The Dodd-Frank Wall Street Reform and Consumer Protection Act ("The Act") contains one of the most significant changes to consumer credit regulation in decades through the creation of the Bureau of Consumer Financial Protection. Currently, a number of agencies are responsible for different aspects of consumer lending and other financial services depending on the regulation and the type of company offering the service.
The Bureau, once it is up and running, will be responsible for updating and enforcing regulations for almost all consumer financial protection laws, including:
Although implementing regulations for these laws and then enforcing the laws and regulations against "covered persons" will be the main functions of the Bureau, it will also be involved in consumer financial education, responding to consumer complaints, and studying the markets for consumer financial products and services.
- Electronic Fund Transfer Act (EFTA)
- Equal Credit Opportunity Act (ECOA)
- Fair Credit Billing Act
- Fair Credit Reporting Act
- Home Owner's Protection Act of 1998
- Fair Debt Collection Practices Act
- Federal Deposit Insurance Act (certain sections)
- Gramm-Leach-Bliley Act (certain sections)
- Home Mortgage Disclosure Act (HMDA)
- Home Ownership and Equity Protection Act of 1994
- Real Estate Settlement Procedures Act (RESPA)
- S.A.F.E. Mortgage Licensing Act of 2008
- Truth in Lending Act
- Truth in Savings Act
- Omnibus Appropriations Act of 2009 (section 626) and
- Interstate Land Sales Full Disclosure Act.
A "covered person" is someone who provides or offers to provide a "financial product or service" to consumers. It also includes affiliates of the covered person if the affiliate provides material services to the covered person. Banks, mortgage companies, payday lenders, private student loan lenders, appraisers, loan servicers, debt collectors, and most other companies that provide financial products or services to consumers are covered. However, the following are excluded from the definition of "covered persons:"
In some cases, they can be brought into coverage by engaging in lending or similar activities, such as a real estate broker who brokers a mortgage loan, a tax preparer who makes a refund anticipation loan or an auto dealer who makes a loan for something unrelated to its primary business of selling, leasing, financing and servicing vehicles.
- Real estate brokers
- Tax preparers
- Insurance agents
- Auto dealers
Financial Product or Service
The definition of "financial product or service" is very broad. It includes not only making and servicing loans but taking deposits, transmitting or exchanging funds, acting as a custodian for funds, providing real estate settlement services such as appraisals, providing stored value or payment instruments, check cashing, check guaranty services, providing payments or other financial data processing (except retailing and website hosting), credit reporting in connection with a credit decision, and debt collection. The definition does not include the business of insurance or electronic conduit services.
One of the primary functions of the Bureau is rulemaking. This means prescribing regulations or rules ("regulation" and "rule" are used interchangeably). The Bureau may issue rules, orders and guidance under the Federal consumer financial laws listed earlier. Even if a different law gave another federal agency authority to prescribe regulations under any of these laws, the Bureau now has exclusive authority. The one exception is that both the Bureau and the Federal Trade Commission can issue regulations regarding "unfair, deceptive and abusive practices." The two agencies are required to consult with each other to avoid duplication. It seems likely that the FTC will defer to the Bureau on financial products and services while continuing to be responsible for the rules relating to all other products and services.
Although the Bureau will be a new office within the Federal Reserve System, the Federal Reserve Board is specifically prohibited from interfering with the management and functions of the Bureau. This means the Board has no control over the content of regulations issued by the Bureau. However, the Financial Stability Oversight Council does have the power to set aside any regulation of the Bureau if, by a 2/3 vote, the Council determines that the regulation "would put the safety and soundness of the United States banking system or the stability of the financial system of the United States at risk."
In the past, the bank regulatory agency, such as the FDIC or OCC, responsible for a particular depository institution (bank, savings association or credit union) would be responsible for both the safety and soundness of the institution and compliance with the Federal consumer financial laws. For non-depository covered persons, various agencies, such as the Federal Reserve Board or HUD, might be responsible for different Federal consumer financial laws. One of the ideas behind the Financial Reform Act was that consumers would be better served by having a single regulator responsible for all of their financial protection, and that this would also leave the bank regulatory agencies, called "Prudential Regulators," more time to concentrate on the stability of the banking system.
