InfoBytes Regulatory Restructuring Report, Issue Four, July 2, 2009
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Administration Delivers to Congress Proposed Legislation to Create Consumer Financial Protection Agency
On June 30, the Obama Administration delivered to Congress legislative language to create the proposed “Consumer Financial Protection Agency” (CFPA), the centerpiece of the consumer protection element of the Administration’s financial regulatory reform plan. The legislative language provides some additional color to the broad policies and provisions originally laid out in the Administration’s White Paper (reported in BuckleySandler Regulatory Restructuring Report, Issue One).
In introducing the legislation, the Department of Treasury noted various purported “causes” of the mortgage crisis that the CFPA is designed to address. For example, Treasury alleged that many of the worst abuses had involved unregulated non-bank lending institutions, and that no agency was charged with supervising lenders of all types on a market-wide basis to ensure fairness and transparency. Although Treasury did not address the role of state mortgage regulators who regularly examine state licensed mortgage companies, Treasury argued that if the CFPA had been in place, its examiners would have been able to review the operations of “unregulated” mortgage companies and would have detected unfair, deceptive, and abusive lending practices.
The legislation would create the CFPA as an independent agency in the executive branch. The CFPA would be required to coordinate with other financial regulators (federal and state) “to promote consistent regulatory treatment of consumer and investment products and services.” It would also create an advisory board to advise and consult with the CFPA on its functions and actions. The legislation also would create a “victim’s fund” supported by civil penalties assessed by the CFPA.
The legislation also sets out the general powers that the CFPA would possess. Those powers include, among other things, the ability to:
• Conduct rulemaking and issue orders and guidance to enforce consumer protection laws;
• Examine or require reports from a covered person to ensure compliance with consumer protection laws and rules;
• Act as primary enforcement authority to enforce certain federal laws and serve as backstop enforcement authority for certain other laws (but, notably, the legislation does not extend to the CFPA the ability enforce or establish a usury limit for extensions of credit); and
• Restrict mandatory arbitration clauses.
Beyond the general powers, the legislation details a number of specific powers that would be granted to the CFPA. Those include, among other things, the ability to:
• Take action to prevent unfair, deceptive or abusive acts or practices and/or proscribe rules identifying certain acts or practices as unlawful as unfair, deceptive or abusive, if the CFPA finds “a reasonable basis to conclude that the act or practice causes or is likely to cause substantial injury to consumers which is not reasonably avoidable by consumers and such substantial injury is not outweighed by countervailing benefits to consumers or to competition”;
• Require disclosures and other communications to consumers (including, specifically, a mandate to adopt rules to combine disclosures required by TILA and RESPA within one year);
• Establish standards and procedures for “pilot disclosures” to provide to consumers;
• Proscribe federal minimum standards to deter and detect unfair, deceptive, abusive, fraudulent or illegal consumer financial transactions;
• Adopt rules to create “standard consumer financial products or services,” defined as one that (i) is or can be readily offered or seek to offer alternative products or services; (ii) is transparent in its terms and features; (iii) poses “lower risks” to consumers; (iv) facilitates comparisons with alternative products or services; and (v) contains features and terms defined by the CFPA for that product or service, and require how and when such products are presented; and
• Establish rules imposing duties on covered persons (or employees, agents or independent contractors of covered persons), including relating to compensation practices.
Significantly, the legislation also addresses federal preemption of state laws in detail. Specifically, any rule adopted by the CFPA would not preempt state law if such state law provides greater protection for consumers and preserve the ability of state attorneys general to enforce the provisions of the legislation through civil actions. It also would amend the National Bank Act and the Home Owners’ Loan Act to clarify that those laws do not preempt state enforcement of consumer protection statutes, or the associated visitorial powers by state attorneys general. In light of the Supreme Court’s decision in Cuomo v. The Clearing House Association, LLC, 557 U.S. ---, No. 08-453 (U.S. June 29, 2009) this week, this would significantly expand the scope of non-preempted state laws that states could enforce against federal chartered banks and their operating subsidiaries through the judicial process.
Finally, the legislation provides a framework for transferring all consumer financial protection functions (including personnel) away from the Board of Governors, the OCC, the OTS, the FDIC, the FTC, and the NCUA, and into the CFPA, although each of those agencies may still initiate enforcement proceedings as a backstop regulator.
To see the press release from Treasury, along with the full text of the legislation and a section-by-section analysis, please go to http://www.treas.gov/press/releases/tg189.htm.
House Financial Services Committee Chairman Barney Frank Outlines Regulatory Reform Schedule
Chairman Barney Frank (D-MA) released the proposed schedule for addressing financial regulatory reform in the House Financial Services Committee. The tentative schedule includes eleven separate hearings between June 24th and July 24th, along with three days set aside for marking-up legislation between July 23rd and July 30th. Chairman Frank has reiterated his intent to have legislation passed before the August recess. To see the proposed schedule, please see http://www.house.gov/apps/list/press/financialsvcs_dem/pressts_062609.shtml.