The U.S. Treasury Department last week delivered to Congress a
152-page draft bill, the Consumer Financial Protection Agency
Act of 2009 (Act), that would establish the Consumer Financial
Protection Agency as a new agency in the executive branch of the
federal government to be responsible for protecting consumers in a
wide range of financial transactions.
In general, the CFPA would assume all of the consumer protection
responsibilities that the federal banking agencies now have, and
would be required to write rules on specified matters while being
permitted to write rules on a wide range of other matters. The new
agency would have monitoring and a wide range of enforcement
powers. In addition, state officials would be specifically
authorized to enforce CFPA rules and, with certain exceptions, to
apply state consumer protection laws to national banks and federal
savings banks.
Among other measures, the proposed legislation would:
- require banks and other financial services providers to make "balanced" communications to consumers of the potential benefits and risks of banking or financial transactions, while prominently disclosing significant risks and costs;
- require the CFPA to write rules to ensure that banks and other financial services providers deal fairly with consumers, which may include restrictions on compensation practices;
- require banks and other financial services providers to make available in electronic form to customers who are consumers information relating to banking and financial transactions with those customers including costs, charges and usage data;
- require the CFPA to write more effective home mortgage disclosure rules unless the Federal Reserve and HUD do so first; and
- permit, but not require, the CFPA to write rules requiring that
banks and other financial services providers offer basic or
"standard" consumer financial products before offering
more complex ones.
1. Scope and Coverage
The law would apply to any "covered person," a term
defined to include any person who engages directly or indirectly in
a "financial activity" (as defined below), in connection
with providing a "consumer financial product or service"
(as defined below). The term "covered person" would
include any bank, savings association or credit union, among other
persons, but generally would not cover insurance companies,
insurance agents or producers, securities firms including
broker-dealers subject to SEC regulation, or commodities firms
subject to CFTC regulation.
The proposed legislation defines "financial activity" to
include, among other activities, accepting deposits, making loans,
brokering or servicing loans, performing appraisals, providing
check-guaranty services, providing or maintaining consumer report
information, debt collection activities, providing real estate
settlement services including title insurance, certain consumer
leasing activities, certain investment advisory services (not
subject to regulation by the CFTC or the SEC), financial advisory
services, financial data processing, money transmitting, sale or
issuance of stored value, acting as a money services business, and
certain custodial activities. The CFPA would have the power to
define other activities as financial activities, and thereby expand
the scope of businesses that are covered persons, subject to
certain exceptions.
The term "financial product or service" is defined to
mean any product or service that, directly or indirectly, results
from or is related to one or more financial activities, and 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.
2. Consumer Financial Protection Agency
As indicated, the CFPA would be established as a new agency in
the executive branch of the federal government to be responsible
for protecting consumers in a wide range of financial transactions
including deposit and loan transactions.
- Purposes
The CFPA's mission would be to ensure that consumers
"have, understand, and can use the information they need"
to make responsible decisions about consumer financial products or
services, that consumers are protected from "abuse,
unfairness, deception, and discrimination," that markets for
consumer financial products or services "operate fairly and
efficiently with ample room for sustainable growth and
innovation," and that traditionally underserved consumers and
communities have access to financial services. In carrying out its
functions, the CFPA would seek to promote "transparency,
simplicity, fairness, accountability, and access in the market for
consumer financial products or services."
- Governance
The CFPA would be governed by a five-member Board of Directors.
Four would be appointed by the President, and would require Senate
approval. Board members would be individuals who have "strong
competencies and experiences related to consumer financial products
or services." The fifth member would be the Director of the
National Bank Supervisor (proposed to replace the Office of the
Comptroller of the Currency). From among the appointed Board
members, the President would designate one member to serve as the
Director, who would be the chief executive of the CFPA. Board
members, including the Director of the CFPA, would each serve
five-year terms.
- Examinations and Reports
The CFPA would be authorized to examine, and require reports
from, covered persons on a periodic basis for purposes of ensuring
compliance with the requirements of applicable consumer protection
laws.
