On June 17, 2009, the Obama Administration released a lengthy proposal for massive reform of the country’s financial services regulatory structure. The proposal covers a vast array of regulatory reforms, including the means by which consumer protections are examined and enforced. On July 8, 2009, Rep. Barney Frank (D-MA), chairman of the House Financial Services Committee introduced H.R. 3126 (the “Act”), a bill to implement the consumer protection reforms proposed by the Administration.
The centerpiece of the Act is the creation of a new federal agency, the Consumer Financial Protection Agency (CFPA), whose key objective would be to protect consumers and investors from financial abuse. The CFPA would be an independent agency with broad jurisdiction over consumer financial products and services, such as credit, savings, and payment products, and activities such as real and personal property appraisal and title insurance. The CFPA would have supervisory, examination, and/or enforcement authority over most persons involved in the provision of consumer financial products and services.
Significantly, the Act proposes to give the CFPA sole rulemaking authority for consumer financial protection statutes (e.g., the Truth in Lending Act, the Equal Credit Opportunity Act, the Real Estate Settlement Procedures Act, the Home Ownership and Equity Protection Act, the Home Mortgage Disclosure Act, and the Fair Debt Collection Practices Act). The Act does not limit the CFPA’s rulemaking authority to these laws; it can promulgate rules as it sees fit to prevent unfair and deceptive practices with respect to consumer financial products and services.
The Act directs the CFPA to improve transparency, fairness, appropriateness, simplicity, and accountability. Importantly, it expressly directs the CFPA to consider restricting or banning mandatory arbitration clauses, and provides that regulations promulgated and/or enforced by the CFPA would not preempt related state laws that provide greater consumer protection, thus creating the potential for increased multistate compliance costs. While the CFPA would be the primary enforcer of consumer protection laws and regulations, the Federal Trade Commission (FTC), the federal banking agencies and the States would enjoy “backstop” enforcement authority should the CFPA fail to act in a timely manner.
Authorities Transferred
The Act transfers virtually all rulemaking and enforcement authority with respect to consumer protections relating to financial products and services from the existing prudential regulators (i.e., the federal banking agencies) and the FTC. It does so in three primary ways—Section 122(a) provides:
“The [CFPA] is authorized to exercise its authorities granted in this title, in the enumerated consumer laws, and transferred under subtitles F and H, to administer, enforce, and otherwise implement the provisions of this title, the authorities transferred in subtitles F and H, and the enumerated consumer laws.”
Enumerated Consumer Laws
All rulemaking and enforcement authority with respect to “enumerated consumer laws” are transferred to the CFPA. The “enumerated consumer laws” are defined in Section 101(16) as:
• The Alternative Mortgage Transaction Parity Act (12 U.S.C. §§ 3801 et seq.)
• The Electronic Funds Transfer Act (15 U.S.C. §§ 1693 et seq.)
• The Equal Credit Opportunity Act (15 U.S.C. §§ 1691 et seq.)
• The Fair Credit Reporting Act (15 U.S.C. §§ 1681 et seq.), except with respect to sections 615(e) (red flags), 624 (affiliate marketing), and 628 (the disposal rule)
• The Fair Debt Collection Practices Act (15 U.S.C. §§ 1692 et seq.)
• Subsections (c), (d), (e), and (f) of Section 43 of the Federal Deposit Insurance Act (12 U.S.C. § 1831t)
• Sections 502, 503, 504, 505, 506, 507, 508, and 509 of the Gramm-Leach-Bliley Act (15 U.S.C. §§ 6802 et seq.)
• The Home Mortgage Disclosure Act (12 U.S.C. §§ 2801 et seq.)
• The Real Estate Settlement Procedures Act (12 U.S.C. §§ 2601 et seq.)
• The Secure and Fair Enforcement for Mortgage Licensing Act (12 U.S.C. §§ 5101 et seq.)
• The Truth in Lending Act (15 U.S.C. §§ 1601 et seq.)
• The Truth in Savings Act (12 U.S.C. §§ 4301 et seq.)
Section 122(d) grants the CFPA exclusive rulemaking and examination authority with respect to these laws (including existing regulations), and Section 122(e)(1) transfers primary enforcement authority to the CFPA. Section 122(e)(2) permits any agency currently authorized to enforce one of these laws to make a written recommendation that the CFPA initiate an enforcement proceeding in the event it detects a potential violation. Under Section 122(e)(3), the recommending agency will have “backstop” authority to enforce the suspected violation if the CFPA does not initiate an enforcement proceeding within 120 days after the recommendation.
