The Consumer Financial Protection Agency

The Department of Treasury has issued a White Paper detailing President Obama's "New Foundation" initiatives for regulatory reform in the financial services sector that proposes a new, independent regulatory agency known as the Consumer Financial Protection Agency ("CFPA"). The idea for a CFPA grows out of concerns about consumer financial losses in the credit card and mortgage industries but the proposal seeks "comprehensive reform" through heightened consumer protections and robust provider regulations for credit, savings, payment and other consumer financial products and services. The overall aim of the CFPA is to "instill a genuine culture of consumer protection" in the regulatory framework.

This new agency would be run by a director and a board and supported by officers and staff. The CFPA director would also be one of the eight members of the new Financial Services Oversight Council, responsible for assessing risks to the entire financial system. Funding for the CFPA would come from fees assessed on covered entities and transactions subject to the agency's supervision.

The CFPA program of comprehensive reform would be based on four principles: transparency, fairness, accountability and access. These objectives would entail making disclosure forms clear, simple and concise and imposing consumer communication duties that are reasonable and not just technically compliant. The CFPA would be encouraging "plain vanilla" or less complex financial products. It would be responsible for regulating and enforcing against unfair, deceptive and abusive practices concerning credit, savings and payment products and services. Its mission would also include making financial products and services more accessible to households and communities that traditionally have had limited access and providing better and more user friendly educational materials about these products and services.

As the overarching consumer protection agency, the CFPA would be granted authority to promulgate and interpret rules and regulations under the wide range of current consumer financial services and fair lending statutes. These include: the Truth in Lending Act (TILA), Home Ownership and Equity Protection Act (HOEPA), Real Estate and Settlement Procedures Act (RESPA), Community Reinvestment Act (CRA), Equal Credit Opportunity Act (ECOA), Home Mortgage Disclosure Act (HMDA) and the Fair Debt Collection Practices Act (FDCPA). The CFPA would be given similar authority under any future consumer protection laws directed at consumer credit, savings, collection or payment markets.

Many of these consumer protection statutes contain private rights of action, allowing for civil lawsuits. Those would remain in effect under the CFPA and there may be new legislation to increase statutory damages. Stricter state consumer protection laws in effect today would also remain in place. In fact, the White Paper envisions the CFPA coordinating efforts with the states as a way to unify and strengthen standards for registering and improving the quality of financial services providers and intermediaries.

For example, as proposed, the CFPA would administer the SAFE Act, setting standards for registering and licensing institutions that originate mortgages, such as higher minimum net worth requirements. Currently, that responsibility is divided among many different federal agencies. Likewise, the CFPA would supervise registration and licensing regimes for other financial service providers and originators, such as debt collectors, debt counselors or mortgage modification operations.

The CFPA would be authorized to collect information through data collection statutes, such as the Home Mortgage Disclosure Act. The White Paper proposes the creation of a research and statistics department at the CFPA with the responsibilities for analyzing the full range of consumer protection, fair lending and community development finance issues.

It also proposes that the CFPA become the central location for collecting and tracking consumer complaints about financial service institutions and products. Other federal agencies would be directed to refer consumer complaints to the CFPA but complaint data would be shared across agencies. The CFPA would also coordinate complaint information with state regulators.

The White Paper identifies the possible abuse of arbitration clauses in financial services contracts and documents as an important area for study by the proposed CFPA. Mandatory arbitration clauses often require consumers to waive their rights to trial when entering into arrangements or contracts for financial services, such as a loan. The CFPA is to determine the extent to which and in what contexts these arbitration clauses promote fair adjudication and effective redress.

Traditionally, the Federal Trade Commission ("FTC") has played a critical role in protecting consumers. If the CFPA is created, however, the White Paper suggests that primary authority for financial services and product protections be shifted to the CFPA, although the FTC would retain back-up authority for the statutes under which it currently has jurisdiction. Both the CFPA and the FTC would have authority for dealing with fraud in the marketplace including the sale of services, like advance fee loans, credit repair, debt negotiation and foreclosure rescue or loan modification fraud.

Congress is expected to consider legislation relating to the creation of the CFPA later in the Summer. We will alert to you any further developments as they take place.