch of the program, the Bureau stated that it may rely on the database to set agency priorities in supervision, enforcement and market monitoring. Some commenters have objected to the release of so much unanalyzed and, in some cases, raw data, on the grounds that it may be misinterpreted and may encourage groundless litigation. The Bureau, however, stated in its Policy Statement that it would “allow the marketplace of ideas to determine what the data shows.” The agency also stated that it expects to expand the program by year-end 2012 to include complaints regarding mortgages, certain other consumer loans and transactions in general with insured depository institutions.
Another example of the Bureau’s approach may be found in the final rule it has issued for the identification of larger participants in the credit reporting market, discussed above. In the preamble, the Bureau discussed its general considerations in selecting the criteria, which approach the agency may follow generally to identify larger participants in other consumer financial markets. The size threshold for “larger” credit reporting agencies was established not simply to cover a handful of the largest providers but to include a sufficient number and range of providers, including specialists and potentially even small businesses, to give the Bureau insight into the operation of and compliance issues in the market generally. In addition, the CFPB has indicated that, once a provider has been identified as a larger participant in a particular consumer financial market, the Bureau will supervise the provider with respect to all consumer financial activities in which it engages.
Protection of Privileged Information
A final noteworthy development is the effort of the Bureau to protect the confidentiality of any privileged information that may be provided to it in the course of its performing its supervisory or examination responsibilities. See DechertOnPoints “U.S. Consumer Financial Protection Bureau Issues Regulation Protecting Privileged Information from Waiver of Privilege” and “Building Consumer Financial Protection Bureau Relationships: Access to Documents.” The ability of the federal banking agencies to provide similar protection to banks, thrifts, their holding companies and other affiliates was not clearly established until Congress amended the Federal Deposit Insurance Act in 2006. It has been suggested that similar legislation is required to protect information disclosed to the Bureau. In adopting a final rule on this topic, the Bureau has stated that it welcomes such legislation but does not consider it to be necessary. According to the Bureau, the agency has rulemaking authority from Congress that allows it to preserve the confidentiality of privileged information provided to it by regulated entities.
The Bureau has taken the position that it has the authority to compel the production of privileged material, but it has stated that it will seek privileged information from supervised entities only when the information is material to its supervisory objective and it cannot practicably obtain the same information from non-privileged sources. The Bureau’s position does not address the 1992 ruling of the U.S. Ninth Circuit Court of Appeals in Clarke v. American Commerce National Bank, in which the court refused to enforce a subpoena issued to a national bank by the Office of the Comptroller of the Currency, the primary federal supervisory authority for national banks, seeking attorney billing record information that would have revealed attorney-client privileged information.
The Bureau’s first year has been eventful, and the agency can be expected to maintain its energetic pace. However, its first year only provides hints as to the methods and procedures that it will use and what their consequences may be. The Bureau clearly deserves further close attention.