The need to distinguish “enumerated consumer laws” by definition is not immediately apparent from the language of the Act, given the CFPA’s ability to initiate enforcement proceedings against “any person” as discussed below. However, the definition may make more sense when considered outside the context of enforcement authority and rulemaking jurisdiction. For example, the CFPA’s authority to craft rulemaking exemptions, restrict mandatory pre-dispute arbitration, conduct hearings, and use the Act’s three-tier civil penalty structure are all subject to the “enumerated consumer laws” definition. In addition, certain of the Act’s provisions regarding preservation of state law (found in subtitle D) refer to the “enumerated consumer laws” definition and do not refer to the conforming amendments in subtitle H (discussed below), where carve-outs in the definition of “enumerated consumer laws” are dropped.
Authorities Transferred Under Subtitle F
Subtitle F of the Act transfers all “consumer financial protection functions” from the banking agencies and the FTC to the CFPA. Section 161(d) defines “consumer financial protection functions” as “research, rulemaking, issuance of orders or guidance, supervision, examination, and enforcement activities, powers, and duties relating to the provision of consumer financial products or services, including the authority to assess and collect fees for those purposes . . .”.
Effectively, this means that the banking agencies and the FTC are stripped of their authority as the primary enforcers of consumer protection laws and regulations without regard to whether such laws and regulations fall within the definition of “enumerated consumer laws.” The Act is not a model of clarity and the language of subtitle F bears that out. For example, FTC authorities carved out of the definition of “enumerated consumer laws” (i.e., red flags, affiliate marketing, and the disposal rule) could be read as being transferred under subtitle F. Neither the FTC nor Treasury consider this to be the case—neither consider red flags, affiliate marketing, and the disposal rule to be part of the FTC’s consumer financial protection functions. Rather, these are privacy and identity theft prevention functions. In addition, both FTC and Treasury have indicated in Congressional testimony that the Act continues to vest primary enforcement authority for information safeguards, data security and identity theft with the FTC. However, given the current lack of clarity, a court could reasonably characterize the FTC’s authorities with respect to FCRA 615(e), 624 and 628 as the “consumer financial protection functions” transferred to the CFPA under subtitle F.
As with the “enumerated consumer laws,” the CFPA has exclusive rulemaking and examination authority as primary enforcement authority over all authorities transferred under Subtitle F.
Authorities Transferred Under Subtitle H
The third method by which authority is transferred to the CFPA is through the conforming amendments found in subtitle H of the Act. These amendments generally replace the references to the banking agencies and the FTC in a number of laws with references to the CFPA, effectively transferring rulemaking and primary enforcement authority from a particular agency to the CFPA. For example, Section 184(b)(7)(A) specifically limits the FTC’s broad enforcement authority under § 621 of the Fair Credit Reporting Act (FCRA) by making it “subject to” Section 122 of the Act. As noted above, Section 122(e)(1) grants primary enforcement authority to the Agency with backstop authority to, in this case, the FTC, thus stripping the FTC of its role as the primary enforcer of the FCRA. Other sections of Subtitle H strip the federal banking agencies of rulemaking and enforcement authority in a similar fashion.
Broad Language = Broad Power
As with any new law, language is important, and there are many provisions in the Act where a careful parsing reveals how broad the authority granted to this new agency may be. For example, Section 122 (b)(1) provides:
“The Agency may prescribe rules and issue orders and guidance as may be necessary or appropriate to enable it to administer and carry out the purposes and objectives of this title, the authorities transferred under subtitles F and H, and the enumerated consumer laws, and to prevent evasions thereof.” (Emphasis added).
In other words, the CFPA’s authority is not limited to the authorities physically transferred to it under the Act—it may regulate in any manner it deems necessary to carry out the purposes of the Act. Note further the language of Section 131(a):
“The Agency may take any action authorized under subtitle E [dealing with the CFPA’s enforcement powers] to prevent a person from committing or engaging in an unfair, deceptive, or abusive act or practice under Federal law in connection with any transaction with a consumer for a consumer financial product or service.” (Emphasis added)
This section authorizes the CFPA to act with respect to any person, not just the entities it directly regulates. So, to the extent a service provider or other person is, in the view of the CFPA, “committing or engaging in an unfair, deceptive, or abusive act or practice under Federal law in connection with any transaction with a consumer for a consumer financial product or service,” the CFPA has the authority to initiate an enforcement proceeding against such service provider or other person.
Further evidence of the broadness of the grant of authority is found in Section 131(b)(1):
“The Agency may prescribe regulations identifying as unlawful unfair, deceptive, or abusive acts or practices in connection with any transaction with a consumer for a consumer financial product or service.”
