On July 21, 2011 the Bureau of Consumer Financial Protection (BCFB) begins official business under the Consumer Financial Protection Act of 2010 (Title X of the Dodd-Frank Wall Street Reform and Protection Act). On that date, known as the designated transfer date, all consumer financial protection functions of the following federal regulators are transferred to the BCFB1:
- Board of Governors of the Federal Reserve Board
- Comptroller of the Currency
- Director of the Office of Thrift Supervision
- Federal Deposit Insurance Corporation
- National Credit Union Administration
With respect to the Federal Trade Commission (FTC), the transfer applies to “enumerated consumer laws” (the 18 laws enumerated in Section 1002). With respect to the Department of Housing and Urban Development, the transfer applies to the Real Estate Settlement Procedures Act (RESPA), the Secure and Fair Enforcement for Mortgage Licensing Act (SFEMLA), the Interstate Land Sales Full Disclosure Act (ILSFDA) and so forth.
What is a consumer financial protection function? There are two such functions: first: rule, order, and guideline-making authority under any “federal consumer financial law,” defined as (1) the enumerated consumer laws, (2) the laws for which rulemaking and enforcement authority is transferred to the BCFB, and (3) any rule or order prescribed by the BCFB. The Federal Trade Commission Act (FTCA) is excluded from the list.
Thus, all these laws2 are covered:
Enumerated Consumer Laws from Section 1002:
- Alternative Mortgage Transaction Parity Act of 1982 (12 U.S.C. 3801 et seq.)
- Consumer Leasing Act of 1976 (15 U.S.C. 1667 et seq.)
- Electronic Fund Transfer Act (15 U.S.C. 1693 et seq.), except with respect to section 920 of that Act
- Equal Credit Opportunity Act (15 U.S.C. 1691 et seq.)
- Fair Credit Billing Act (15 U.S.C. 1666 et seq.)
- Fair Credit Reporting Act (15 U.S.C. 1681 et seq.), except with respect to sections 615(e) and 628 of that Act (15 U.S.C. 1681m(e), 1681w)
- Home Owners Protection Act of 1998 (12 U.S.C. 4901 et seq.)
- Fair Debt Collection Practices Act (15 U.S.C. 1692 et seq.)
- Subsections (b) through (f) of section 43 of the Federal Deposit Insurance Act (12 U.S.C. 1831t(c)-(f)) Sections 502 through 509 of the Gramm-Leach-Bliley Act (15 U.S.C. 6802-6809) except for section 505 as it applies to section 501(b)
- Home Mortgage Disclosure Act of 1975 (12 U.S.C. 2801 et seq.)
- Home Ownership and Equity Protection Act of 1994 (15 U.S.C. 1601 note)
- Real Estate Settlement Procedures Act of 1974 (12 U.S.C. 2601 et seq.)
- S.A.F.E. Mortgage Licensing Act of 2008 (12 U.S.C. 5101 et seq.)
- Truth in Lending Act (15 U.S.C. 1601 et seq.)
- Truth in Savings Act (12 U.S.C. 4301 et seq.)
- Section 626 of the Omnibus Appropriations Act, 2009 (Public Law 111-8) I
- nterstate Land Sales Full Disclosure Act (15 U.S.C. 1701)
And in addition:
- Provisions of the Consumer Financial Protection Act itself
- Secure and Fair Enforcement for Mortgage Licensing Act
- Telemarketing and Consumer Fraud and Abuse Prevention Act
- Fair and Accurate Credit Transactions Act (FACTA)
- Expedited Funds Availability Act (EFAA) [shared in part with the Board of Governors]
- Mortgage Reform and Anti-Predatory Lending Act [shared in part with the Department of Housing and Urban Development] (Title XIV of the Dodd-Frank Act)
On July 21 the BCFB will publish a final list of the rules and orders that will be enforced by the BCFB. The preliminary list was published for comment at 76 Fed. Reg. 31222. The preliminary list of rules and orders does not track the list of laws set out above; once the final list is published the self-set scope of the CFPB’s authority will be clear.
The Second Function transferred is the examination authority over insured depository and credit unions with total assets of more than $10 million "large institutions", as well as examination authority for "service providers" to these large banks. A service provider means any person that provides in connection the offering or provision of a consumer financial product or service a material service to any “covered person” (defined as a person who engages in offering or providing a consumer financial product or service, and its affiliate if it in turn acts as a service provider to that person). “Service” includes participation in the design, or operation, or maintenance of the product or service, and processing transactions. Thus, for example, an ATM operator and a mortgage loan servicer would presumably be covered.
After the transfer, the prudential regulators such as the OCC and the FDIC can still require reports and conduct examinations for compliance with federal consumer financial laws to the large institutions in order to fulfill their backup role under which they can recommend matters to the CFPB for enforcement. For insured institutions and credit unions that have total assets <$10B, the CFPB may at its discretion include examiners on a sampling basis of the examinations performed by the "prudential regulator" (the appropriate federal banking agency for the institution) to assess compliance. The prudential regulator has “exclusive authority…to enforce federal consumer financial laws.” The CFPB is authorized to notify the prudential regulator in writing whenever it believes that an institution has engaged in a material violation of a federal consumer financial law, and to recommend appropriate action. The prudential regulator has 60 days to respond. A service provider to a substantial number of covered non-large institutions is subject to the supervision authority the CFPB enjoys over large banks “to the same extent as if the Bureau were an appropriate federal bank agency under section 7(c) of the Bank Service Company Act (BSCA).” Thus, service providers to a substantial number of non-large banks are treated differently than the non-large institutions they service. Under the BSCA, the CFPB can examine the service provider in the same way as the appropriate federal bank agency.
