A linchpin of the Obama Administration’s (the “Administration”) plan for restructuring the regulation of financial services is the creation of a “Consumer Financial Protection Agency” (“CFPA” or “Agency”). Please refer to the Kilpatrick Stockton’s alert on June 19, 2009 titled “Administration Proposes Restructuring of Financial Services Regulation”. The Administration has blamed lax consumer protections, particularly with respect to subprime and nontraditional mortgages, for “contributing significantly” to the current financial crisis. The Administration’s response is the proposed establishment of the CFPA, which is intended “to have the authority and accountability to make sure that consumer protection regulations are written fairly and enforced vigorously.”
The Administration recently submitted to the Senate and the House of Representatives proposed legislation that would establish the CFPA. From that legislation, some details can be ascertained about how the CFPA would operate if the legislation is enacted.
The CFPA would be an independent agency headed by a five member board. Four of the board members would be appointed by the President, with the advice and consent of the Senate. One of those four board members would be designated as the CFPA’s Director and he or she would be the Agency’s chief executive officer. The fifth board member would be the Director of the National Bank Supervisor, which is the agency that would result from the Administration’s proposed merger of the Office of Thrift Supervision and the Office of the Comptroller of Currency. The proposed legislation provides for the transfer of consumer compliance personnel from the depository institution regulatory agencies to initially staff the Agency. The CFPA would be required to establish a Consumer Advisory Board of experts in financial services, consumer products or services and community development to consult on the Agency’s operations.
The CFPA would have such funds appropriated to it “as are necessary.” However, the proposed legislation contemplates that the Agency will recover funds expended through assessments or fees on regulated entities.
The CFPA’s general mandate, according to the legislation, would be to “seek to promote transparency, simplicity, fairness, accountability and access in the market for consumer financial products or services.” The CFPA would generally be authorized to exercise its authority to ensure that (i) consumers have, understand and can use the information they need to make responsible decisions about consumer financial products or services; (ii) consumers are protected from abuse, unfairness, deception and discrimination; (iii) markets for consumer financial products or services operate fairly and efficiently with ample room for sustainable growth and innovation and (iv) traditionally underserved consumers have access to financial services.
Regulated parties would include, not only depository institutions and their affiliates, but any person (defined to include individuals and business entities) who directly or indirectly engages in a financial activity (broadly defined to include a wide variety of services ranging from deposit-taking and lending to debt collection, real estate settlement services and money transmitting or money service business) in connection with the provision of a consumer financial product or service (i.e., the advertisement, marketing, solicitation, sale, disclosure, delivery or account maintenance or servicing of such a product or service). Anyone who provides a material service to or processes a transaction on behalf of such a person would also be subject to the CFPA’s jurisdiction. Persons regulated by the Securities and Exchange Commission and Commodities Futures Trading Commission would be excluded, but only to the extent they act in a registered capacity.
The Agency would have general rulemaking authority to carry out its duties. However, in issuing any rules, the CFPA would be required to consider the costs and benefits to consumers and regulated entities, including the potential reduction of access to financial products or services due to the rule. It would also be required to consult with the federal depository institution regulators and other appropriate federal agencies concerning the consistency of the rule with the prudential, market or systemic objectives of those agencies.
The CFPA would assume the primary responsibility for implementing existing consumer protection and fair lending laws including the Truth in Lending Act, Truth in Savings Act, Real Estate Settlement Procedures Act, Fair Debt Collection Act, Equal Credit Opportunity Act, Community Reinvestment Act (“CRA”) and the S.A.F.E. Mortgage Licensing Act. The proposed legislation would specifically withhold from the CFPA any authority to establish usury limits unless explicitly authorized by law. The legislation would authorize the CFPA to “on a periodic basis, examine, or require reports from” regulated parties to evaluate compliance. The Agency would be directed to make use of reports that have been filed with other agencies or are publicly available, to the extent possible, and would, upon providing reasonable assurances of confidentiality, have access to the safety and soundness examination reports of depository institutions prepared by the federal depository institutions regulators. Those regulators would be authorized to make referrals to the CFPA of any suspected violations of consumer protection and fair lending laws that they discover during the course of their usual regulatory activities.
The CFPA’s responsibility would include taking action to prevent unfair, deceptive or abusive acts or practices in connection with financial services and products and ensuring appropriate communications, disclosure and sales practices with respect to such products and services. In order to prohibit a practice as unfair, the CFPA would need to have a reasonable basis to conclude that the act or practice causes or is likely to cause substantial injury to consumers and such injury is no outweighed by countervailing benefits to consumers or to competition. The Agency would have explicit authority to prohibit or limit the use of mandatory arbitration clauses in consumer agreements. The CFPA would be charged with establishing procedures for persons to seek approval of pilot disclosures to be provided to consumers in connection with financial products or services.
