On July 21, 2010, President Barack Obama signed into law the
"Dodd-Frank Wall Street Reform and Consumer Protection
Act" (the "Act"), the federal government's
game-changing response to the perception that lax regulation of the
financial industry contributed to the economic recession that began
in late 2007.
One of the Act's most significant innovations is the creation of the Bureau of Consumer Protection Agency, or "BCPA," a new regulatory agency that will oversee the vast array of financial services provided to consumers.
This initial client alert provides an overview of the BPCA's new responsibilities and mandates.
Within the next six to 18 months, the BCPA will inherit regulatory authority that is currently invested in numerous and diverse federal agencies, including the Federal Trade Commission (FTC), Federal Reserve, Federal Deposit Insurance Corporation, Comptroller of the Currency and the Department of Housing and Urban Development. The BCPA will assume responsibility for (1) enforcing existing consumer financial laws and regulations that were previously enforced by these agencies, (2) monitoring the consumer operations of the companies that were previously subject to oversight by the transferring agencies, and (3) making new rules governing these operations.
The Act designates a broad variety of businesses as "covered persons" that will be subject to the BCPA's regulatory and supervisory oversight, including:
- banks, thrifts, and credit unions
- consumer finance lenders
- mortgage loan originators
- loan servicers and brokers
- currency exchanges
- real estate settlement companies, appraisers, appraisal companies and appraisal management companies
- consumer credit reporting agencies
- debt collectors
- debt settlement and debt management services
- check cashing, collection, or guaranty services
- lenders and brokers in certain lease-to-own arrangements
- financial and investment advisors that are not registered with the SEC
- payday lenders
- credit counselors
- broker-dealers, non-depository trust companies, and deposit intermediation services
- service providers and related persons of covered persons
- certain sellers or issuers of stored value cards and instruments
- money services businesses, money transmitters, and wire transmitters
- some tax preparers, accountants, merchants or retailers, and attorneys
- financial data processors, including data storage providers, transmission services, and software and hardware providers.
Similar to Section 5 of the FTC Act1, the BCPA's
primary legal directive will be 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."
The Act vests the BCPA with exclusive rulemaking authority to prescribe any regulations authorized by Federal consumer laws. This rulemaking authority will extend not only to enacting rules prohibiting "unfair, deceptive, or abusive acts or practices," but also those designed to "prevent" such acts or practices.
Congress placed the same limitations on the BCPA's rulemaking authority regarding "unfair" consumer financial acts as are presently imposed on the FTC2. Before declaring an act to be "unfair," the BCPA must determine that "(1) the act or practice causes or is likely to cause substantial injury to consumers which is not reasonably avoidable by consumers; and (2) such substantial injury is not outweighed by countervailing benefits to consumers or to competition."
The Act also directs the BCPA to utilize the analysis recently developed by the FTC for determining whether an act is "abusive."3 Before declaring an act to be "abusive," the BCPA must find that it "(1) materially interferes with the ability of a consumer to understand a term or condition of a consumer financial product or service; or (2) takes unreasonable advantage of (a) a lack of understanding on the part of the consumer of the material risks, costs, or conditions of the product or service; (b) the inability of the consumer to protect the interests of the consumer in selecting or using a consumer financial product or service; or (c) the reasonable reliance by the consumer on a covered person to act in the interests of the consumer."
The Act directs the BCPA to investigate and respond to consumer complaints and authorizes the agency to require covered persons to respond to such investigations. The new law also allows consumers to make information and document requests directly to covered persons. Failure to respond to such requests, made either by the BCPA or consumers, is a "prohibited act " that can subject violators to substantial penalties issued in administrative proceedings or in state or federal court actions.
One of the most significant aspects of the Act is the implementation of extensive penalties for violations. Among the penalties available to the BCPA to respond to Act violations are:
- A full range of legal and equitable relief, including rescission or reformation of contracts, refund of monies 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, and limitations on the activities or functions of the person.
- Civil penalties ranging from $5,000 to $1 million per day for each violation, depending on the violator's subjective knowledge and intent
- Referrals of criminal violations to the U.S. Attorney
- Recovery of the government's attorneys fees and costs
Enforcement actions for violations of the Act may be brought
against covered persons as well as their affiliates, related
parties and other parties that provided "substantial
assistance" to a covered person in engaging in an
"unfair, deceptive or abusive act."
Unlike other federal statutes that preempt enforcement actions brought by state authorities on the same or similar grounds, the Act expressly authorizes state attorneys general to pursue civil or criminal enforcement actions based on violations of federal consumer financial laws, requiring only notification procedures to allow state and federal agencies to coordinate their efforts.
In the Act's six to 18 month implementation period, agencies that are currently responsible for enforcing existing consumer financial laws and supervising and monitoring companies under their respective statutory jurisdictions will continue to enforce those laws and regulate those companies. Upon a designated "transfer date" announced by the BCPA, these responsibilities will be shifted to the new agency.
1. Section 5(a) of the FTC Act prohibits ''unfair or deceptive acts or practices in or affecting commerce.'' 15 U.S.C. § 45(a).
2. Section 5(n) of the FTC Act provides: "The Commission shall have no authority ... to declare unlawful an act or practice on the grounds that such act or practice is unfair unless the act or practice causes or is likely to cause substantial injury to consumers which is not reasonably avoidable by consumers themselves and not outweighed by countervailing benefits to consumers or to competition. 15 U.S.C. § 45(n).
3. The "abusive" standard appears to have its roots in rules initially promulgated by the FTC pursuant to the Telemarketing and Consumer Fraud and Abuse Prevention Act ("TCPA"), 15 U.S.C. § 6101-6108. Although there does not appear to be any statutory or case authority addressing this new standard, the FTC has employed the "abusive" standard derived from the TCPA to prohibit advance fees from being charged to consumers for credit repair services, recovery services, advance fee loans, and, most recently, debt relief services.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.