Last week, the Administration released “Financial Regulatory Reform: A New Foundation” (the “Proposal”) which recommends, among other things, significant organizational and substantive changes to federal regulation of the credit card business. Although these changes are not yet in the form of legislative language, and there is no assurance that they will be enacted as proposed, they nevertheless presage further upheavals in the legislative and regulatory landscape of the business. This alert briefly identifies and discusses the most significant of the proposed changes. The changes include both a reorganization of the regulatory structure and revisions to substantive regulation.
Reorganization of the regulatory structure
The Proposal recommends the creation of a Consumer Financial Protection Agency (“CFPA”), whose mission would be to help ensure that “consumers have the information they need to make responsible financial decisions; consumers are protected from abuse, unfairness, deception or discrimination; consumer financial services markets operate fairly and efficiently with ample room for sustainable growth and innovation; and traditionally underserved consumers and communities have access to lending, investment and financial services.” Accordingly, the CFPA would have broad jurisdiction and authority, including sole rulemaking and interpretive authority with respect to the Truth in Lending Act, Equal Credit Opportunity Act, Fair Debt Collection Practices Act and “any future consumer protection laws addressing the consumer credit, savings, collection or payment markets,” as well as supervision, examination, and enforcement authority over “all entities subject to its regulations.” According to the Proposal, “the FTC should . . . remain the lead federal consumer protection agency on matters of data security, with front-end privacy protection on financial issues moved to the CFPA.”
The CFPA would have a director and a board (including one seat reserved for the head of a safety-and-soundness regulator) and would be funded by fees assessed on entities and transactions across the financial sector, including bank and non-bank institutions and other providers of consumer financial products and services. It would have complaint, consumer education and community affairs functions and an outside advisory panel like the one that currently advises the Federal Reserve. According to the Proposal, the “core of such an agency can be assembled reasonably quickly from discrete operations of other agencies” because “most rule writing authority is [already] concentrated in a single division of the Federal Reserve, and three of the four federal banking agencies have mostly or entirely separated consumer compliance supervision from prudential supervision.”
In short, the CFPA would be like the Consumer and Community Affairs Division of the Federal Reserve, established as a separate agency and augmented by the corresponding staff from the other banking agencies, as well as by broader legal authority. This reorganization could have significant implications for the regulation of the credit card business. Consumer compliance regulation would no longer be subject to intra-agency compromise with safety-and-soundness regulation, oversight by the Federal Reserve’s Legal Division, and approval by a Board consisting largely or exclusively of economists whose main concern is macroeconomic performance rather than consumer protection. Moreover, the Legal Division would no longer be able to exert a moderating influence on the consumer compliance operations of the other banking agencies via the Consumer Division’s participation in interagency negotiations.
Changes to substantive regulation
The Proposal recommends “legislation, regulations and administrative measures by the CFPA to reform consumer protection based on principles of transparency, simplicity, fairness, accountability and access for all.” Specifically, the Proposal recommends, among other things:
- New disclosure standards: “The CFPA should make judgments about which risks and costs should be highlighted and which need not be.” Also, disclosures should be “reasonable.” “Reasonableness includes balance in the presentation of risks and benefits, as well as clarity and conspicuousness in the description of significant product costs and risks. This is a higher standard than merely refraining from deception.” Further, “disclosures should show consumers the consequences of their financial decisions,” such as through online interest calculators. As a process matter, the CFPA should be authorized to provide an issuer with “the equivalent of a ‘no action’ letter for disclosure and other communications for a new product.”
- "Plain vanilla products": The Proposal states that “the regulator should be authorized to define standards for ‘plain vanilla’ products that are simpler and have straightforward pricing. The CFPA should be authorized to require all providers and intermediaries to offer these products prominently, alongside whatever other lawful products they choose to offer.”
- "Tailored restrictions": The Proposal states that “the CFPA [should] be authorized to place tailored restrictions on product terms and provider practices, if the benefits outweigh the costs.”
- Duties of care: “We propose granting the CFPA authority to impose carefully crafted duties of care on financial intermediaries. For example, the CFPA could impose a duty of care to counteract an intermediary’s patent conflict of interest, or to align an intermediary’s conduct with consumers’ reasonable expectations as demonstrated by empirical evidence.”
- Elimination of exceptions from the Bank Holding Company Act: As has been widely reported, under the Proposal, holding companies of industrial loan companies and special purpose credit card banks would become bank holding companies. This would affect, for example, a retailer that owns a special purpose bank that issues the retailer’s private-label cards or cobranded general purpose cards.
- Reverse pre-emption: The Plan states that federal “rules promulgated by the CFPA under a pre-existing statute or its own organic rulemaking authority should override weaker state laws, but states should be free to adopt stricter laws. In addition, we propose that states should have concurrent authority to enforce regulations of the CFPA. We propose that federally chartered institutions be subject to nondiscriminatory state consumer protection and civil rights laws to the same extent as other financial institutions.”
- Arbitration clauses: The CPFA would study mandatory arbitration clauses to determine to what extent, and in what contexts, “they promote fair adjudication and effective redress.”
- Triennial reviews: “To promote regulatory accountability, the CFPA should be required to complete a regulatory study of each newly enacted regulation at least every three years after the effective date.”
The foregoing represents only a fraction of the many recommendations presented in the Proposal that would impact the credit card market. These items make clear, however, that the Administration’s vision of the market differs significantly from its historical or current form. All stakeholders should consider whether they have an interest in tempering the Administration's vision and how that interest can be advanced by government-relations activity, consumer education, or other means.
The Proposal can be found here.
Davis Wright Tremaine’s advisory describing the Credit CARD Act of 2009 (enacted late last month) can be found here.