Insights

The Consumer Financial Protection Act of 2010 (the “CFPA” or “Act”) revolutionizes federal regulation of the consumer financial services industry. The Act concentrates industry regulation in one central regulator and vests that regulator with expansive supervisory, rulemaking, and enforcement authority.

The new central regulator will be the Consumer Financial Protection Bureau (the “Bureau”). Although the Bureau will be housed within the Federal Reserve Board (“FRB”), it will be largely autonomous. At the head will be one Director, appointed by the President for a 5-year term. The consumer financial protection personnel currently housed at the various federal financial institution regulatory agencies will be transferred to the new agency, and given the Bureau’s mandate, authority, and funding, the staff can be expected to grow exponentially. The Bureau will have the resources to exercise the most significant powers over the consumer financial services industry ever vested in a single federal government agency.

The current regulatory framework for the consumer financial services industry had evolved over a 40-year period, beginning with the enactment of the federal Truth in Lending Act in 1968. Additional consumer protections were enacted piecemeal over the years to address specific areas of concern, such as access to credit, debt collection practices, privacy, data security, etc. Administrative enforcement of these laws was assigned to multiple federal regulatory agencies, including the FRB, the OCC, the OTS, the FDIC, and the FTC. Consumer groups and other critics argued that this combination of piecemeal regulation and diverse enforcement enabled predatory and irresponsible lenders to engage in practices that contributed to the current financial crisis. These criticisms gave rise to the idea of a single consumer financial protection agency vested with strong powers – hence the CFPA creating the new Bureau.

The CFPA is much more than a reaction to the circumstances that engendered the current financial crisis. As the legislation moved through Congress, various industry groups argued that they should remain outside the scope of the new agency’s jurisdiction, and maintained that the legislation should concentrate on the consumer mortgage lending industry. In reply, the bill’s supporters asserted that the new agency afforded an opportunity to jettison the historical regulatory framework. One such advocate was quoted as saying: “This is the opportunity to fix forty years of failed consumer protection.”

Creditors and other providers of consumer financial products and services take umbrage at the suggestion that the current system of comprehensive and complex laws and regulations could constitute “failed consumer protection.” However, perception is often the reality in Washington, and the CFPA will undoubtedly add to the regulatory costs and burdens for this industry. The following is a brief overview of the CFPA’s scope, the Bureau’s powers, and new substantive consumer protection laws.

Who’s Covered?

The CFPA’s principal scope will involve “covered persons” and “service providers” to covered persons. Covered persons are those who engage in offering or providing a “consumer financial product or service.” Covered persons include creditors, loan servicers, lessors, real estate settlement providers, debt collectors, and credit reporting agencies, among others.

Who’s Not Covered?

The Bureau will have no authority over motor vehicle dealers, insurance, accountants and tax preparers, attorneys, persons regulated by a state insurance regulator, merchants, retailers, other sellers of non-financial services, real estate brokerage activities, manufactured home retailers, and modular home retailers.

A word of caution: the Bureau’s rulemaking authority under the specifically “enumerated consumer laws” (e.g., TILA, EFTA, ECOA, FCRA, FDCPA, HMDA, RESPA, the SAFE Act, etc.) will apply to anyone subject to those laws, even if they are not “covered persons” or “service providers.”

What are the Bureau’s Role and Purpose?

The Bureau will regulate the offering and provision of consumer financial products and services under the Federal consumer financial laws. The Bureau is charged with the implementation and consistent enforcement of these laws for the purpose of ensuring that “all consumers have access to markets for consumer financial products and services and that markets for consumer financial products and services are fair, transparent, and competitive.”

What are the Bureau’s Powers?

1. Supervisory Authority

The Bureau will examine banks and credit unions with greater than $10 billion in assets and all mortgage-related businesses (such as lenders, servicers, and mortgage brokers). In addition, the Bureau may assert supervisory authority over any kind of entity deemed to be a “larger participant of a market for other consumer financial products or services.” In order to assert such authority, the Bureau must issue a rule, in consultation with the Federal Trade Commission to define such “larger participants.” The Bureau must issue the initial rule not later than 1 year after the designated transfer date. In addition, the Bureau may exercise supervisory authority over covered persons when it has reasonable cause to determine that the covered person’s offering or provision of consumer financial products or services conduct poses risks to consumers. Finally, the Bureau will supervise private student lenders and pay day lenders.