- Fees and Assessments on Covered Persons
The CFPA would be required to recover the amount of funds it
spends annually through the collection of annual fees or
assessments on covered persons. The CFPA would issue regulations to
govern the collection of fees and assessments. The regulations
would specify the basis of fees or assessments (such as the
outstanding volume of consumer credit accounts, total assets under
management, or consumer financial transactions), the amount and
frequency of fees or assessments, and such other factors as the
CFPA deems appropriate.
- Civil Penalty Fund
The proposed legislation would establish in the Treasury a fund
to be known as the "Consumer Financial Protection Agency Civil
Penalty Fund." If the CFPA obtains a civil penalty against any
person in any judicial or administrative action, the CFPA would
deposit the amount of any penalties collected into the Civil
Penalty Fund. Amounts in the fund would be available to the CFPA
for payments to victims of activities for which civil penalties
have been imposed.
3. Matters Required or Permitted to Be Covered in CFPA Rules
- In General
In writing rules, the CFPA would be required to consider the
potential benefits and costs to consumers and covered persons,
including the potential reduction of consumers' access to
consumer financial products or services resulting from rules, and
consult with the federal banking agencies, or other federal
agencies, as appropriate, regarding the consistency of a proposed
rule with prudential, market, or systemic objectives administered
by those agencies.
Nutter Notes: The CFPA, by rule or order, could exempt
any covered person or any consumer financial product or service or
any class of covered persons or consumer financial products or
services from any law or rule, as the CFPA deems necessary or
appropriate. In issuing an exemption by rule or order, the
CFPA would be required to take into consideration the total assets
of the covered person, the volume of transactions involving
consumer financial products or services in which the covered person
engages, the extent to which the covered person engages in one or
more financial activities, and the extent to which existing laws or
regulations which are applicable to the consumer financial product
or service provide adequate protection.
- Ensuring Fair Dealing
The CFPA would be required to issue rules imposing duties on
covered persons and their employees, agents and independent
contractors who deal or communicate directly with consumers in the
provision of consumer financial products or services to ensure fair
dealing with consumers. In issuing the rules, the CFPA would be
required to consider whether the covered person, employee, agent,
or independent contractor represents implicitly or explicitly that
it is acting in the interest of the consumer with respect to any
aspect of the transaction; whether the covered person, employee,
agent, or independent contractor provides the consumer with advice
with respect to any aspect of the transaction; whether the
consumer's reliance on any advice from the covered person,
employee, agent, or independent contractor would be reasonable and
justifiable under the circumstances; whether the benefits to
consumers of imposing a particular duty would outweigh the costs;
and any other factors the CFPA considers appropriate.
Nutter Notes: The CFPA would be permitted to issue rules
establishing duties regarding compensation practices applicable to
covered persons and their employees, agents, and independent
contractors who deal or communicate directly with consumers in the
provision of consumer financial products or services for the
purpose of promoting fair dealing with consumers. However, the CFPA
could not prescribe a limit on the total dollar amount of
compensation paid to any person.
- Prohibiting Unfair, Deceptive or Abusive Practices
The CFPA would be authorized to issue rules identifying as
unlawful certain unfair, deceptive, or abusive acts or practices in
connection with any transaction with a consumer for a consumer
financial product or service, and to take a variety of other
actions to prevent a person from committing or engaging in an
unfair, deceptive, or abusive act or practice in connection with
any transaction with a consumer for a consumer financial product or
service.
Nutter Notes: The CFPA would have no authority to declare
an act or practice unfair unless the CFPA 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.
- Balanced Disclosures and Communications
Subject to CFPA rules, covered persons would be required, with
respect to disclosures or communications regarding any consumer
financial product or service, to make or provide to consumers
"balanced" communication of the benefits of the product
or service with communication of significant risks and costs.
Covered persons would also be required to prominently disclose the
significant risks and costs, in reasonable proportion to the
disclosure of the benefits, and communicate significant risks and
costs in a clear, concise, and timely manner designed to promote a
consumer's awareness and understanding of the risks and costs,
as well as a consumer's ability to use the information to make
financial decisions.
