Consumer Financial Services Industry, Meet Your New Regulator
Financial Services Reform Alert
by
Melanie H. Brody,
Stephanie C. Robinson
. July 7, 2010
K&L Gates published this alert prior to July 21, 2010, the date on which President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act into law. However, this alert discusses the final version of the bill that would eventually be signed into law.
While the 2,319-page, sixteen-title Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank Act") imposes new regulatory requirements on virtually every sector of the financial industry, the centerpiece of the Dodd-Frank Act from a consumer protection standpoint is the creation of a consumer financial protection watchdog. The new agency will be called the Bureau of Consumer Financial Protection ("Bureau") and will be created pursuant to Title X of the Dodd-Frank Act, entitled the Consumer Financial Protection Act of 2010 ("CFPA" or "Act"). Its main goal will be to protect consumers. Based on an idea advocated by Harvard Law School professor Elizabeth Warren,[1] the Bureau will have exceptionally wide-reaching powers over providers of consumer financial products and services and vast implications for the financial industry. As we have reported in prior alerts, the creation of this new agency will fundamentally change how financial products and services are regulated in the United States.[2]
The majority of existing federal consumer financial laws will come under the purview of the Bureau, and the Bureau will have the authority to enforce those laws as well as issue its own rules to implement the CFPA. The Act transfers consumer financial protection functions and personnel from other federal agencies to the Bureau and purports to make one agency primarily accountable for protecting consumers in financial transactions. The Bureau will have to be a behemoth just to handle the single national consumer complaint hotline where consumers will report problems with financial products and services.
Potential penalties for violations of the CFPA and existing federal consumer financial laws will be extensive. Possible liability for taking a wrong step under just about any law that touches on the provision of consumer financial products or services is enormous. The Bureau will have the power to order remedies such as rescinding or reforming contracts, civil money penalties of up to $1 million per day in some cases, disgorgement for unjust enrichment, and restitution.
The Dodd-Frank Act, however, still is not law. The bill that emerged from a joint House-Senate conference committee on June 25 has already passed the House of Representatives. Senate Majority Leader Harry Reid says that the Senate will vote on the measure when the Senators return from recess on July 12. Although the vote is likely to be close—supporters may get exactly the 60 votes they need to avert a filibuster—Messrs. Dodd and Frank are publicly confident that the President will sign the bill by mid-month.
After providing some background on the CFPA, this alert will address the following questions:
Evolution of the CFPA Legislation
The legislation has undergone a number of significant changes since House Financial Services Committee Chairman Barney Frank first introduced the bill in the House of Representatives in July 2009. Among the more notable changes are the (qualified) exemptions from the Act for insurers, auto dealers, and retailers, as well as the scaled back coverage of community banks.
Some of the specific authorities that would have been granted to the Bureau under early drafts of the bill also have been eliminated. For example, at one point the legislation would have required providers of financial products and services to disclose to consumers the risks and costs of such products and services in "reasonable proportion" to benefits. That vague language alarmed many readers last year but does not appear in the final bill.
A provision requiring "fair dealing" regulations applicable to persons who communicate with consumers in the provision of a consumer financial product or service also did not survive in the final version of the bill. Provisions in the original bill that would have made it difficult for a covered person to offer "alternative" consumer financial products or services are not in the final bill; however, at least with respect to residential mortgages, only plain vanilla products are left under the Mortgage Reform and Anti-Predatory Lending Act. We discuss that Act in detail in a separate alert.
The version of the legislation that the House of Representatives passed in December 2009 defined a covered person to include someone who "indirectly" engages in a financial activity in connection with the provision of a consumer financial product or service. Fortunately, that definition has evolved and the word "indirectly" has been removed. There are also no longer the words of "encouragement" to the states to prescribe operational standards to deter unfair, deceptive, or abusive practices.
What Is the Bureau of Consumer Financial Protection?
The CFPA creates the Bureau, which will regulate the offering and provision of consumer financial products and services for the purpose of ensuring access to markets for consumer financial products and services that are fair, transparent, and competitive.[3] The Bureau will be autonomous[4]—but housed within the Federal Reserve System.[5] The Director of the Bureau will be appointed by the President with advice and consent of the Senate.[6]
The Bureau will be an executive agency[7] with a dedicated budget paid by the Federal Reserve System.[8] It will receive annually a fixed percentage of the total operating expenses of the Federal Reserve System. Congress also approved a mechanism for authorizing appropriations for the Bureau when the Director determines that the funding needs of the Bureau will exceed the amount that may be transferred from the Board of Governors. If the Director determines that more funds are needed and submits a required report to the President and the appropriations committees of the Senate and House of Representatives, the CFPA authorizes an additional $200 million in appropriations for each fiscal year through 2014.