On July 12, 2011 the CFPB outlined its approach to supervising the 111 large institutions: "Starting on July 21, we will be a cop on the beat – examining banks and protecting consumers." Through satellite offices in Chicago, New York, San Francisco and Washington, D.C., 100 examiners transferring over from the FDIC, Fed, OCC and OTS together with newly hired CFPB examiners will begin the examination process. Interim CFPB head Elizabeth Warren stated at a housing hearing on July 14 that twenty of the 111 large institutions can expect to receive letters from the CFPB on July 21 outlining what to expect in “periodic” examinations and what they should begin to gather for the examiners. In the weeks following July 21, examiners will begin the first round of on-site examinations and the process will begin remotely and progress into the institution thereafter. The CFPB intends to conduct outreach over the next several weeks and the largest institutions will have imbedded, year round examiners. Others can expect an exam once every two years, according to Interim head Warren.
What are the examiners looking for?
- institution’s internal ability to detect, prevent, and remedy violations that may harm consumers;
- the institution’s internal procedures;
- interviews with personnel;
- information about the products and services the institution offers;
- compliance with requirements during the entire life cycle of products and services;
- information about how products are developed, marketed, sold and managed;
- fair lending reviews will be conducted to detect and address potential discriminatory practices; and
- the institution’s policies and practices will be evaluated to ensure compliance with consumer financial protection laws and regulations.
What does the CFPB intend to do if it finds problems?
- the CFPB will seek corrective actions;
- strengthen the company’s programs and processes to ensure that such violations do not recur;
- ensure remedies are instituted; and
- implement appropriate enforcement actions to address harm to consumers.
Is there an examination protocol?
At an unspecified but presumably early date, the CFPB intends to post on its website the initial phase of its examinations manual.
What should banks do to prepare?
Obviously large banks subject to direct ongoing examination by the CFPB will be more affected than non-large banks. But all banks should take these steps, if they haven’t already:
 Scrutinize every consumer product and service against the screen of unfair, deceptive, or abusive.
- "Unfair" means “likely to cause substantial injury to consumers which is not reasonably avoidable by consumers,” and such substantial injury is not outweighed by counterwailing benefits to consumers or to competition.
- The Bureau may consider “established public policies as evidence to be considered with all other evidence” in determining whether an act or practice is unfair. A public policy consideration may not serve as “a primary basis for such determination.”
“Abusive” means an act or practice which “materially interferes with the ability of a consumer to understand a term or condition of a consumer financial product or service” or takes unreasonable advantage of:
- a lack of understanding on the part of the consumer of the material risks, costs, or conditions of the product or service;
- the inability of the consumer to protect the interests of the consumer in selecting or using a consumer financial product or service;
- the reasonable reliance by the consumer on a covered person to act in the interests of the consumer.
- The CFPB will issue rules to better define unfair, deceptive and abusive acts or practices, and must consult with the other federal banking agencies. However, don’t wait. Consult with counsel now and do a thorough review of all your products, not just of terms, prices, etc., but of marketing, administering, collecting, etc. The rule covers all aspects of your business.
 Review, revise and enhance your complaint policies and procedures.
- Your process should include comprehensive docketing of all consumer complaints and their resolution.
- Complaints to regulators should be subject to enhanced procedures and to involvement of counsel as appropriate.
- The regulators will increasingly look to the level and nature of consumer complaints in evaluating your institution.
 Review, simplify and enhance all forms, websites, customer correspondence, marketing materials, phone sites (every way in which you interact with your customer) to make them conform to “Plain Language” standards. Minnesota has a Plain Language Act. Federal agencies have developed Plain Language guidelines under the federal Plain Writing Act passed in 2010 and applicable to federal agencies. Section 1032 of the Act describing the CFPB’s model disclosures uses the term 'plain' to mean “clear format and design, easily readable type font, and succinct explanation.” Everything should be reviewed under these guidelines with the goal of making it clear, understandable and fair. Interim head Warren has been very clear on this point:
- All important terms up front and not in small print
- Less is better than more
- No legalese
- All costs disclosed
- All risks to the customer disclosed
- No bait and switch
- Customer must be able to comparison shop
- Hide nothing
- Be up front about any and all negative features
Here is what Interim head Warren said in her House testimony on July 14, 2011:
- “Financial services companies ought to be required to write in plain language.”
- “The American people . . . suffer under the notion of; you’re legally obligated to do something and you can’t figure out what it is.”
- “I think the best place to start in changing a law in which big corporate interests chew up American families and spit out the bones is to make prices clear. To make risks clear. To [eliminate] fine print so people can make head-to-head comparisons . . .”
- “. . . we should start with much clearer disclosure.”
- "[We want to eliminate] surprise, trick-drown[ing] them in terms that no one understands so that consumers are neither able to ask the question; can I afford this? And is this the best deal I can get?”