In response to the financial crisis which began in late-2008, the Obama Administration and Congress enacted the Dodd-Frank Act, widely considered the most sweeping overhaul of the country’s financial regulatory system since the Great Depression. Title X of the Dodd-Frank Act – known as the Consumer Financial Protection Act of 2010 (“Title X”) – is especially noteworthy because it creates the Bureau of Consumer Financial Protection (the “CFPB”). The CFPB is an independent regulatory agency empowered with broad authority to issue new regulations, supervise depository and non-depository institutions, enforce consumer financial protection laws, and prevent “unfair,” “deceptive,” and “abusive” acts by financial service firms. The CFPB, which became operational on July 21, 2011, poses a greater risk of regulatory and investigatory actions for financial service firms and their service providers than existed before Dodd-Frank.
In this article, we will briefly discuss the key provisions of Title X, highlighting the CFPB’s scope of authority.
What does the CFPB do?
Title X establishes the CFPB as the primary regulator of “federal consumer financial laws,” which encompasses virtually every existing federal consumer financial statute.This regulatory authority is a compilation of the consumer financial protection functions of a number of federal agencies, including the Federal Reserve and FDIC. The CFPB is designed to prevent unfair, deceptive, and abusive practices in connection with the marketing and sale of financial service products to consumers. The CFPB also has the exclusive authority to issue regulations and enforce the myriad federal consumer protection laws enumerated in Title X, including, but not limited to:
- Truth in Lending Act;
- Fair Debt Collection Practices Act;
- Fair Credit Reporting Act;
- Electronic Fund Transfers Act;
- Equal Credit Opportunity Act;
- Home Owners Protection Act
- Privacy of Consumer Financial Information.
Congress envisioned the CFPB as the exclusive regulatory agency over consumer financial products, and in turn, Title X gives the CFPB broad authority to accomplish this purpose. The transfer of these laws and consumer financial protection functions to the CFPB raises questions, however, about whether businesses may rely upon prior guidelines. It will be important to watch for future CFPB rules and regulations, as well as enforcement actions, to see how the CFPB will enforce such laws.
Who does the CFPB regulate?
The CFPB regulates “covered persons” who engage in offering or providing “consumer financial services or products.” A covered person is broadly defined under the Act to include individuals or entities who engage in the following consumer financial services or products:
- Extending consumer credit and servicing loans;
- Extending or brokering leases of property that are the functional equivalent of purchase finance arrangements;
- Providing real estate settlement services (other than appraisal of real or personal property);
- Engaging in deposit-taking activities, transmitting or exchanging funds, or acting as a custodian of funds;
- Selling, providing, or issuing stored value or payment instruments, unless the seller does not exercise substantial control over the terms and conditions of the stored value;
- Providing check-cashing, check collection, or check guaranty services; and
- Providing payments or other financial data processing products or services to a consumer by any technological means.
The CFPB also regulates financial “service providers” to covered persons in the same manner as covered persons. Together, these definitions encompass most companies engaged in banking or financial services or who provide financial products or services to consumers, with some exceptions, including persons regulated by the Securities and Exchange Commission and auto dealers.
How will the CFPB enforce consumer financial laws?
Title X prohibits businesses from engaging in “unfair,” “deceptive,” and “abusive” practices when marketing or selling financial products or services to consumers (“UDAAP”). The CFPB has the authority to enforce UDAAP and promulgate rules identifying unfair, deceptive and abusive practices. The FTC and other federal agencies, under the guise of the FTC Act, have already promulgated standards for “unfair” and “deceptive” acts. For now, the CFPB is likely to follow established guidelines for what constitutes “unfair” and “deceptive” practices. The lingering question, however, is how the agency will define “abusive” behavior. This likely will be answered in the coming months with the confirmation of a new director and the issuance of implementing rules and regulations.
In the meantime, the CFPB can enforce all existing federal consumer financial laws. The CFPB can pursue both administrative and judicial remedies for violations of such laws, which include:
- Civil penalties (ranging from $5,000 - $250,000 - $1 million per day of the violation, depending upon the mental state);
- Rescission or reformation of contracts;
- Restitution and civil penalties;
- Disgorgement and damages; and
- Public notification of the violation.
Additionally, state attorneys general and regulators have the authority to enforce Title X and CFPB regulations on behalf of the CFPB in state and federal court.
The FTC will continue to enforce the FTC Act and its prohibition on the use of unfair and deceptive trade practices with respect to non-consumer financial products or services. The FTC will also have the authority to enforce CFPB rules against non-depository banks not covered by the CFPB. The two agencies are scheduled to negotiate an agreement coordinating their enforcement powers by January 2012, at which point each agency’s scope of authority should become clearer.
How will the CFPB supervise businesses?
The CFPB supervises non-depository financial service providers and depository banks. With respect to non-depository companies, the CFPB will run risk-assessments to determine whether to conduct further investigation into a company for possible UDAAP violations. Consumer complaints, reports from other federal and state agencies, industry reports, and reports generated by the CFPB will all factor into the final assessment. A product or service that poses a high risk to consumers is subject to further investigation by the CFPB. Banks with less than $10 billion in assets will continue to be regulated by their primary federal and state bank regulatory agencies.