A Consumer Advisory Board will advise the Bureau by providing information on emerging practices in the consumer financial products or services industry.[9] Members should include experts in consumer protection, financial services, community development, fair lending, and civil rights, among others.[10] An earlier version of the bill would have created two new boards—an advisory board and an oversight board, both of which would advise the Director—but the final legislation eliminated that redundancy.
A Financial Stability Oversight Council established in Title I of the Dodd-Frank Act will in a sense oversee the watchdog. The Council would have the power to set aside a final regulation promulgated by the Bureau under certain conditions.
What Are the Bureau's Objectives?
The CFPA outlines five primary objectives:
[11]
- ensure consumers receive timely and understandable information;
- protect consumers from unfair, deceptive, or abusive acts or practices;
- address outdated, unnecessary, or unduly burdensome regulations;
- enforce federal consumer financial law consistently, without regard to status of a person as a depository institution; and
- ensure the transparent and efficient operation of markets for consumer financial products and services.
"Federal consumer financial law" means the CFPA, certain "enumerated consumer laws" (defined below), the laws for which authorities are transferred under subtitles F (transferring consumer financial protection functions and personnel) and H of the CFPA (making conforming amendments to 25 federal laws), and any rule or order that the Bureau issues under any of the foregoing.[12] The "enumerated consumer laws" encompass almost all federal laws that regulate the activities of consumer financial product and service providers, including:
-
the Alternative Mortgage Transaction Parity Act;
-
the Consumer Leasing Act;
-
the Electronic Fund Transfer Act;
-
the Equal Credit Opportunity Act;
-
the Fair Credit Billing Act;
-
the Fair Credit Reporting Act (portions);
-
the Home Owners Protection Act;
-
the Fair Debt Collection Practices Act;
-
the Federal Deposit Insurance Act (portions);
-
the Gramm-Leach-Bliley Act (portions);
-
the Home Mortgage Disclosure Act;
-
the Home Ownership and Equity Protection Act;
-
the Real Estate Settlement Procedures Act;
-
the S.A.F.E. Mortgage Licensing Act;
-
the Truth in Lending Act;
-
the Truth in Savings Act;
-
section 626 of the Omnibus Appropriations Act; and
-
the Interstate Land Sales Full Disclosure Act.
[13]
New mortgage reform provisions in Title XIV of the Dodd-Frank Act also are transferred to the Bureau. The Federal Trade Commission Act, however, is not an "enumerated consumer law."
The Fair Housing Act also is conspicuously absent from the list of enumerated consumer laws, and the CFPA explicitly states that no provision of the CFPA "shall be construed as affecting any authority arising under the Fair Housing Act."[14] Administrative enforcement of the Fair Housing Act at the federal level will stay with the Department of Housing and Urban Development. This is significant because most allegations of discrimination by mortgage lenders support parallel claims under the Fair Housing Act and the Equal Credit Opportunity Act (which, as noted above, is an "enumerated consumer law"). The Bureau also will have the authority to issue regulations under another title of the Dodd-Frank Act—Title XIV, called the Mortgage Reform and Anti-Predatory Lending Act, discussed in more detail in a separate alert—to ban lending practices that "promote disparities among consumers of equal credit worthiness but of different race, ethnicity, gender, or age."[15]
In short, fair lending enforcement in the mortgage industry will still be divided among multiple federal agencies. Conforming amendments to the Federal Deposit Insurance Act would require federal banking agencies to make referrals to the Bureau when the agency "has a reasonable belief that a violation of an enumerated consumer law…has been committed,"[16] and the Bureau may engage in joint fair lending investigations with the Department of Justice, the Department of Housing and Urban Development, or both.[17] The FTC would continue to have authority to enforce the Equal Credit Opportunity Act.[18]
What Are the Bureau's Primary Functions?
The primary functions of the Bureau are to:
[19]
- conduct financial education programs;
- collect, investigate, and respond to consumer complaints;
- collect, research, monitor, and publish information relevant to the functioning of markets;
- supervise covered persons and enforce federal consumer financial law;
- issue rules, orders, and guidance implementing federal consumer financial law; and
- perform necessary and useful support activities.
When Does the Act Become Effective?
