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Obama's consumer protection agency — the new nightmare

CFPA Looms Large For Banks

The Obama Administration has proposed a sweeping reform of financial consumer protection laws, and the House Financial Services Committee plans to begin hearings on the proposal on July 23, 2009. What follows is a brief outline of some of the key elements contained in the proposal:

Board Make-Up. Four of the five Board members are appointed by the President subject to Senate confirmation. They must be U.S. citizens “who have a strong competencies [sic] and experiences related to consumer financial products or services.” There is no requirement that these Board members have any knowledge about the manner in which any type of financial institution (broadly defined) actually works or functions. [§ 1012 (a)(1)(A) and (B)].

Jurisdiction and Funding. The agency will have extensive, broad jurisdiction over all traditional banks, credit unions, and other financial services providers. It will be funded through assessments and fees on 'covered persons' which includes “any person who engages directly or indirectly in a financial activity” (as defined and noted below) as well as any service provider in connection with the transaction. [§ 1018 (b)].

Consumer transactions involving any financial product or service are broadly defined to include: (directly or indirectly) taking deposits; making and servicing loans (which includes brokering loans, appraisals of real estate in connection with loans, selling credit, mortgage or title insurance of any kind; offering stored-value cards) and numerous other kinds of activities. [§ 1002 (18)]. It also includes jurisdiction over advertising, marketing, selling, disclosures, delivery maintaining or servicing any financial product or service. [§ 1002 (29)].

Under the proposal, it will be unlawful to “advertise, market, offer, sell, enforce, or attempt to enforce, any term, agreement, change in terms, fee or charge in connection with a consumer financial product or service that is not in conformity with this title or applicable rule or order issued by the Agency.” [§ 1039]

Imposing Duties on Bankers; Compensation Practices – the Agency is mandated to:

“prescribe rules imposing duties on (bank employees) or (their agents) as the Agency deems appropriate or necessary to ensure fair dealing with consumers” who provide financial products and services to consumers, and may prescribe rules dealing with compensation practices for bank employees, in order to promote “fair dealing” with consumers. [§ 1037]

Mandates and Objectives: Section 1021of the proposed bill sets forth its mandates and objectives:
(a) The Agency shall seek to promote transparency, simplicity, fairness, accountability, and access in the market for consumer financial products or services. (emphasis added)
(b) The Agency is authorized to exercise its authorities granted in this title . . . for the purposes of ensuring that—
(1) consumers have, understand, and can use the information they need to make responsible decisions about consumer financial products or services;
(2) consumers are protected from abuse, unfairness, deception, and discrimination;
(3) markets for consumer financial products or services operate fairly and efficiently with ample room for sustainable growth and innovation; and
(4) traditionally underserved consumers and communities have access to financial services. (emphasis added)

Under the provisions of this mandate, the CFPA will be authorized to propose rules and regulations, to administer and enforce them through examination authority. It eliminates the examination of traditional commercial banks for consumer purposes by other federal or state banking agencies and makes this Agency's authority exclusive as to banking institutions.

Unfair, Deceptive and Abusive Acts and Practices – At the heart of the new agency is its ability to define what constitutes “unfair” “deceptive” and “abusive” practices as these terms relate to consumer financial products and services. [§1031].

For example, it must develop a combined mortgage loan disclosure form within one year combining RESPA disclosures with TILA disclosures into one form. [§ 1032 (d)].

The Agency may establish rules, practices and guidance for sales efforts of financial products or services (credit and debit cards, overdraft privilege arrangements, and so forth). [§1033]. It may also require registration, licensing and certification standards for any class of 'covered persons' [ § 1035].

Standard Consumer Products and Services – The Agency may adopt 'standard' products and services (as defined) and may require a bank to offer those standard products and services before an alternative is offered. It will cover all means of warnings, advertising, marketing and other information about the product or service, and mandate an “opt-out” provision. [§ 1036].

Transfer of Consumer Laws: The proposal, which will also cover credit unions, sweeps into its tent all “enumerated consumer laws” – [§ 1002 (16)(A-P), § 1011 (A), and Subtitles F and H]. These include:
1. Alternative Mortgage Transaction Parity Act;
2. Community Reinvestment Act;
3. Consumer Leasing Act;
4. Electronic Funds Transfer Act;
5. Equal Credit Opportunity Act;
6. Fair Credit Billing Act
7. Fair Credit Reporting Act
8. Fair Debt Collection Practices Act;
9. Provisions of the Federal Deposit Insurance Act;
10. Provisions of the Gramm-Leach-Bliley Act;
11. Home Mortgage Disclosure Act;
12. Home Ownership and Equity Protection Act;
13. Real Estate Settlement Procedures Act;
14. SAFE Mortgage Licensing Act;
15. Truth in Lending Act;
16. Truth in Savings Act.

Arbitration Clauses – The agency has the authority to prohibit the use of or impose conditions on the use of arbitration clauses contained in loan agreements. [§ 1025].

Preservation of State Law – Federal law provides the minimum standard for consumer protection mandates, and leaves it up to states to enact stiffer laws with greater protection for consumers. The federal law will not pre-empt any state law that provides such greater protection for consumers. [Subtitle D, § 1041 et seq.]

State Attorneys General are authorized to file civil actions to recover monetary damages or obtain equitable relief for any violation of this new law. The Agency may, or may not, intervene in such an action. The pre-emption of state laws under the National Bank Act is virtually eliminated. [§ 1043].

Enforcement – The new agency has authority to issue subpoenas and otherwise enforce its directives in federal court, and to bring civil actions for damages against any violator of the new law. [Subtitle E, § 1051 et seq.] It also includes “whistle-blower” protection for anyone who brings violations to the attention of the Agency. [§ 1057].

Penalties are based on the level of the violation, including standards of simply violating a final order or condition imposed by the Agency (Tier 1), recklessly engaging in a violation of a rule, enumerated consumer law or order of the Agency (Tier 2) or knowingly “violates this title, any enumerated consumer law, or a rule or order prescribed under this title (Tier 3).

Penalties range from $5,000 to $1,000,000 for each day the violation remains in effect. [§ 1055].

Victim's Relief Fund –If the Agency recovers civil penalties against a bank or other provider, the money goes into a “Victim's Relief Fund” which will be distributed to persons who are the subject of the action. [§ 1018 (c) (1)].

Community Affairs – Authorizes creation of a community affairs unit [§ 1014 (c) (2)] to provide information and assistance with respect to 'traditionally underserved consumers and communities.' It also authorizes creation of a 'consumer complaint' unit to establish a central database for collecting and tracking information about consumer complaints and their resolution.

It also creates a Consumer Advisory Board to provide advice and counsel to the Agency. [§ 1015].

Authority – By rule or order, the Agency may grant exemptions to banks or any other class of 'covered person', conditionally or unconditionally; the Agency may also grant exemptions for any consumer financial product or service as it may deem necessary. [§ 1022 (b)(3)]. The Agency will also have access to the results of bank safety and soundness examinations.

Exemptions – Persons regulated by the Securities and Exchange Commission or the Commodities Futures Trading Commission are exempt from the Act. [§ 1022 (f)].

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