Compliance Bulletin

Summary of the Consumer Financial Protection Agency Act of 2009
July 6, 2009

The Obama Administration released its ambitious proposal to create the Consumer Financial Protection Agency (“CFPA” or “Agency”) pursuant to the Consumer Financial Protection Agency Act of 2009 (the “Act”). 

The Act is the first and the most significant part of the Administration’s plan to overhaul the financial services industry, and is the first to be considered by Congress.

Administration of the CFPA

The CFPA will be an independent agency governed by a board composed of five members, four appointed by the President subject to Senate confirmation, and the final seat held the director of the new National Bank Supervisor (NBS) [1]. The President will appoint one of the board members to be the Director (chief executive) of the Agency, whose term will be five years.

The Agency will have a research unit, community affairs unit, and office of consumer complaints. It will establish a Consumer Advisory Board to advise the Agency composed of experts in financial services, community development, and consumer financial products or services. In addition, the Agency is required to coordinate with other regulatory agencies, including the federal and state banking agencies, in order to promote consistent regulatory treatment of consumer and investment products and services [2].

Powers and Authorities

The legal coverage of CFPA is broad. It will have jurisdiction over “covered persons,” who are persons engaged in “financial activities.” This term is broadly defined to include, among other things, deposit-taking; acquiring, brokering, and servicing credit and credit related services; using consumer report information; debt collection; settlement services; leasing; acting as an investment adviser; money transmitting; or other activities determined by the Agency.

The Agency will receive appropriations and will also have authority to collect fees and assessments on banks and other covered persons in order to carry out its functions. In addition, any civil penalties that it collects will be deposited into the Consumer Financial Protection Agency Civil Penalty Fund established in the Treasury Department. The fund will be used to pay victims of prohibited activities for which civil penalties have been imposed.

The mandate of the Agency is to promote transparency, simplicity, fairness, accountability, and access in the market for consumer financial products or services. It will ensure that consumers have useful information to make responsible decisions about acquiring financial products or services, that they are protected from abuse and discrimination, that markets are fair and efficient with allowance for sustainable growth and innovation, and that traditionally underserved consumers and communities have access to financial services.

Among the CFPA’s authorities will include transfers of enforcement authority under the following existing consumer laws:

  • Alternative Mortgage Transaction Parity Act (12 U.S.C. 3801 et seq.);
  • Community Reinvestment Act (12 U.S.C. 2901 et seq.);
  • Consumer Leasing Act (15 U.S.C. 1667 et seq.);
  • Electronic Funds Transfer Act (15 U.S.C. 1693 et seq.);
  • Equal Credit Opportunity Act (15 U.S.C. 1691 et seq.);
  • Fair Credit Billing Act (15 U.S.C. 1666-1666j);
  • Fair Credit Reporting Act except with respect to identity theft red flags, affiliate sharing of consumer information for marketing purposes, and rules on the disposal of records (15 U.S.C. 1681 et seq.);
  • Fair Debt Collection Practices Act (15 U.S.C. 1692 et seq.);
  • Federal Deposit Insurance Act, provisions pertaining to certain institutions not benefiting from deposit insurance (12 U.S.C. 1831t(c)-(f));
  • Gramm-Leach-Bliley Act pertaining to privacy of consumer information (15 U.S.C. 6802-6809);
  • Home Mortgage Disclosure Act (12 U.S.C. 2801 et seq.);
  • Home Ownership and Equity Protection Act (15 U.S.C. 1639);
  • Real Estate Settlement Procedures Act (12 U.S.C. 2601-2610);
  • S.A.F.E. Mortgage Licensing Act (12 U.S.C. 5101-5116);
  • Truth in Lending Act (15 U.S.C. 1601 et seq.); and
  • Truth in Savings Act (12 U.S.C. 4301 et seq.).

Rulemaking

In addition to having primary enforcement authority over these laws, the CFPA will have exclusive rulemaking authority. The federal banking agencies will no longer be responsible for writing and amending the regulations issued under these laws. When exercising its rulemaking authority, the Agency is required to consult with the federal banking agencies to ensure consistency with their “prudential, market, or systemic objectives.” In its discretion, the Agency may exempt a covered person or product or service, considering such factors as the covered person’s total assets, volume and type of transactions, and the effectiveness of existing laws and regulations.

In addition, the Agency also has the authority to write and implement rules applicable to covered persons and their employees, agents and independent contractors who deal or communicate with consumers, as necessary or appropriate to ensure fair dealing with consumers. The Agency’s authority extends to prescribing rules pertaining to compensation practices of covered persons, but such authority does not include setting compensation limits paid to any person. These rules are enforceable administratively by the Agency or a state regulator [5].