The Bureau will come into existence as soon as the President signs the Dodd-Frank Act. But the Bureau will not immediately have the authorities and personnel that will be transferred to it from other agencies. That will not happen until a "designated transfer date" to be determined by the Treasury Secretary.[20] Most of the substantive provisions in the CFPA also do not become effective until the designated transfer date.[21]
The Treasury Secretary must decide on a designated transfer date within sixty days of the Dodd-Frank Act becoming law (in other words, by mid-September if the sponsors of the bill stick to the current schedule). When setting this date, he must consult with various federal agency heads.[22] The designated transfer date cannot be sooner than six months after the bill is enacted (mid-January 2011, assuming a mid-July Presidential signing) and no later than 12 months after enactment.[23] The Treasury Secretary can extend the designated transfer date beyond 12 months if he submits a report to Congress explaining, among other things, why it is not feasible to complete the transition within the statutory timeframe.[24] It will be interesting to observe the existing federal agencies issuing regulations under and enforcing the "enumerated consumer laws" during this transition period, knowing that the entire decision making process soon could change.
Whom and What Does the Act Cover?
In general, the Act applies to "covered persons." Covered persons are persons or entities that engage in offering or providing a consumer financial product or service, and include their affiliates that act as service providers for them.
[25] A "consumer financial product or service" is any "financial product or service" defined in the Act when it is offered or provided for use by consumers primarily for personal, family, or household purposes. "Consumer" means an individual or an agent, trustee, or representative acting on behalf of an individual.
[26] Financial products and services include the following:
[27]
- extending credit, which would include first- and subordinate-lien, open-end and closed-end, residential mortgage loans,*
- acquiring, purchasing, selling, brokering, or servicing loans or other extensions of credit (but not solely extending commercial credit to an originator of consumer credit);*
- leasing or brokering leases equivalent to purchase finance arrangements under certain conditions;
- providing real estate settlement services, other than insurance or electronic conduit services;[28]
- performing appraisals of real estate or personal property;
- deposit-taking, money transmitting, or money services;
- selling, providing, or issuing stored value in any electronic format if the seller exercises substantial control over terms and conditions of the stored value;
- check cashing, check collection, and check guaranty services;
- financial data processing and transmission services;
- providing financial advisory services, including providing credit counseling to consumers and providing services to assist a consumer with debt management or debt settlement, with modifying loans, or with avoiding foreclosure (but excluding persons regulated by the SEC or a state securities commission);
- collecting, analyzing, maintaining, or providing consumer report information or other account information for use in connection with any decision regarding the offering or provision of a consumer financial product or service, with certain exceptions;*
- debt collection related to a consumer financial product or service;* and
- such other product or service as defined by Bureau regulation if the Bureau finds the product or service is entered into or conducted as a subterfuge or with a purpose to evade any federal consumer financial law, or if it is permissible for a bank or a financial holding company to offer or provide it under federal law or regulation and has or is likely to have a material impact on consumers; but
- does not include the business of insurance or electronic conduit services.
As noted above, the term "covered person" includes an affiliate of a person that provides a consumer financial product or service if the affiliate acts as a service provider to that person.[29] The Act defines "service provider"as a person that provides a material service to a covered person in connection with the offering or provision by the covered person of a consumer financial product or service. Service providers include: (i) a person that participates in designing, operating, or maintaining the consumer financial product or service; and (ii) a person who processes related transactions (other than unknowingly or incidentally and in a manner in which the data is undifferentiated from other types of data the person transmits or processes).[30] The term does not include a person who merely offers or provides ministerial support services or advertising space.[31]
"Related persons" also are "covered persons." "Related persons" is defined, but only with respect to a covered person that is not a bank holding company, credit union, or depository institution, as:[32]
- directors, officers, employees with managerial responsibility, controlling shareholders of, or agents for, the covered person;
- shareholders, consultants, joint venture partners, and any other person as determined by the Bureau who materially participates in the conduct of the affairs of the covered person; and
- independent contractors (including attorneys, appraisers, or accountants) who knowingly or recklessly participate in any violation of law or regulation, or breach of a fiduciary duty.[33]
What Persons and Activities Are Not Covered?
The CFPA specifically exempts certain entities to the extent they are not engaging in financial activities. Except to the extent that a person otherwise engages in offering or providing a consumer financial product or service, or is otherwise subject to any enumerated consumer law or any law for which authorities will be transferred to the Bureau, the following generally are not subject to the Act:[34]
- persons engaged in the business of insurance, which includes reinsurance;[35]
- providers of electronic conduit services;[36]
- merchants, retailers, and sellers of non-financial goods or services;[37]
- real estate licensees and registrants;[38]
- manufactured home retailers and modular home retailers;[39]
- accountants and tax preparers;[40]
- lawyers;[41]
- persons regulated by a state insurance regulator;[42]
- employee benefit and compensation plans and certain other arrangements under the Internal Revenue Code of 1986;[43]
- persons regulated by the SEC or a state securities commission;[44]
- persons regulated by the CFTC;[45]
- persons regulated by the Farm Credit Administration;[46]
- people engaged in the solicitation or making of charitable contributions; and[47]
- auto dealers predominantly engaged in the sale and servicing of motor vehicles, the leasing and servicing or motor vehicles, or both.[48]
What Authority Will the Bureau Have Over "Very Large" Banks, Savings Associations, Credit Unions, and Their Affiliates?