- Sales Practices
The CFPA would be authorized to prescribe rules and issue orders
and guidance regarding the manner, setting, and circumstances of
sales of any consumer financial products or services to ensure that
the risks, costs, and benefits of the products or services, both
initially and over the term of the products or services, are fully
and accurately represented to consumers.
- Combined Mortgage Loan Disclosures
Within one year after the date that consumer protection
responsibilities are transferred to the CFPA, the CFPA would be
required to propose for public comment rules and model disclosures
that combine the disclosures currently required under the Truth in
Lending Act and the Real Estate Settlement Procedures Act into a
single, integrated disclosure for mortgage loan transactions
covered by those laws, unless the CFPA determines that any proposal
issued by the Federal Reserve and HUD carries out the same
purpose.
- Standard Consumer Financial Products or Services
The CFPA would be permitted – but not required
– to adopt rules or issue guidance requiring the offer of
a "standard consumer financial product or service" at or
before the time an "alternative consumer financial product or
service" is offered to a consumer, including warnings to
consumers about the heightened risks of alternative consumer
financial products or services and providing consumers a meaningful
opportunity to decline standard consumer financial products or
services.
Nutter Notes: In general, a "standard consumer
financial product or service" is one that is or can be readily
offered by covered persons that also offer alternative consumer
financial products or services, is transparent to consumers in its
terms and features, poses lower risks to consumers, facilitates
comparisons with alternative consumer financial products or
services, and contains the features or terms defined by the CFPA
for the particular product or service. An "alternative
consumer financial product or service" is a consumer financial
product or service that is of the same type or class as a standard
consumer financial product or service, but that contains different
or additional terms, fees or features.
- Pilot Disclosures
The CFPA would be required to establish standards and procedures
for approval of pilot disclosures to be provided or made available
by covered persons to consumers in connection with the provision of
a consumer financial product or service. Pilot disclosures would be
required to be limited in time and scope and reasonably designed to
contribute materially to consumer awareness and understanding of
disclosures or communications about the risks, costs, and benefits
of consumer financial products or services. The CFPA's
procedures must require public disclosure of pilots, but the CFPA
could limit disclosure to the extent necessary to encourage covered
persons to conduct effective pilots.
- Mandatory Arbitration
The CFPA would be authorized to issue rules prohibiting or
imposing conditions or limitations on the use of agreements between
a covered person and a consumer that require the consumer to
arbitrate any future dispute between the parties arising under any
consumer law if the CFPA finds that such prohibition, conditions,
or limitations are in the public interest and for the protection of
consumers.
- Consumer Rights to Access Information
Subject to CFPA rules, and with certain exceptions, a covered
person would be required to make available to a consumer
information in the control or possession of the covered person
concerning the consumer financial product or service that the
consumer obtained from the covered person including information
relating to any transaction, series of transactions, or to the
consumer's account, including costs, charges and usage data.
The information would be required to be made available in an
electronic form usable by consumers.
Nutter Notes: The text of the proposed legislation is
silent as to whether the information must be made available in any
case, or only upon a request by a consumer. The words "made
available in electronic form" suggest that making it available
through a secure web site or providing it by e-mail would be
satisfactory.
4. State Law, State Enforcement and Preemption
- State Action to Enforce the Act and CFPA
Regulations
The proposed legislation provides that any state attorney
general may bring a civil action in the name of the state on behalf
of individuals residing in the state in any federal district court
or state court having jurisdiction over the defendant, to secure
monetary or equitable relief for violation of any provision of the
Act or any CFPA regulation. The proposed legislation provides that
nothing in it should be construed to modify, limit or supersede the
operation of any provision of any existing federal consumer
protection law that relates to the authority of a state attorney
general or state regulator to enforce the law.