Examinations and Reporting

The Agency will have examination authority as well as authority to obtain reports from covered persons, and may also receive examination reports from federal banking agencies. The Act also allows federal banking agencies to furnish other reports or confidential supervisory information to the CFPA, and likewise for the CFPA to share its examination reports with the banking agencies. Where a federal law gives the Agency and another federal agency authority to enforce a federal law, the other agency may recommend that the CFPA initiate an enforcement proceeding. Here too, it is the CFPA that will have the primary enforcement authority. The other agency may initiate enforcement proceedings if the Agency does not do so within 120 days after a recommendation.

The Agency’s broad enforcement powers do not affect any authority of the Department of Justice. Also, the authorities of the SEC and the Commodity Futures Trading Commission (CFTC) to adopt rules or take enforcement or other actions with respect to their regulated entities are not affected. However, the SEC and CFTC are required to consult and coordinate with the CFPA regarding any rule on investment products and services that are the same as, or compete with, products or services within the CFPA’s jurisdiction. The Agency is also authorized to restrict or prohibit the use of mandatory arbitration provisions in consumer agreements.

The CFPA will have broad authority, to include rulemaking authority, in consultation with banking and other agencies to prevent covered persons from engaging in unfair [6], deceptive, or abusive acts or practices with respect to a consumer transaction [7].

Disclosures

One of the functions of the CFPA is to ensure that consumers receive effective disclosures, meaning that they communicate to the consumer the benefits of the products and services together with the risks and costs. Specifically, the Agency will propose for public comment rules and model disclosures that combine and integrate the disclosure requirements of TILA and RESPA, unless the Agency determines that a proposal issued by the Federal Reserve and HUD carries out the same purpose. The Agency may also prescribe rules and issue orders and guidance regarding the sale and provision of consumer financial products and services.

To further this end, the Agency will establish standards and procedures for approving time- and scope-limited pilot disclosures to be provided to consumers by covered persons in order to aid in the understanding of such disclosures.

“Standard” Products and Services

The Agency will adopt rules and guidance pertaining to the offering of “standard” financial products or services, defined as those that are “readily offered” by covered persons that offer “alternative” consumer financial products or services [8]; are “transparent”; pose lower risks to consumers; facilitate comparison with alternative products and services; and contain features or terms defined by the Agency. Institutions must provide warnings about the heightened risks of alternative products or services, and provide consumers with a meaningful opportunity to decline to obtain the standard product or service.

Data and Reports

Covered persons are required to make information within their control or possession available to consumers regarding transactions or accounts such as costs, charges, and usage data. The information must be made available in an electronic form usable by consumers, and the Agency will prescribe formatting standards for the provision of such information. Exceptions are available for confidential commercial information (such as algorithms used to derive credit scores); information collected by the covered person to prevent fraud or unlawful conduct; information legally required to be kept confidential; or information that cannot be retrieve in the ordinary course of business. No new duties are created by these requirements to maintain any consumer information.

Relation to State Laws

The Act creates a federal legal floor rather than a ceiling, such that the Act and any rule adopted by the CFPA will not preempt state law, regulation, or other requirement if the state requirement provides greater protection for consumers. The Agency may make a determination regarding the consistency of a state requirement by rule, order or guidance adopted by the Agency on its own motion or in response to a “non-frivolous petition initiated by any interested person.”

Non-compliance with the Act or any regulation thereunder is a violation of law. State attorneys general are authorized to bring civil actions for violations of the Act or regulations in federal or state court, subject to a requirement to notify and coordinate with the Agency [9].

The statute “clarifies” the preemption of state laws under the National Bank Act (NBA) and the Home Owners Loan Act (HOLA) by amending the NBA and HOLA. Generally, state consumer protection laws of general application (e.g., laws prohibiting unfair and deceptive acts and practices, repossession law, collection law, laws on foreclosures, and the like) apply to national banks and federal thrifts [10]. Also, state consumer laws that apply to state banks and that are enacted under a federal law that permits states to exceed or supplement the requirements of the federal law apply also to national banks and federal thrifts. However, in either case, the state law would not apply to national banks or federal thrifts if it discriminates against the federally-chartered institutions or is inconsistent with federal law, but only to the extent of the inconsistency [11].

If a state consumer law applies to a transaction at the inception of the transaction, the law is not preempted solely because a national bank or federal thrift succeeds to the transaction.