Supervision on the nondepository covered persons begins on the date of enactment, while simultaneous and coordinated supervision of very large depository institutions also begins on the date of enactment. Banks with assets of $10 billion or less will continue to be regulated and examined by their respective prudential regulator, but they must comply with Bureau rules

2. Rulemaking Authority

The Bureau will have extensive rulemaking authority under two statutory mandates. First, the Director may “prescribe rules and issue orders and guidance as may be necessary or appropriate to enable the Bureau to administer and carry out the purposes and objectives of the Federal consumer financial laws, and to prevent evasions thereof.” The “Federal consumer financial laws” are the CFPA and the “enumerated consumer laws” (e.g., TILA, EFTA, ECOA, FCRA, FDCPA, HMDA, RESPA, the SAFE Act, etc.), but not the FTC Act. The CFPA is given exclusive rulemaking authority to “administer and carry out the purposes and objectives” of these consumer financial laws. These rules will apply to any person subject to these laws, regardless of whether the person is a “covered person” under the CFPA or otherwise subject to the Bureau’s jurisdiction.

In addition, the Bureau will prescribe rules applicable to a covered person or service provider 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, or the offering of a consumer financial product or service. These rules may include requirements for the purpose of preventing such acts or practices. In prescribing these rules, the Bureau must consult with the Federal banking agencies, or other Federal agencies, as appropriate, concerning the consistency of the proposed rule with prudential, market, or systemic objectives administered by such agencies.

Unfairness rulemaking authority: The Bureau cannot declare an act or practice in connection with a transaction with a consumer for a consumer financial product or service, or the offering of a consumer financial product or service, to be unlawful on the grounds that such act or practice is unfair, unless the Bureau has a reasonable basis to conclude that: (a) the act or practice causes or is likely to cause substantial injury to consumers not reasonably avoidable by consumers; and (b) countervailing benefits to consumers or to competition does not outweigh such substantial injury. In determining whether an act or practice is unfair, the Bureau may consider established public policies as evidence to be considered with all other evidence. Such public policy considerations cannot serve as a primary basis for such determination.

Abusive rulemaking authority: The Bureau cannot declare an act or practice abusive in connection with the provision of a consumer financial product or service, unless the act or practice: (a) materially interferes with the ability of a consumer to understand a term or condition of a consumer financial product or service; or (b) takes unreasonable advantage of (1) a lack of understanding on the part of the consumer of the material risks, costs, or conditions of the product or service; (2) the inability of the consumer to protect the interests of the consumer in selecting or using a consumer financial product or service; or (3) the reasonable reliance by the consumer on a covered person to act in the interests of the consumer.

Disclosures: The Bureau may prescribe rules to ensure that the features of any consumer financial product or service, both initially and over the term of the product or service, are fully, accurately, and effectively disclosed to consumers in a manner that permits consumers to understand the costs, benefits, and risks associated with the product or service, in light of the facts and circumstances. In prescribing rules this section, the Bureau must consider available evidence about consumer awareness, understanding of, and responses to disclosures or communications about the risks, costs, and benefits of consumer financial products or services.

The CFPA gives the Bureau only one specific mandate with regard to rulemaking. With respect to an extension of credit secured by residential real estate or a dwelling, if documented income of the borrower, including income from a small business, constitutes a repayment source for an extension of credit secured by residential real estate or a dwelling, the creditor may consider the seasonality and irregularity of such income in the underwriting of and scheduling of payments for such credit.

No Usury Cap: The Bureau has no authority to establish a usury limit applicable to an extension of credit offered or made by a covered person to a consumer, unless explicitly authorized by law.

3. Enforcement

The CFPA gives the Bureau far more extensive enforcement powers and remedies than ever before entrusted in any consumer protection agency, including the Federal Trade Commission. The Bureau may take any action authorized under Subtitle E (Enforcement Powers) to prevent a covered person or service provider 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, or the offering of a consumer financial product or service.