The CFPA would also be responsible for monitoring risks to consumers in the provision of consumer financial products or services, including developments in the markets for such products and services.
The CFPA would have primary enforcement authority over the consumer protection and fair lending statutes and regulations that it administers. That would include power to issue subpoenas and civil investigative demands, take oral testimony, issue cease and desist orders or civil money penalties and the ability to commence civil actions to seek civil penalties and other legal or equitable relief including injunctions, recission or reformation of contracts and restitution.
The Agency would be authorized to adopt rules or issue guidance regarding the offering of “standard consumer financial products or services” or, more colloquially, so-called “plain vanilla products.” The proposed legislation generally defines such products as those that can readily be offered by persons that offer or seek to offer more complex alternative consumer financial products or services, are transparent to consumers in terms and features, facilitate comparisons with alternative products or services and pose lower risk to consumer. Authorized rules could include requirements that standard consumer financial products be offered at or before the time more complex alternative products are offered. The Agency would also be authorized to issue regulations imposing fiduciary duties on regulated persons, who deal directly with consumers in connection with consumer financial products or services, and their agents or independent contractors, as necessary to ensure fair dealing. That may also include duties regarding compensation practices applicable to such parties (although not a limit on the total amount paid to any person).
The proposed legislation encourages the states to prescribe standards applicable to nondepositories to deter and detect unfair, deceptive, abusive, fraudulent or illegal transactions. The CFPA may promulgate rules establishing minimum standards for nondepositories and enforce compliance against such persons with either its standards or those of the applicable state.
The legislation specifically provides that it does not preempt state laws or regulations that are not inconsistent with and provide greater protection to consumers, as determined by the CFPA. A state’s authority to enforce its consumer protection laws against national banks and federal savings associations (and their subsidiaries and affiliates) would be preserved in the legislation provided that the state law does not discriminate against national banks or federal savings associations. State attorneys general would be authorized to bring civil court actions to enforce the laws and regulations administered by the CFPA upon prior notice to the Agency.
The CFPA legislation is, as of this writing, the only part of the Administration’s financial regulatory restructuring plan that has been submitted to Capitol Hill subsequent to the formal public release of the plan. The Administration argues that a dedicated consumer protection agency is necessary to enhance accountability, reduce gaps in and streamline federal consumer protection supervision and elevate the role of consumer protection in the financial regulatory system. Senate Banking Committee Chairman Christopher Dodd and House Financial Services Committee Chairman Barney Frank have endorsed the general concept of a separate consumer financial services regulator. Some banking industry trade groups, and existing bank regulators, have opposed the CFPA concept on the grounds that (i) safety and soundness regulation and consumer protection are interrelated and severing them will result in less effective overall regulation and conflicts between the goals of the prudential regulators and the CFPA, with the depository institutions in the middle, (ii) establishing a new consumer protection agency creates unnecessary regulatory burdens and costs, particularly on community banks and credit unions, and (iii) a better approach is to close existing gaps in regulation rather than adding a new layer and more bureaucracy.
Even assuming that Congress accepts the establishment of the CFPA generally, there are specific aspects of the Administration’s proposal that may be controversial with Senators and Congressman. Those include the CFPA’s authority to mandate that so-called “plain vanilla products” be offered, the extent to which states will be permitted to enforce their laws against national banks and whether the legislation provides for sufficient regulation of nondepository institution financial services providers such as mortgage brokers and finance companies. As to the latter point, banking industry trade groups have argued that the proposal continues a pattern of regulating depository institutions more extensively than their nondepository competitors.
At a recent committee hearing, the question arose as to whether it was appropriate to transfer responsibilities for CRA to the CFPA, given that the statute has been historically enforced through consideration of CRA ratings in connection with corporate applications and that the statutory language itself provides that an institution’s responsibilities under CRA should be consistent with safe and sound operation. Chairman Frank’s comments suggested some sympathy for the view that CRA responsibility should remain with the depository institution regulators. He subsequently introduced the Administration’s CFPA legislation in the House of Representatives as H.R. 3126, but changed it so that CRA responsibility would not be transferred to the Agency. Consequently, another issue of contention during the legislative process will be where and how CRA is administered.
Chairman Frank has indicated that he anticipates a committee markup of the CFPA title prior to Congress’ August recess, although the title will not advance out of the committee without the remainder of the regulatory reform legislation. The Senate Banking Committee is not expected to take up the proposed legislation until after Labor Day. However, both Chairman Frank and Senator Dodd have indicated a desire to have the legislation enacted this year.