Following the U.S. Supreme Court’s decision in Cuomo v. Clearing House Association, the Act clarifies that the NBA’s and HOLA’s restriction on the exercise of visitorial powers will not be construed to limit the authority of any state attorney general to bring an action to require a national bank or federal thrift to produce records related to the investigation of violations of state or federal consumer laws, enforce a federal or state law, or act on behalf of residents of a state to enforce a federal or state law against the institution or seek relief and recover damages for such residents. The attorney general must consult with the National Bank Supervisor before bringing such actions.

Where the National Bank Supervisor brings an enforcement action against the institution, private parties are not precluded from enforcing rights in the courts. Also, the Act does not affect the applicability of state laws to a non-depository institution, subsidiary, other affiliate, or agent of the institution.

Enforcement Powers

The CFPA is endowed with a range of enforcement powers, including the power to issue subpoenas that are enforceable in federal court, to issue civil investigative demands to produce records and tangible things, and to answer questions and give oral testimony.

The Agency may also conduct hearings and adjudication proceedings. Special rules are established for cease-and-desist proceedings and enforcement of orders. The Agency may bring civil actions for violations and impose civil penalties, and seek legal or equitable relief. If the Agency prevails in an action, it is entitled to recover its costs in connection with prosecuting such action if the Agency is the prevailing party.

A violation of any provision of the Act, an enumerated consumer law, or any rule or order issued under the Act subjects a person to civil penalties. A “first tier” violation, which is a violation of a final order or condition imposed in writing by the Agency, is subject to a civil penalty of up to $5,000 for each day that the violation continues. A “second tier” violation is a “reckless” violation that involves the provision of alternative consumer financial products or services, and is subject to a civil penalty of up to $25,000 for each day that the violation continues. A “third tier” violation is a knowing violation and could bring a civil penalty of up to $1,000,000 for each day that the violation continues. Mitigation factors may apply, and the imposition of penalties is subject to notice and hearing requirements or court adjudication, as applicable.

Moreover, the Agency also has the power to furnish evidence of any federal criminal violation to the U.S. attorney general. The Act includes a whistleblower protection provision, which includes the authority of the Agency to investigate alleged instances of retaliation against employees or their authorized representatives

Transfers of Authority

The Act transfers the consumer financial protection functions and related authorities of the Federal Reserve, OCC, OTS, FDIC, FTC, and NCUA to the Agency, subject to these agencies’ secondary enforcement authority discussed above. The term, “consumer financial protection functions” means research, rulemaking, issuance of orders or guidance, supervision, examination, and enforcement activities, powers, and duties relating to the provision of consumer financial products or services, including the authority to assess and collect fees for those purposes. The date of transfer of functions to the CFPA will be between six and 18 months after enactment of the Act, subject to extension of no later than 24 months after the enactment date.

Existing rights, duties, obligations, orders and rules of the transferring agencies are not affected by the transfers. Also, the various transferring agencies will jointly determine with the Agency the number and identity of employees to be transferred as necessary to carry out the consumer financial protection functions.

Recordkeeping

In order to “promote awareness and understanding of the access of individuals and communities to financial services, and to identify business and community development needs and opportunities,” each financial institution is required to maintain records of the number and dollar amounts of deposit accounts of customers with respect to each branch, ATM at which deposits are accepted, and other deposit-taking facilities. The customers’ residence or business locations must be geo-coded by census tracts, and each account must be identified as an account for a residential or commercial customer.

These data must be submitted annually to the Agency or to a federal banking agency, and personally unidentifiable information regarding the location of facilities, types of accounts, and certain census tract data must also be made publicly available on an annual basis. The data are required to be retained for at least three years after the date of preparation and made available to the public, upon request, in a form prescribed by the Agency.

Amendments are made specifically to the Equal Credit Opportunity Act pertaining to collection of data on loans to small businesses. The purpose of the amendments is to improve enforcement of fair lending laws and help identify business and community development needs and opportunities of women- and minority-owned small businesses [12].

To accomplish these goals, the financial institution is required to inquire whether the applicant for a loan is a women [13] – or minority-owned [14] business, without regard to how the application is received and whether or not the application is in response to a solicitation. A record of the responses to such inquiry must be maintained separate from the application and accompanying information. The applicant may refuse to provide the information. Steps must be taken to prevent loan underwriters or other persons responsible for the credit decision to have access to this demographic information. However, if the institution determines that such access should be given, it must notify the applicant of the access and disclose that the institution may not discriminate on this basis of this information.

