Yesterday, Treasury sent Congress proposed legislation for the creation of a federal Consumer Financial Protection Agency (CFPA). Announced in connection with President Obama’s plan to overhaul the U.S. financial regulatory structure, Secretary Geithner stated that the “agency will have only one mission – to protect consumers – and have the authority and accountability to make sure that consumer-protection regulations are written fairly and enforced vigorously.” The proposed legislation would also amend the Federal Trade Commission Act to require the FTC to “consult and coordinate” with the new agency when investigating unfair and deceptive acts or practices related to consumer financial products.

The stated purpose of the CFPA would be to “achieve the true needs of consumers – protection against unscrupulous practices as well as efficient and innovative markets and increased access.” The CFPA would “have authority to examine and enforce compliance against any institution, bank or non-bank, that provides consumer financial products or services.” The term “consumer financial product” would be defined to include all products used by an individual, or an agent, trustee or representative acting on behalf of an individual, primarily for personal, family or household purposes.

Examples of the proposed agency’s specific duties and roles would include:

  • Enforcement of the Credit CARD Act of 2009 enacted earlier this year;
  • Creation of guidelines for standard mortgages to be originated (i) without prepayment penalties; (ii) on a fully underwritten basis using the consumer’s documented income; (iii) that collect escrow for taxes and insurance; and (iv) that have predictable monthly payments;
  • Creation of a duty of best execution on mortgage brokers, requiring them to execute the best available mortgage for the consumer and a duty to ensure that only appropriate loans are offered to the consumer; and
  • Banning unfair practices that encourage consumer abuse, such as the payment of yield spread premiums and other side-payments to mortgage brokers that serve as an incentive to place the consumer with a higher priced loan.