The Bureau will supervise covered persons that are insured depository institutions or credit unions with total assets of more than $10 billion, as well as any of their affiliates (collectively, "Very Large Banks").[49] To that end, the Bureau will require reports, conduct examinations, and coordinate its supervisory activities with those of prudential regulators and state bank regulatory authorities.[50] A prudential regulator and the Bureau must conduct simultaneous examinations unless the supervised institution requests that examinations be conducted separately.[51] If the proposed supervisory determinations of the Bureau and a prudential regulator are conflicting, then the Very Large Bank can ask the agencies to coordinate and present a joint statement of coordinated supervisory action within thirty days. If they fail to do so, the Very Large Bank can appeal to a governing panel.[52]
The Bureau will have primary enforcement authority over Very Large Banks with respect to a federal consumer financial law, although any federal agency other than the FTC that is authorized to enforce a federal consumer financial law may make a referral to the Bureau.[53] If the Bureau does not initiate an enforcement proceeding within 120 days of the referral, the other agency may initiate an enforcement proceeding.
The Very Large Bank subject to supervision under this section is required to provide to the Bureau and other agencies with jurisdiction timely responses concerning a consumer complaint or inquiry.[54]
How Does the CFPA Affect Smaller Banks, Savings Associations, and Credit Unions?
As a result of much lobbying and negotiation, the CFPA’s application to community banks is not as extensive as it would have been under earlier versions of the bill. The Director could require reports from covered persons that are insured depository institutions and credit unions with total assets of $10 billion or less (collectively, "Smaller Banks"); however, to the extent possible the Bureau is supposed to rely on public information and reports that have been provided to a federal or state agency.[55] The Bureau also could include its examiners "on a sampling basis" of the examinations performed by the prudential regulator.[56] The prudential regulators will retain exclusive enforcement authority (relative to the Bureau) over Smaller Banks, but the Bureau could make a referral to the regulator to recommend action if the Bureau has reason to believe that the Smaller Bank has engaged in a material violation of federal consumer financial law.[57] These provisions do not reference affiliates of Smaller Banks.
What Authority Will the Bureau Have Over Non-Depository Covered Persons?
Supervisory Authority
The Bureau must consult with the FTC in defining non-depository covered persons subject to Bureau supervision, and must issue its initial rule within one year of the designated transfer date.[58] With respect to any covered person other than a Very Large Bank or Smaller Bank who:
(i) offers or provides origination, brokerage, or servicing of loans secured by real estate for use by consumers primarily for personal, family, or household purposes, or loan modification or foreclosure relief services in connection with such loans;
(ii) is "a larger participant of a market for other consumer financial products or services," as defined by rule by the Bureau;
(iii) the Bureau has reasonable cause to determine is engaging or has engaged in conduct that poses risks to consumers;
(iv) offers or provides to a consumer any private education loan; or
(v) offers or provides to a consumer a payday loan,[59]
the Bureau can: conduct examinations and require reports; coordinate its supervisory activities with those of prudential regulators and state bank regulatory authorities; and require registration, among other things.[60] The Bureau's authority to prescribe rules regarding registration requirements applicable to a non-depository covered person appears to be permissive. That is, the Bureau may prescribe such registration rules but the CFPA does not expressly require the Bureau to do so.[61]
Enforcement Authority
If a federal law authorizes the Bureau and another federal agency to enforce federal consumer financial law against a non-depository covered person, the Bureau will have exclusive authority to enforce that law; however, the other federal agency may make a referral to the Bureau by recommending that the Bureau initiate an enforcement proceeding.[62]
Notwithstanding this, the FTC will retain its enforcement authority over non-depository covered persons or their service providers. Within six months after the designated transfer date, the Bureau and FTC must negotiate an agreement for coordinating their enforcement actions. The agreement must include procedures for notice to the other agency prior to initiating a civil action to enforce any federal law regarding the offering or provision of consumer financial products or services.[63]
State attorneys general are explicitly authorized to bring civil actions to enforce the CFPA and its implementing regulations against any covered persons except national banks and federal thrifts. Under the category of "dancing on the head of a pin," a state attorney general may bring a civil action against a national bank or federal thrift to enforce a regulation that the Bureau has issued under the CFPA, but not to enforce a provision of the statute itself.[64] In order to bring an action against a national bank or federal thrift, however, the state attorney general must first notify the Bureau and applicable prudential regulator, and the Bureau may intervene in the action as a party.[65] Upon intervening, the Bureau could remove the action to the appropriate United States district court, be heard on all matters arising in the action, and appeal any order or judgment to the same extent as any other party in the proceeding may.[66]
The CFPA expressly does not alter the authority of state attorneys general to enforce federal consumer credit laws besides the CFPA: "No provision of this title shall be construed as modifying, limiting, or superseding the operation of any provision of an enumerated consumer law that relates to the authority of a State attorney general or State regulator to enforce such Federal law."[67] Thus, in enforcing federal consumer financial laws other than the CFPA, state attorneys general could not use the additional administrative authorities that are available to the Bureau for a violation of those laws.