This demographic data of small businesses must be compiled and maintained, and the non-identifiable data must also be itemized in order to clearly and conspicuously disclose:

  • the number applications and the dates received;
  • the type and purpose of the loan applied for;
  • the amount of the credit or credit limit applied for and the amount of the credit transaction or the credit limit approved for such applicant;
  • the action taken and date of such action;
  • the census tract of the principal place of the applicant;
  • the gross annual revenue of the business;
  • the race and ethnicity of the principal owners of the business; and
  • any additional data as determined by the Agency.

The data must be submitted annually to the Agency, which will make the aggregate data available to the public annually. Institutions are required to maintain the data for at least three years after the date of preparation, and make the data available to the public upon request.

Conforming Amendments

The remainder of the Act makes conforming amendments to the other federal laws that are affected by the Act, including the enumerated consumer laws.

CBA’s Position

CBA will work with Congress to support effective consumer protection reforms. But CBA believes that transferring existing banking-related consumer protection statutes and regulations to a new agency creates even worse problems. Gaps in the existing regulatory structure—such as the regulation and supervision of nonbank financial providers—should be filled. But the banking agencies have been effectively enforcing both safety and soundness and consumer protection regulations for decades.

Regulations on safety and soundness and consumer protection cannot be separated. Doing so would lead to conflicts, duplication, and inconsistent requirements on banks. The CFPA will have little appreciation for banking supervision, and the banking agencies’ staff, over time, will lose their expertise on consumer protection and thus lose their necessary and valuable perspective.

Also, concurrent enforcement of federal statutes by the states—together with an invitation for states to erect stricter and inconsistent standards—will leave banks subject to a patchwork of inconsistent regulation and enforcement.

  1. The Secretary of the Treasury is authorized to perform certain transition functions of the Agency until three of the appointed board members are confirmed.
  2. The term “consumer financial product or service” means any financial product or service to be used by a consumer primarily for personal, family, or household purposes.
  3. This term refers to any person who engages in a financial activity in connection with the provision of a consumer financial product or service, or a person who provides a material service to such person.
  4. The Agency may define other activities as a “financial activity” but may not so define engaging in the business of insurance, other than with respect to credit insurance, mortgage insurance, or title insurance.
  5. The Agency is not authorized to prescribe rules pertaining to attorneys to the extent that the consumer financial product or service provided is within the attorney-client relationship with the consumer [perhaps “client” is intended?], or to a trustee, custodian, or other person that holds a fiduciary duty in connection with a trust, including a fiduciary duty to a grantor or beneficiary of a trust, that is subject to and in compliance with the applicable law relating to such trust.
  6. An act or practice may not be considered unlawful on the grounds that it is unfair “unless the Agency has 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.”
  7. The Act also encourages the states to prescribe similar standards that apply to covered persons other than depository institutions. They include standards on background checks; registration, licensing, or certification; bond or other similar requirements; recordkeeping; and providing or maintaining consumer accounts. The Agency has the authority to prescribe rules, in consultation with state and federal authorities and agencies, establishing minimum standards and also to enforce compliance with the Agency’s own standards or those of a state.
  8. The Agency’s rules will apply to a covered person who voluntarily offers a product or service “that is of the same type, or in the same class,” as a standard product or service, or who has a relationship with a consumer involving a product or service that is substantively similar to the standard product or service.
  9. The Agency is authorized to intervene as a party, remove an action to federal court, and to appeal any order or judgment.
  10. The preemption of state law may not be treated as a right, privilege, or immunity for purposes of 42 U.S.C. 1983 – Civil Action For Deprivation of Civil Rights.
  11. A state consumer law is not inconsistent with federal law if it affords consumers greater protection than the federal law as determined by the Agency.
  12. The term “small business loan” will be defined by the Agency.
  13. “Women-owned business” means that more than 50 percent of the ownership or control is held by one or more women, and more than 50 percent of the net profit or loss accrues to one or more women.
  14. A “minority-owned business” means that more than 50 percent of the ownership or control is held by one or more minority individuals, and more than 50 percent of the net profit or loss accrues to one or more minority individuals.

The information contained in this CBA Regulatory Compliance Bulletin is not intended to constitute, and should not be received as, legal advice. Please consult with your counsel for more detailed information applicable to your institution.

© This CBA Regulatory Compliance Bulletin is copyrighted by the California Bankers Association, and may not be reproduced or distributed without the prior written consent of CBA.

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