Specifically, under the Act’s enforcement authority, the Bureau may bring investigations, and issue Civil Investigative Demands (CID’s) in connection with those investigations. It may conduct cease-and-desist administrative proceedings, and bring enforcement actions in U.S. District Court. The CFPA vests in the court, or in the Bureau in the case of an administrative proceeding, jurisdiction to “grant any appropriate legal or equitable relief with respect to a violation of Federal consumer financial law, including a violation of a rule or order prescribed under a Federal consumer financial law.” This relief may include, without limitation, rescission or reformation of contracts; refund of moneys or return of real property; restitution, disgorgement or compensation for unjust enrichment; payment of damages or other monetary relief; public notification regarding the violation, including the costs of notification; limits on the activities or functions of the person; and civil money penalties. In addition, if the Bureau, a State attorney general, or any State regulator is the prevailing party in an action to enforce any Federal consumer financial law, it may recover its costs in connection with prosecuting such action.

The Bureau may also use these powers in its enforcement of any Federal consumer financial law, including TILA, EFTA, ECOA, FCRA, FDCPA, HMDA, RESPA, the SAFE Act, etc.

4. Registration, Monitoring, Information Gathering

The Bureau may require registration by covered persons, other than an insured depository institution, insured credit union, or related person.

The Bureau will monitor for risks to consumers in consumer financial products or services, including developments in markets for such products or services. The Bureau will publish annually at least one report of the significant findings resulting from this monitoring. The Bureau will have the authority to gather information regarding the organization, business conduct, markets, and activities of covered persons and service providers. The Bureau will prescribe rules regarding the confidential treatment of information obtained in connection with the exercise of its authorities under the Federal consumer financial laws.

The Bureau will have access to any report of examination or financial condition made by a prudential regulator or other Federal agency having jurisdiction over a covered person or service provider, and the prudential regulator or other Federal agency may, in its discretion, furnish to the Bureau any other report or other confidential supervisory information concerning any insured depository institution, credit union, or other entity examined by such agency under authority of any provision of Federal law. A prudential regulator, a State regulator, or any other Federal agency having jurisdiction over a covered person or service provider will have access to any report of examination made by the Bureau with respect to such person.

5. Consumer Access to Information Held By Covered Persons; Consumer Complaint Response Procedures

The Bureau will issue rules to require covered persons to make available to consumers the information in the control or possession of the covered person concerning the financial product or service that the consumer obtained from the covered person. The Bureau will also establish procedures for the federal regulatory agencies to provide timely responses to consumer complaints or inquiries regarding covered persons.

6. Mandatory Arbitration

The Bureau will study and report to Congress concerning pre-dispute arbitration agreements between a covered person and a consumer for a consumer financial product or service, and the Bureau may prescribe regulations that prohibit or impose conditions or limitations on the use of such arbitration agreements.

7. Prohibited Acts

The CFPA makes it unlawful for any covered person or service provider to offer or provide to a consumer any financial product or service not in conformity with Federal consumer financial law, or otherwise commit any act or omission in violation of a Federal consumer financial law, or engage in any unfair, deceptive, or abusive act or practice. Such persons cannot fail or refuse, as required by Federal consumer financial law, or any rule or order issued by the Bureau under such laws to permit access to or copying of records; to establish or maintain records; or to make reports or provide information to the Bureau.

If any person knowingly or recklessly provides substantial assistance to a covered person or service provider in violation of the CFPA’s provisions or any rule or order issued the Bureau, the provider of such substantial assistance shall be deemed to be in violation of that section to the same extent as the person to whom such assistance is provided.

Conclusion

Because the CFPA vests the Bureau with such a broad mandate and powers to effectuate that mandate, the full effect of the new Act will depend to a large extent on how the Bureau’s Director and the other senior management exercise their discretion in carrying out that mandate. In any event, the federal landscape for consumer financial services regulation has been completely altered.

Anne P. Fortney is a partner in the Washington, D.C., office of Hudson Cook, LLP. Basis Points readers can reach Anne at 202-327-9709 or by email at afortney@hudco.com.

Catherine M. Brennan is a partner in the Maryland office of Hudson Cook, LLP. Basis Points readers can reach Cathy at 410-865-5405 or by email at cbrennan@hudco.com.