The proposed Consumer Financial Protection Agency would have sweeping authority and carry far-reaching implications for financial institutions.
On June 30, 2009, the Obama administration released a 152-page legislative proposal to create a new Consumer Financial Protection Agency (CFPA) in response to the call for financial regulatory reform and the perceived failure of existing regulatory agencies to adequately police and protect consumer interests. The administration's plan, if enacted, would provide this new agency with sweeping regulatory authority over all financial products and services, supplant the authority of existing agencies to promulgate regulations related to consumer protection, and carry far-reaching implications for any institution or person engaged in the financial services industry.
Financial regulatory reform is a legislative priority for the administration, as well as the Democratic majorities in the U.S. House of Representatives and U.S. Senate. House Financial Services Committee Chairman Barney Frank (D-MA) is a strong proponent of the CFPA and has announced a series of hearings on regulatory reform in July 2009. Chairman Frank intends to mark-up legislation in committee prior to the August Congressional recess, with possible consideration of legislation on the House floor in the fall. Chairman Frank's Senate counterpart, Chairman of the Senate Committee on Banking, Housing and Urban Affairs Chris Dodd (D-CT), likewise has announced his support for the CFPA. Chairman Dodd's committee is scheduled to holding a hearing on the proposal on July 14, 2009. However, the committee is not expected to markup legislation prior to the August recess, with possible Floor consideration in the fall.
Among other major provisions, the administration's proposal would:
- Establish the CFPA as an independent agency in the executive branch "to regulate the provision of consumer financial products," and provide for a five-member board.
- Authorize the agency to promulgate regulations and issue orders and guidance, as well as examine or require reports from a "covered person" (defined in the proposal generally as "any person who engages directly or indirectly in a financial activity") to ensure compliance with consumer laws and agency rules.
- Authorize the agency to "prescribe rules 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," and "prescribe rules to ensure appropriate and effective disclosure or communication to consumers of costs, benefits, and risks associated with any consumer financial product or service."
- Authorize the agency to weigh in on sales practices by prescribing rules and issuing orders and guidance regarding the "manner, settings, and circumstances for the provision of any consumer financial products or services to ensure that the risks, costs and benefits of the products and services, both initially and over the term of the product or services, are fully and accurately represented to consumers."
- Allow the agency to prescribe rules establishing duties regarding compensation practices applicable to a covered person, employee, agent or independent contractor "who deals or communicates directly with a consumer in the provision of a consumer financial product or service" – with the exception that the agency shall not prescribe a limit on the total dollar amount of compensation paid to any person.
- Authorize the agency to prohibit, limit or impose conditions upon the use of mandatory pre-dispute arbitration in agreements.
- Preempt state law only to the extent that it is inconsistent with federal law or provisions of the CFPA Act, and specifically authorize states to enact or adopt laws, regulations, orders or interpretations that afford consumers greater protection than afforded by this Act.
- Authorize state attorneys general to bring civil actions in federal district court or state court to "secure monetary relief or equitable relief for violation of any provisions of this title or regulations there under."
- Authorize the agency or agency investigators to issue subpoenas as part of the investigative and administrative discovery process.
- Transfer all consumer financial protection functions of the U.S. Federal Reserve System, Office of the Comptroller of the Currency, Office of Thrift Supervision, Federal Deposit Insurance Corporation, Federal Trade Commission and National Credit Union Administration to the agency. ("Consumer financial protection functions" are defined as "research, rulemaking, issuance of orders and guidance, supervision, examination, and enforcement activities, powers and duties relating to the provision of consumer financial products or services.")
Congressional hearings on the administration's proposal have already begun. On July 8, 2009, the U.S. House Energy and Commerce Subcommittee on Commerce, Trade and Consumer Protection held a hearing to explore the plan's effect on the Federal Trade Commission. Assistant Treasury Secretary Michael Barr, who helped write the administration's proposal, betrayed no defensiveness regarding the broad authority that would be provided the CFPA. He testified that: "A new agency with a focused mission, comprehensive jurisdiction, and broad authorities is also the only way to ensure consumers and providers high and consistent standards and a level playing field across the whole marketplace without regard to the form of a product – or the type of its provider."
While Congress will likely alter the administration's proposal, the general consensus is that Congress will pass legislation establishing a new consumer financial protection agency by year end. Already, key financial services trade associations (e.g., Mortgage Bankers Association, American Bankers Association, National Auto Dealers Association) have joined forces to lobby against the administration's proposal. However, as Scott Talbott of the Financial Services Roundtable has stated: "Politically, it would be difficult to kill it outright. Our goal is to change the agency, change the proposal, to where the benefits outweigh the costs."
The McDermott Difference
McDermott's Government Strategies Practice Group is closely monitoring and, where appropriate, lobbying on this proposal on behalf of a range of clients. There is little question that, as proposed, the CFPA would have the authority to mandate specific disclosures and effectively rewrite contracts; alter certain sales and business practices, including compensation incentives and arrangements; and even ban certain types of financial products. Every financial institution has a strong interest in the consideration and outcome of this legislative proposal.
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