Non-depository InstitutionsThe Bureau will have exclusive authority to examine non-bank covered persons for compliance with the Federal consumer financial laws. The Bureau also has exclusive enforcement authority.
Very Large Depository Institutions For banks, savings associations and credit unions with assets of over 10 billion dollars, the Bureau will have exclusive supervision authority and primary enforcement authority for compliance with the Federal consumer financial laws. The Bureau and the Prudential Regulator must coordinate exams and share reports.
Other Depository Institutions
For banks, savings associations and credit unions with assets of 10 billion dollars or less, the Prudential Regulator has exclusive supervision and enforcement authority even for consumer protection. The Bureau can only request reports from the institution and include examiners on a sampling basis when the Prudential Regulator conducts its exam.
| ||Non-depository ||Depository>$10B ||Depository≤$10B |
|Bureau ||Exclusive supervision & enforcement ||Exclusive supervision & primary enforcement ||Limited supervision -- request reports & sample exams |
|Prudential Regulator ||No authority ||Back-up enforcement ||Exclusive supervision & enforcement |
The Bureau's enforcement powers allow it to bring an action in court for any violation of a Federal consumer financial law, rule, order or condition and seek injunctive relief, restitution and damages on behalf of consumers, and civil penalties of up to $5,000 per day for simple/technical violations, $25,000 a day for reckless violations, and $1,000,000 a day for knowing violations.
Transfer of Powers
The Secretary of the Treasury is required to choose a "designated transfer date" when the consumer protection power of the other agencies, as well as some of their personnel, will be transferred to the Bureau. Secretary Geithner set July 21, 2011 as the designated transfer date, but he can, with an explanation to Congress, extend the date up to six months.
On this date all "consumer financial protection functions" will be transferred to the Bureau from the Federal Reserve Board, the Comptroller of the Currency, the Office of Thrift Supervision, the Federal Deposit Insurance Corporation, and the National Credit Union Administration. "Consumer financial protection functions" means the supervision/enforcement authority described above and "all authority to prescribe rules or issue orders or guidelines pursuant to any Federal consumer financial law." This is a little confusing since the Bureau already has authority from the date of enactment to draft regulations and supervise non-depository institutions and very large depository institutions. However, it is questionable how much will get done before the designated transfer date since the Bureau will not be fully staffed until the transfer occurs.
The FTC will retain its authority to issue and enforce rules under the FTC Act, but the Bureau can also issue and enforce rules relating to unfair and deceptive practices. Also, the Department of Housing and Urban Development will transfer whatever consumer financial protection functions it has under the Real Estate Settlement and Procedures Act, the Secure and Fair Enforcement for Mortgage Licensing Act and the Interstate Land Sales Full Disclosure Act. The reason the transfer of authority from the FTC and HUD are limited is because the FTC Act and the Fair Housing Act are not included in the list of laws for which the Bureau will have full consumer protection responsibility.
Besides its function as the primary consumer financial services regulator, the Bureau is also required to include the following special function units:
- Research/ Education
- Community Affairs
- Fair Lending and Equal Opportunity
- Financial Education
- Private Education Loan Ombudsman
- Consumer Advisory Board
- Service Member Affairs
- Financial Protection for Older Americans and
- Minority and Women Inclusion.
The President must appoint a Director who will serve as head of the Bureau for a term of five years. Until a Director is appointed and confirmed by the Senate, the Secretary of the Treasury will act as head of the Bureau. It was rumored that President Obama wanted to appoint Harvard law professor and consumer advocate Elizabeth Warren as the director, but declined to do so because she would have received strong opposition from Republicans and business leaders in her confirmation hearings. Instead, he made her Assistant to the President and Special Advisor to the Secretary, which does not require any advice or consent from the Senate, to organize the Bureau, recruit staff, and design policy.
This is part two of a series.
Read part one, an overview of this law.
Questions & Answers: Financial Services