State consumer financial laws are preempted for national banks and federal savings associations only if: (i) their application would have a discriminatory effect on national banks or thrifts in comparison with the effect of the law on a bank chartered by that state; (ii) they meet the preemption standard set forth in Barnett Bank v. Nelson (i.e., the state law prevents or significantly interferes with the exercise by the national bank of its powers); or (iii) the state law is preempted by a provision of federal law other than the National Bank Act (for national banks) or Home Owners’ Loan Act (for federal thrifts).[68] State laws will not be preempted as to non-depository subsidiaries and affiliates of national banks and thrifts.[69] "State consumer financial law" is a precisely defined term for purposes of these preemption standards, and will not include many state laws that regulate consumer financial transactions, including arguably UDAP laws. We discuss in detail in a separate alert the CFPA’s implications for preemption of state law.
Rulemaking and Examination Authority
To the extent that federal law authorizes the Bureau and another federal agency to issue regulations or guidance, conduct examinations, or require reports from a non-depository covered person, the Bureau will have exclusive authority.[70]
What About Service Providers?
Service providers to covered persons will likewise be subject to the authority of the Bureau, to the same extent as if they were engaged in a service relationship with a bank and the Bureau were an appropriate federal banking agency.[71] But service providers to Smaller Banks are subject to Bureau authority only if they provide services to a “substantial number” of such persons.[72] Presumably, a Smaller Bank that acts as a service provider to a Very Large Bank or non-depository covered person would be covered to the same extent as any other service provider. In conducting exams or requiring reports of service providers, the Bureau will coordinate with the appropriate prudential regulator.[73]
What Rulemaking Authority Will the Bureau Have?
The Bureau will have exclusive authority to prescribe rules under the federal consumer financial laws.[74] In doing so, it must consider the potential costs and benefits to consumers and covered persons alike.[75] It also must consult with appropriate prudential regulators or other federal agencies regarding consistency with prudential, market, or systemic objectives administered by such agencies.[76] The Bureau must conduct an assessment of each significant rule or order it adopts and publish a report of its assessment within five years of the effective date of the subject rule or order.[77]
The Act authorizes—and in some cases requires—the Bureau to make rules or guidelines regarding the following:
-
the definition of other financial products or services;
[78]
-
confidential treatment of information obtained from persons in connection with the exercise of its authorities under federal consumer financial law;
[79]
-
registration of non-bank covered persons;
[80]
-
restricting mandatory pre-dispute arbitration clauses in agreements between a covered person and consumer for a consumer financial product or service;
[81]
-
identifying prohibited unfair, deceptive, or abusive acts or practices, including with respect to mortgage loan modification and foreclosure rescue services;
[82]
-
mandating the form and content of disclosures to consumers, with a safe harbor for a covered person that uses a model form;
[83]
-
combining the disclosures required under TILA and RESPA into a single, integrated disclosure form;
[84]
-
consumer rights to access information related to their consumer financial product or service transaction or account;
[85]
-
state attorney general enforcement actions (the Bureau must prescribe regulations to implement the requirements of the CFPA that preserve state enforcement powers, and must provide guidance from time to time to coordinate actions with the state attorneys general and other regulators);
[86]
-
capturing information about loans to women-owned, minority-owned, or small businesses;
[87]
-
standards for remittance transfer providers;
[88]
-
interchange transaction fees;
[89]
-
payment card network restrictions and network fees;
[90]
-
conditions or limitations on reverse mortgages;
[91]
-
minimum net worth or surety bond requirements under S.A.F.E. Mortgage Licensing Act for residential mortgage loan originators and minimum requirements for recovery funds paid into by loan originators;
[92] and
-
the accuracy and integrity of information furnished to consumer reporting agencies, and regulations requiring persons that furnish information to credit reporting agencies to establish reasonable policies and procedures for implementing those guidelines.