Nutter Notes: Before initiating any action in court or
administrative proceeding against any covered person to enforce any
provision of the Act or CFPA rule, a state attorney general or
state regulator would be required to provide to the CFPA a copy of
the complaint to be filed and written notice describing the action
or proceeding. If prior notice is not practicable, the state
attorney general or state regulator would be required to provide a
copy of the complaint and notice to the CFPA immediately upon
commencing the action or proceeding.
- Visitorial Standards
The proposed legislation would permit any state attorney general
to bring a court action to require a national bank or federal
savings association to produce records relative to an investigation
of violations of state or federal consumer laws, to enforce any
applicable federal or state law, to the extent authorized by the
law, or to seek relief and recover damages for residents of the
state.
Nutter Notes: The U.S. Supreme Court last week struck down a
regulation of the Office of the Comptroller of the Currency that
bars states from going to court to enforce state laws against
national banks. In Cuomo vs. Clearing House Association,
the Court held that the OCC exceeded its statutory authority when
it crafted a regulation that bars states from "prosecuting
enforcement actions" in court against national banks. At the
same time, the Court held that a lower court applying the OCC's
preemption regulations properly enjoined the issuance of a subpoena
by the New York State Attorney General to a national bank because
such a subpoena, not in connection with a judicial enforcement
action, would have amounted to an impermissible visitation by a
state official.
- Preemption Rules Clarified
The proposed legislation provides that, in general, state
consumer protection laws, including laws relating to unfair or
deceptive acts or practices, consumer fraud, and repossession,
foreclosure, and collection, would apply to national banks and
federal savings associations, as well as their subsidiaries and
affiliates. Those state laws would not apply to national banks or
federal savings associations, or their subsidiaries and affiliates,
if they discriminate against them or are inconsistent with
provisions of federal law, but only to the extent of the
inconsistency. A state consumer law would not be inconsistent with
federal law if the protection the state consumer law affords
consumers is greater than the protection provided under federal law
as determined by the CFPA.
Nutter Notes: The proposed legislation provides no preemption
shield for national banks and federal savings associations that
acquire loans and other assets after they are originated.
Specifically, the proposed legislation provides that state consumer
law applicable to a transaction at the inception of the transaction
may not be preempted under federal law solely because a national
bank or federal savings bank subsequently acquires the asset or
instrument that is the subject of the transaction.
5. Data Collection
- Collection of Deposit Account Data
The proposed legislation would require that, for each branch,
automated teller machine, and other deposit taking facility, a
financial institution maintain records of the number and dollar
amounts of deposit accounts of customers. The customers'
addresses would be required to be geo-coded so that data is
collected regarding the census tracts of the residence or business
location of the customers. In maintaining records on deposit
accounts, the financial institution would be required to record
whether the deposit account is for a "residential" or
commercial customer.
Nutter Notes: It is not clear in the draft legislation
whether "residential" customer means any consumer or only
those consumers who have mortgage loans with the institution. The
following information would be required to be publicly disclosed on
an annual basis: the address and census tract of each branch,
automated teller machine, and other deposit taking facility, the
type of deposit account, and data on the number and dollar amounts
of the accounts, presented by census tract location of
"residential" and commercial customers.
- Collection of Small Business Loan Data
In the case of any application by a small business to a
financial institution for credit, the financial institution would
be required to inquire as to whether the business is a women- or
minority-owned business, without regard to whether the application
is received in person, by mail, telephone, electronic mail or other
form of electronic transmission, or by any other means, and whether
or not the application is in response to a solicitation by the
financial institution.
Nutter Notes: Where feasible, no loan underwriter or
other officer or employee of a financial institution, or any
affiliate of a financial institution, involved in making any
determination concerning an application for credit would be
permitted to have access to the collected information. If a
financial institution determines that a loan underwriter or other
officer or employee involved in making any determination concerning
an application for credit should have access to the information,
the financial institution would be required to provide notice to
the applicant along with a related notice that the financial
institution would be barred from discriminating on the basis of the
information.
This update is for information purposes only and should not be construed as legal advice on any specific facts or circumstances. Under the rules of the Supreme Judicial Court of Massachusetts, this material may be considered as advertising.