In the Spring of 2009, President Obama announced a proposal for reforming the financial regulatory system in a "White Paper" titled "A New Foundation: Rebuilding Financial Supervision and Regulation." A key component of the President's proposal is the creation of a new regulatory agency, the Consumer Financial Protection Agency ("CFPA"). White Paper, p. 55. The creation of the CFPA would dramatically alter the regulatory landscape for banking entities, intermediaries, originators, and financial institutions, including some that are not currently regulated by the federal government. The premise for the creation of the CFPA is that the current system of regulation is inadequate to provide consumers with confidence in the stability and fairness of the financial system. The CFPA's stated purpose is "to promote transparency, simplicity, fairness, accountability, and access in the market for consumer financial products and services." Id. at 55-56.
The creation of the CFPA, therefore, represents a purposeful shift away from the current system of federal financial regulation. First, the CFPA would have jurisdiction over all consumer financial services and products, i.e., credit, savings and payment products, id. at 57, and would consolidate "authority over the closely related functions of writing rules, supervising and examining institutions' compliance, and administratively enforcing violations," id. at 56. Second, the CFPA would have "all responsibilities for supervising banking institutions for compliance with consumer regulations, whether federally chartered or state chartered and supervised by a federal banking regulator." Id. at 59. The CFPA's authority would extend beyond the banking institutions themselves to include all bank affiliates including those not currently supervised by a federal regulator. Id. And, notably, the CFPA rules and regulations would act only as a floor, not a ceiling, thus providing the states with concurrent jurisdiction to enact and enforce more stringent legislation. Id. at 60-61. Moreover, the President's proposal would maintain the existing consumer protection statutes that authorize private rights of action and would look into increasing statutory damages for violations. Id. at 58.
The cornerstones of the White Paper's envisioned overhaul of the consumer protection regulations are: transparency, simplicity, fairness, and access.
Transparency: The CFPA would be authorized to impose new standards and duties relating to disclosures and other communications with consumers. The first step would require all mandatory disclosure forms to be "clear, simple, and concise." Id. at 63. The CFPA would make new determinations and set new regulations regarding the risks and costs that must be highlighted in mandatory disclosures. The new requirements would focus in part on disclosures in mortgage loans in light of the mortgage crisis plaguing the national economy. Id. at 64. Specifically, the CFPA would create a new, single, integrated federal mortgage disclosure form. Id.
The CFPA would require that all disclosures and other communications with consumers be "reasonable," which the White Paper defines as clarity and conspicuousness in the description of significant product costs and risks and balance in the presentation of risks and benefits to the consumer. Id. But, a "reasonable" disclosure could not include "a litany of every conceivable risk, which effectively obscures significant risks." Id. Instead, significant risks would have to be identified conspicuously in an effort to help consumers understand the consequences of their financial decisions. Id. In this regard, disclosures and other communications with consumers would have to be balanced in their presentation of benefits to the consumer. Disclosures relating to consumer credit and other financial products also would have to clearly and conspicuously identify costs, penalties, and risks to the consumer. Id. at 63-64.
The CFPA also would require providers and intermediaries to (1) insure that communications with the consumer are reasonable, not merely technically compliant and nondeceptive, and (2) share the burden of updating the mandatory disclosure forms when new consumer products are introduced. Id. at 64-65. Providers and intermediaries also could be required to implement specific technologies to provide more readily available information to consumers. Id. at 65. For example, providers could be required to provide a web-based mortgage calculator equipped to clarify the differences between the various financial products offered. Id.
Simplicity: The CFPA would have the authority to require financial service providers to make available "plain vanilla" consumer financial products with simpler and more straightforward pricing and offer those products prominently along with the provider's other products. Id. at 66. For example, "plain vanilla" mortgages would have terms easily understood by consumers and the CFPA would be authorized to define set standards for such products. Id. Moreover, the CFPA could (1) impose strong warning labels on all alternative products, (2) require providers to have applicants fill out financial experience questionnaires, and/or (3) require providers to have applicants "opt-in" to such products. Originators and purchasers of "plain vanilla" mortgages would enjoy a strong presumption that the products are suitable and affordable for the borrower." Id.
Fairness: Seeking to provide greater fairness to the "least sophisticated consumers," the CFPA would be authorized to address "overly complex financial contracts." Id. at 68. For example, the CFPA could ban prepayment penalties on some or all consumer financial products. The CFPA also could require disclosure of or ban entirely "invisible side payments" that mortgage originators earn when they sell a product with terms less favorable than the terms for which the consumer otherwise could qualify. Id. The CFPA could consider eliminating up-front, lump-sum compensation payments to originators in favor of a system that would pay compensation over time and tie it to loan performance. Id. The CFPA also would have the authority to impose duties of care on financial intermediaries. Id.
Two specific examples of issues that the CFPA could regulate in the interest of "fairness" are (1) mandatory arbitration clauses and (2) overdraft protection and fees. First, the CFPA could restrict or ban mandatory arbitration clauses to the extent they are found not to "promote fair and effective redress" of consumer issues, with a particular focus on mortgage loans. Id. at 62-63. Second, the CFPA could regulate overdraft protection as though it were a credit product, and would consider requiring consumers to consent to an overdraft fee at the point of sale and "opt in" to over the- limit coverage before a financial institution could charge overdraft fees. Id. at 69.
Access: The CFPA would focus, as part of its mission, on providing access to financial services to households and communities that have traditionally had limited access to those services. Id. This would be achieved by rigorous application of the Community Reinvestment Act and vigorous enforcement of fair lending laws. Id. at 69-70.
In short, the CFPA would result in a seachange in the federal regulatory system for financial service providers and appears to have political support. On July 8, 2009, Congressman Barney Frank introduced a bill to Congress proposing the creation of the CFPA. See H.R. 3126, 111th Cong., 1st Session (2009).
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