[93]
In connection with its authority to impose requirements regarding consumer disclosures, the Bureau could include in any final rule a model form, which must be validated through consumer testing.[94] The Bureau could also allow a covered person to conduct a trial disclosure program for the purpose of improving upon any model form.[95] Any new disclosure regulations the Bureau might propose have the potential to require consumer financial product and service providers to overhaul their existing disclosure systems.
Fair Lending
Conforming amendments to the Equal Credit Opportunity Act require the Bureau to make regulations to carry out the purposes of ECOA with respect to auto dealers (even though the Bureau does not have general enforcement jurisdiction over auto dealers).[96]
State Request for Regulation
Additionally, the Bureau has to respond to state calls for regulation. It must issue a notice of proposed rulemaking whenever a majority of the states has enacted a resolution in support of the establishment or modification of a consumer protection regulation by the Bureau.[97] This would not require the Bureau to issue rules that comport with the states’ resolution, but the Bureau at least must initiate a rulemaking proceeding to consider such an action.
Review of Bureau Regulations
A member agency of the Financial Stability Oversight Council may petition the Council to set aside all or part of a final regulation prescribed by the Bureau, regardless of whether the regulation implements other federal consumer financial laws or falls under the Bureau’s independent rulemaking authority.[98] The Council may set the regulation or provision aside if it finds that it would put the safety and soundness of the United States banking system or the stability of the financial system at risk.[99] This is an extremely high standard of review. It seems unlikely that the Bureau would promulgate any regulations that put the entire national financial system in jeopardy; nevertheless, this is at least a check on the Bureau's authority. The Council’s decision to set aside a Bureau regulation would be subject to judicial review.[100] The CFPA directs the Council to prescribe procedural rules to implement these provisions.
What Enforcement Powers Will the Bureau Have?
The Bureau will have the power to:
-
issue civil investigative demands and file a petition to a court for their enforcement;
[101]
-
conduct joint investigations, including joint fair lending investigations with HUD and/or DOJ;
[102]
-
-
conduct hearings and adjudication proceedings and issue cease-and-desist orders; and
[104]
-
commence civil actions.
[105]
The statute of limitations for bringing an action under the CFPA is three years from the date of discovery of the violation to which the action relates. Actions arising under the enumerated consumer laws or laws for which authorities are transferred under the Act may be brought in accordance with the statute of limitations requirements of those laws, as applicable.[106]
The CFPA is silent with respect to private rights of action. An earlier version of the legislation that was approved in the House of Representatives on December 11, 2009 had included specific language stating that the CFPA does not create a private right of action, but also does not negate any private right of action arising under the enumerated consumer laws or authorities transferred under subtitles F or H of the Act.[107] Presumably, the availability of private rights of action under the enumerated consumer laws remains unchanged, and no new private right of action is created under CFPA.
What Acts Are Prohibited, and What Are the Penalties for Violating the CFPA?
The CFPA expressly prohibits a covered person or service provider from: (i) engaging in unfair, deceptive, or abusive acts or practices, or knowingly or recklessly providing substantial assistance to a covered person or service provider in violation of the CFPA's UDAP provisions or rules; (ii) offering or providing to a consumer a financial product or service not in conformity with federal consumer financial law; or (iii) failing to permit access to or copying of records, establishing or maintaining records, or making reports or providing information to the Bureau.
[108]
Penalties for violations of federal consumer financial laws, including rule or order violations, include:
-
rescission or reformation of contracts;
-
refunds of money or return of real property;
-
restitution;
-
disgorgement of compensation for unjust enrichment;
-
monetary damages;
-
limits on activities or functions of the person;
-
public notification of the violation, including costs for notification; and
-
civil money penalties of up to $5,000 per day, up to $25,000 per day for a reckless violation, or up to $1 million per day for a knowing violation.
[109] Mitigating factors are to be considered, and the Bureau could reduce the penalty accordingly.
These remedies in large measure are patterned after the rights afforded to federal banking agencies under section 8 of the Federal Deposit Insurance Act. In several respects, however, the Bureau has fewer statutory hurdles it must scale before it can invoke certain of these remedies.
The CFPA states that in an administrative proceeding or court action brought under federal consumer financial law, the court or Bureau may grant any of the above relief without limitation.[110] Litigation costs also may be recovered in actions brought by the Bureau, a state attorney general, or a state regulator to enforce any federal consumer financial law.[111] Thus, the CFPA's penalty provisions effectively amend each federal consumer financial law by providing an entirely new set of remedies.
The Bureau also must refer any person to the Attorney General of the United States if the Bureau obtains evidence that the person has engaged in criminal conduct.[112] The Act also contains whistleblower protection provisions.[113]
What Authorities Will Be Transferred to the Bureau?
