Alert August 04, 2009

Proposed Legislation to Establish the Consumer Financial Protection Agency

As part of its financial regulatory reform program, the Obama Administration, through the Treasury, submitted to Congress proposed legislation that would establish a new consumer regulatory agency, the Consumer Financial Protection Agency (the “CFPA”), which would consolidate and expand the existing regulatory regime for consumer financial products.  Rep. Barney Frank, Chairman of the House Financial Services Committee, has introduced the proposed legislation to that committee as H.R. 3126.  The House Financial Services Committee has already held hearings on the proposed legislation, but will not be able to pass the legislation out of committee before Congress’ summer recess.  The proposed legislation is designed to implement recommendations made in the Treasury’s June 2009 White Paper on financial regulatory reform (as discussed in the June 23, 2009 Alert). 

The proposed legislation does not differ substantially from the White Paper.  The most significant change from the White Paper is that under the proposed legislation the federal banking agencies retain jurisdiction over the Community Reinvestment Act.  The proposed legislation also differs from the White Paper by referring to the agency that charters and supervises national banks rather than the proposed National Bank Supervisor. 

The CFPA would combine the rule-writing, supervision and enforcement powers for consumer financial products currently spread among several federal agencies, which addresses what the Treasury asserts is a key weakness in the current regulatory system.  Under the proposed legislation these combined consumer protection powers are separated from prudential supervision, which the Treasury believes creates no true conflicts despite the concerns to the contrary which have been vehemently expressed by both the financial services industry and the Federal banking agencies.  The proposed legislation seeks to promote transparency, simplicity, fairness, accountability, and access in the market for consumer financial products or services.  The sole mission of the CFPA would be to protect consumers in the market for consumer financial products and services.  If enacted in its current form, the proposed legislation would be one of the most significant changes to financial regulation in the last quarter century and would have broad effects beyond the financial services industry, as its regulations would apply to anyone offering consumer financial products.

Establishment of the CFPA.  The CFPA would be established as an independent agency in the executive branch.  All consumer financial protection functions (other than backstop enforcement authority) and personnel would be transferred from the Federal Trade Commission and the Federal banking agencies.  The CFPA would have a five member board ( the “CFPA Board”) composed of four members appointed by the President and the regulator of national banks (currently the Comptroller of the Currency, but if other sections of the proposed legislation are enacted, this seat would be held by the Director of the National Bank Supervisor).  The Director of the CFPA would be appointed by the President from the members of the CFPA Board.  The terms of the CFPA board members are staggered, however, unlike other boards such as the SEC or the FDIC, there is no provision to balance the political affiliation of the members of the CFPA Board.  The proposed legislation also provides for the establishment of a Consumer Advisory Board comprised of outside experts that would advise and consult with the CFPA on consumer financial matters.  Though the proposed legislation requires the CFPA to coordinate with other federal and state agencies, there is no explicit mechanism for resolving disputes with other agencies such as the federal prudential regulators. 

CFPA Funding.  The proposed legislation authorizes the CFPA to collect fees and assessments on a defined basis such as the outstanding volume of consumer credit accounts, total assets under management, or consumer financial transactions.  The CFPA would also be able to obtain civil money penalties under the proposed legislation.  Such civil money penalties would be deposited into a Consumer Financial Protection Agency Civil Penalty Fund to provide for payments to “victims of activities for which civil penalties have been imposed.” 

Scope and Authority of the CFPA.  As in the White Paper, the proposed legislation gives the CFPA broad authority to regulate any person who engages directly or indirectly in a financial activity in connection with the provision of a consumer financial product or service (“Covered Persons”).  This would include service providers and transaction processors for persons engaged in providing consumer financial products and services.  However, neither investment products regulated by the SEC or the CFTC nor insurance products regulated by the states would be regulated by the CFPA.  Under the proposed legislation, the CFPA would have exclusive rulemaking authority and primary enforcement powers for the Alternative Mortgage Transaction Parity Act, the Electronic Funds Transfer Act, the Equal Credit Opportunity Act (“ECOA”), the Fair Credit Reporting Act (except with respect to red flags, affiliate marketing and data disposal), the Fair Debt Collection Practices Act, certain provisions of the Federal Deposit Insurance Act relating to disclosures by uninsured depository institutions, the privacy policy provisions of the Gramm-Leach‑Bliley Act, the Home Mortgage Disclosure Act (“HMDA”), the Real Estate Settlement Procedures Act, the Secure and Fair Enforcement for Mortgage Licensing Act, the Truth in Lending Act and the Truth in Savings Act.  The CFPA is further authorized to restrict mandatory pre-dispute arbitration for any dispute arising from its regulations or the foregoing statutes.  When prescribing rules, the proposed legislation requires the CFPA to consider the potential benefits and costs to consumers and Covered Persons, including the potential reduction of consumer’s access to consumer financial products and services, and to consult with the Federal banking agencies.  The proposed legislation also authorizes the CFPA to examine or require reports from Covered Persons and grants the CFPA access to reports of the Federal banking agencies.  The proposed legislation further grants the CFPA certain specific authorities incorporated from the White Paper:

  • The authority to prohibit unfair, deceptive or abusive acts or practices in connection with any transaction with a consumer for a consumer financial product or service;
  • The authority to require disclosures and other communications to customers describing the costs, benefits and risk associated with any consumer financial product or service, subject to a reasonableness standard;
  • The authority to prescribe rules and issue orders and guidance regarding the sales practices for consumer financial products and services;
  • The authority to establish standards and procedures for the approval of pilot disclosures by Covered Persons to consumers;
  • The authority to require background checks, licensing, bonding, recordkeeping and other procedures for Covered Persons;
  • The authority to impose duties on a Covered Person or its employees, agents or independent contractors; and,
  • The authority to require Covered Persons to make available to a consumer information regarding that consumer;

The proposed legislation prohibits the CFPA from establishing a usury limit.  However, the proposed legislation does grant the CFPA authority over transaction charges and fees.

Standard Consumer Financial Products or Services.  One of the most controversial provisions of the proposed legislation would provide the CFPA with the authority to define standard (or “plain vanilla” as referred to in the White Paper) consumer financial products and services.  The proposed legislation gives the CFPA the authority to require that Covered Persons offer standard products if the Covered Person is offering other consumer financial products or services of the same type.  Consumers would be given warnings regarding the “heightened risks of alternative consumer financial products or services” and could decline such alternative products in favor of the standard product.  Standard consumer financial products and services would have a presumption of suitability for consumers.  Conversely, alternative consumer financial products and services may not be presumed to be suitable and would be subject to enhanced regulatory scrutiny.  Many in financial services industry believe these provisions will stifle innovation in the markets for consumer financial products and services.  Despite these concerns, the Treasury continues to maintain that the proposed legislation is not inconsistent with financial innovation.

Relation with State Law.  The proposed legislation does not contain any preemption of state law.  Rather it sets a floor for consumer protection laws and allows states to adopt more restrictive laws so long as they are not inconsistent with the statutes and regulations of the CFPA.  Further, the proposed legislation empowers, in consultation with the CFPA, the state attorneys general to bring civil actions for monetary or equitable relief for violations of the proposed legislation or any regulations of the CFPA.  The proposed legislation also sets aside over 100 years of preemption for federally chartered financial institutions by providing that any consumer protection provision in state consumer laws of general application shall apply to national banks, federally-chartered thrifts and the subsidiaries of either, so long as such laws are not discriminatory against federally chartered institutions and are consistent with federal law.  The proposed legislation also amends the National Bank Act and the Home Owners Loan Act to provide that visitorial powers would not prevent or restrict a state attorney general from demanding records or enforcing federal or state law, expanding on the U.S. Supreme Court’s recent decision in Cuomo v. The Clearing House Association, LLC (as discussed in the June 30, 2009 Alert.) 

Enforcement Powers.  The proposed legislation provides that the CFPA may enforce the statutes under its jurisdiction and its regulations through administrative proceedings or civil actions.  Civil money penalties are authorized under the proposed legislation for (i) up to $5,000 per day for a violation of an CFPA order or condition; (ii) up to $25,000 per day for violations of any rule or regulation relating to standard consumer financial products and services or for any reckless violation of the laws and regulations of administered by the CFPA; or (iii) up to $1,000,000 per day for knowing violations of the laws and regulations of administered by the CFPA.  The proposed legislation further provides for the protection of employees of Covered Persons who provide information to the CFPA. 

Private Rights of Action.  The proposed legislation does not create any new private rights of action to enforce the regulations and statutes of the CFPA.  However, existing private rights of action under the statutes for which the CFPA would have jurisdiction would be retained under the proposed legislation. 

Data Collection.  The proposed legislation requires financial institutions to collect certain additional data regarding deposit accounts, including the addresses of depositors and whether a deposit account is for a residential or commercial customer.  The ECOA would be amended by the proposed legislation to require data collection relating to small business loans and women- and minority-owned small businesses.  The proposed legislation also imposes additional HMDA data collection requirements.