This authority is not tied to any rulemaking or enforcement authority granted under existing or future consumer protection statutes. The CFPA is authorized to act on its own initiative whenever it deems such action necessary to prevent unfair and deceptive acts and practices.
In addition, the Act grants authority to the CFPA to prescribe disclosure, to require financial services providers to offer standard “plain vanilla” products in addition to less traditional products, to impose greater penalties with respect to non-traditional products, and to dictate business terms through its ability to prevent unfair and deceptive practices.
Covered Persons
The Act defines a class of persons as “covered persons.” Under Section 101(9), these are “persons who engage directly or indirectly in a financial activity, in connection with the provision of a consumer financial product or service, or persons who provide a material service to, or process a transaction on behalf of, [another covered person].”
“Financial activities” are broadly defined, and include many activities one might not immediately consider to be traditional financial activities. They include:
• Deposit-taking activities.
• Extending credit and servicing loans (including acquiring, brokering, or servicing loans or other extensions of credit; engaging in any other activity usual in connection with extending credit or servicing loans, including performing appraisals of real estate and personal property and selling or servicing credit insurance or mortgage insurance).
• Check-guaranty services.
• Collecting, analyzing, maintaining, and providing consumer report information or other account information by covered persons, including information relating to the credit history of consumers and providing the information to a credit grantor who is considering a consumer application for credit or who has extended credit to the borrower.
• Collection of debt related to any consumer financial product or service.
• Providing real estate settlement services, including providing title insurance.
• Leasing personal or real property or acting as agent, broker, or adviser in leasing such property if the lease is on a non-operating basis; the initial term of the lease is at least 90 days; and in the case of leases involving real property, at the inception of the initial lease, the transaction is intended to result in ownership of the leased property to be transferred to the lessee.
• Acting as an investment adviser (to the extent not subject to regulation by or required to register with the Commodity Futures Trading Commission or the Securities and Exchange Commission) to any person.
• Acting as financial adviser to any person, including providing financial and other related advisory services; providing educational courses, and instructional materials to consumers on individual financial management matters; or providing credit counseling, tax planning or tax-preparation services to any person.
• Financial data processing, including providing data processing and data transmission services, facilities (including data processing and data transmission hardware, software, documentation, or operating personnel), databases, advice, and access to such services, facilities, or databases by any technological means, if the data to be processed or furnished are financial, banking, or economic; and the hardware provided in connection therewith is offered only in conjunction with software designed and marketed for the processing and transmission of financial, banking, or economic data, and where the general purpose hardware does not constitute more than 30 percent of the cost of any packaged offering.
• Money transmitting.
• Sale or issuance of stored value.
• Acting as a money services business.
• Acting as a custodian of money or any financial instrument.
• Any other activity that the CFPA defines, by regulation, as a financial activity (NB: the CFPA cannot define engaging in the business of insurance as a financial activity, except with respect to credit insurance, mortgage insurance, or title insurance).
Essentially, covered persons are banks and other depository institutions, creditors generally, real and personal property appraisers, title insurance providers, consumer reporting agencies, debt collectors, lessors, financial literacy program providers, persons providing fraud detection, skip tracing, repossession services or any other “material service” to a covered person, etc.
As with “enumerated consumer laws” definition, the need to define a “covered person” is not immediately apparent from the language of the Act. The Act’s approach to enforcement and rulemaking authority largely disregards distinctions between “covered persons” and other persons with respect to the Agency’s jurisdiction. However, the reasoning behind these distinctions may make more sense with respect to other types of authority assigned to the CFPA. For example, the CFPA may collect its self-funding fees only from “covered persons,” and its authority to examine, require reports, and monitor extends only to “covered persons.”
Conclusion
The Act represents a sweeping change to the way consumer protections are regulated and enforced with respect to consumer financial services and products. It separates prudential enforcement from consumer protection enforcement, and requires only that the CFPA “consult” with prudential regulators with respect to CFPA rulemakings. Congress, as of this writing, is holding a series of hearings on the Act, pitting industry against consumer advocates once more. At the moment, the Act appears to have significant traction in the House despite the concerns of Republicans and more conservative Democrats. However, these concerns point one to the conclusion that any bill that may pass the House and go to the Senate is likely to look much different than the Act in its current form. Presumably, the Senate will be faced with its own reservations, not the least of which will be the cost of this new agency.
Stay tuned!
Michael Benoit is a partner in the Washington, D.C., office of Hudson Cook, LLP. Basis Points readers can reach Michael at 202-327-9705 or by email at mbenoit@hudco.com.