All consumer financial protection functions of the Board of Governors, FDIC, NCUA, OCC, and OTS will be transferred to the Bureau, except as discussed above.
[114] All consumer protection functions of HUD relating to RESPA and the S.A.F.E. Mortgage Licensing Act are transferred to the Bureau.
[115]
The authority of the FTC under an enumerated consumer law to prescribe rules, issue guidelines, or conduct a study or issue a report mandated under such law will be transferred to the Bureau.[116] The Bureau also will have the authority to enforce a rule prescribed under the FTC Act with respect to an unfair or deceptive act or practice to the extent that the rule applies to a covered person or service provider with respect to the offering or provision of a consumer financial product or service as if it were a rule prescribed by the Bureau under its own authority.[117] Similarly, the FTC will have the authority to enforce under the FTC Act any CFPA rule with respect to a covered person who is subject to FTC jurisdiction.[118] The CFPA directs the FTC and Bureau to negotiate an agreement to coordinate rulemaking by each agency to avoid duplication or conflict between rules.[119] As noted above, the two agencies must negotiate a similar agreement to coordinate enforcement. Whenever one agency files a civil action against a covered person, the other agency may not file its own action against the person, but may intervene as a party.[120]
These transfers of functions do not affect the authority of these agencies from conducting examinations or initiating and maintaining enforcement proceedings in accordance with the provisions described above.[121] Personnel will be transferred from these agencies to the Bureau.[122]
Conclusion
Even the most cynical observers of gridlock in our nation’s capital have to stand back in awe at the creation and empowerment of the Bureau. The transfer of functions and personnel from various federal agencies previously charged with supervising consumer credit laws, and the broad authorization of new rulemaking powers, will result in an extraordinarily strong advocate for consumers. Whether it will use those powers and authorities in an evenhanded way will be determined over time.
* In addition to the above financial products and services that are "consumer financial products or services" when offered or provided for use by consumers primarily for personal, family, or household purposes, the Act also provides that a financial product or service that is described in one or more of the activities listed above with an asterisk beside them are also deemed to be consumer financial products or services—even if they are not provided for use by consumers primarily for personal, family, or household purposes—if they are delivered, offered, or provided in connection with a consumer financial product or service provided for such purposes.
[1] See, e.g., E. Warren, A Clear-Cut Case for Regulatory Reform, The Hill (2009), http://thehill.com/special-reports/finance-july-2009/51569-a-clear-cut-case-for-regulatory-reform. Professor Warren has been serving as chair of the Congressional Oversight Panel mandated by TARP.
[2] See, e.g., Stephanie C. Robinson, Analysis of Consumer Financial Protection Agency Legislation: Top Ten Issues, Mortgage Banking & Consumer Financial Products Alert (Oct. 26, 2009) (available at http://www.klgates.com/newsstand/ Detail.aspx?publication=5986); Melanie H. Brody, Steven M. Kaplan, David L. Beam & Stephanie C. Robinson, Million Dollar Baby: The Consumer Financial Protection Agency Act of 2009, Mortgage Banking & Consumer Financial Products Alert (July 27, 2009) (available at http://www.klgates.com/newsstand/ Detail.aspx?publication=5816); Melanie H. Brody & Stephanie C. Robinson, Singularity of Purpose: Is Looking Out for Consumers Too Narrow a Mission?, Mortgage Banking Alert (June 25, 2009) (available at http://www.klgates.com/newsstand/ Detail.aspx?publication=5735); Melanie H. Brody & Stephanie C. Robinson, Fifty Ways to Need a Lawyer: Congress Proposes to Establish Financial Services Watchdog Agency, Mortgage Banking & Consumer Credit Alert (Apr. 15, 2009) (available at http://www.klgates.com/newsstand/ Detail.aspx?publication=5547).
[3] Consumer Financial Protection Act of 2010, Title X of the Dodd-Frank Wall Street Reform and Consumer Protection Act , H.R. 4173, 111th Cong. § 1021(a) (2010) [hereinafter CFPA].
[8] Id. § 1017(a). An earlier version of the bill that was approved by the House last December would also have assessed fees on covered entities to fund the Bureau, but those assessments were eliminated from the final bill.
[15] Mortgage Reform and Anti-Predatory Lending Act, Title XIV of the Dodd-Frank Wall Street Reform and Consumer Protection Act, H.R. 4173, 111th Cong. § 1403 (2010).
[21] Id. §§ 1018, 1029A, 1037, 1048, 1058, & 1100G.
[27] Id. § 1002(5), (15).
[28] Electronic conduit services means the provision of electronic data transmission, routing, intermediate or transient storage, or connections to a telecommunications system or network, except where the person: (i) selects or modifies the content of the electronic data; (ii) transmits, routes, stores, or provides connections for electronic data, including financial data, in a manner that such financial data is differentiated from other types of data of the same form that such person transmits, routes or stores, or with respect to which, provides connections; or is a payee, payor, correspondent, or similar party to a payment transaction with a consumer. Id. § 1002(11).
[32] Id. § 1002(25)(A), (B).
[34] See id. § 1027 for specific exclusionary language and limitations.
[35] Id. §§ 1002(3), 1002(15)(C), 1027(m).
[37] Id. § 1027(a). The vast majority of retail sales would not be covered by CFPA. Merchants, retailers, and sellers of non-financial goods or services that offer or provide consumer financial products or services in connection with the sale or brokerage of non-financial goods or services are covered if certain conditions apply, but there are some exceptions for small businesses. See id. § 1027(a)(2).
[41] Id. § 1027(e). The exclusion for the activity of an attorney engaged in the practice of law does not apply where a financial product or service: (i) is not offered or provided as part of or incidental to the practice of law, occurring exclusively within the scope of the attorney-client relationship; or (ii) is otherwise offered or provided by the attorney in question with respect to any consumer who is not receiving legal advice or services from the attorney in connection with the financial product or service. Id. § 1027(e)(2).
[48] Id. § 1029(a). This exclusion for auto dealers will not apply to a person that (i) provides consumers with any services related to residential or commercial mortgages or self-financing transactions involving real property; (ii) operates a line of business that involves the extension of retail credit or retail leases involving motor vehicles, and in which (a) the extension of retail credit or retail leases is provided directly to consumers; and (b) the contract governing such extension of retail credit or retail leases is not routinely assigned to an unaffiliated third party finance or leasing source; or (iii) offers or provides a consumer financial product or service not involving or related to the sale, financing, leasing, rental, repair, refurbishment, maintenance, or other servicing of motor vehicles, motor vehicle parts, or any related or ancillary product or service. Id. § 1029(b). Furthermore, the Federal Trade Commission is authorized to prescribe rules under sections 5 and 18(a)(1)(B) of the Federal Trade Commission Act with respect to an auto dealer, and the Act preserves the authorities of other agencies over motor vehicle dealers. Id. § 1029(c), (d).
[61] See id. §§ 1022(c)(7) & 1024(b)(7).
[71] See id. §§ 1024(e), 1025(d), & 1026(e).
[73] See id. §§ 1024(e), 1025(d), & 1026(e).
[74] Id. § 1022(b)(4), but see § 1061(b)(5) relating to Federal Trade Commission authority.
[75] Id. § 1022(b)(2)(A).
[76] Id. § 1022(b)(2)(B).
[78] Id. § 1002(15)(A)(xi).
[81] Id. § 1028(b). If the Bureau prescribes such a regulation restricting mandatory pre-dispute arbitration, the regulation will apply to agreements entered into after the end of the 180-day period beginning on the effective date of the regulation. Id. § 1028(d).
[82] Id. §§ 1031(b), 1097.The Bureau will have to consult with other agencies for consistency, and cannot declare an act or practice to be "unfair" unless the Bureau has a reasonable basis to conclude that the act or practice causes or is likely to cause substantial injury to consumers that is not reasonably avoidable by consumers and the injury is not outweighed by countervailing benefits to consumers or to competition. Id. §§ 1031(c)(1),(e). The Bureau similarly cannot declare an act or practice to be "abusive" unless the act or practice 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: (i) the consumer’s lack of understanding of material risks, costs, or conditions; (ii) the consumer's inability to protect his or her own interests in selecting or using the product or service; or (iii) the consumer's reasonable reliance on the covered person to act in his or her interests. Id. § 1031(d). The Bureau's UDAP rules must provide that a mortgage lender may consider the seasonality and irregularity of a borrower's income in the underwriting of and scheduling of payments for residential mortgage loans. Id. § 1031(f).
[84] Id. § 1032(f). The Bureau must propose such model disclosure form within one year of the designated transfer date.
[101] Id. § 1052(c), (e).
[107] See Consumer Financial Protection Agency Act of 2009, Title X of the Wall Street Reform and Consumer Protection Act of 2009, H.R. 4173, 111th Cong. § 4508 (2009).
[116] Id. § 1061(b)(5)(A).
[117] Id. § 1061(b)(5)(B).
[118] Id. § 1061(b)(5)(C)(ii).
[119] Id. § 1061(b)(5)(D).
[120] Id. § 1024(c)(3)(B).
Contacts:
Melanie H. Brody, +1.202.778.9203,
melanie.brody@klgates.com
Stephanie C. Robinson, +1.202.778.9856,
stephanie.robinson@klgates.com