On July 21, 2010, President Barack Obama signed into law the “Dodd-Frank Wall Street Reform and Consumer Protection Act” (the “Act”), the federal government’s game-changing response to the perception that lax regulation of the financial industry contributed to the economic recession that began in late 2007.
One of the Act’s most significant innovations is the creation of the Consumer Financial Protection Bureau, or “CFPB,” a new regulatory agency that will oversee the vast array of financial services provided to consumers.
This initial client alert provides an overview of the CFPB’s new responsibilities and mandates.
Within the next six to 18 months, the CFPB will inherit regulatory authority that is currently invested in numerous and diverse federal agencies, including the Federal Trade Commission (FTC), Federal Reserve, Federal Deposit Insurance Corporation, Comptroller of the Currency and the Department of Housing and Urban Development. The CFPB will assume responsibility for (1) enforcing existing consumer financial laws and regulations that were previously enforced by these agencies, (2) monitoring the consumer operations of the companies that were previously subject to oversight by the transferring agencies, and (3) making new rules governing these operations.
The Act designates a broad variety of businesses as “covered persons” that will be subject to the CFPB’s regulatory and supervisory oversight, including:
- banks, thrifts, and credit unions
- consumer finance lenders
- mortgage loan originators
- loan servicers and brokers
- currency exchanges
- real estate settlement companies, appraisers, appraisal companies and appraisal management companies
- consumer credit reporting agencies
- debt collectors
- debt settlement and debt management services
- check cashing, collection, or guaranty services
- lenders and brokers in certain lease-to-own arrangements
- financial and investment advisors that are not registered with the SEC
- payday lenders
- credit counselors
- broker-dealers, non-depository trust companies, and deposit intermediation services
- service providers and related persons of covered persons
- certain sellers or issuers of stored value cards and instruments
- money services businesses, money transmitters, and wire transmitters
- some tax preparers, accountants, merchants or retailers, and attorneys
- financial data processors, including data storage providers, transmission services, and software and hardware providers.
Similar to Section 5 of the FTC Act1, the CFPB’s primary legal directive will be to “prevent a covered person or service provider from committing or engaging in an unfair, deceptive, or abusive act or practice under Federal law in connection with any transaction with a consumer for a consumer financial product or service, or the offering of a consumer financial product or service.”
The Act vests the CFPB with exclusive rulemaking authority to prescribe any regulations authorized by Federal consumer laws. This rulemaking authority will extend not only to enacting rules prohibiting “unfair, deceptive, or abusive acts or practices,” but also those designed to “prevent” such acts or practices.
Congress placed the same limitations on the CFPB’s rulemaking authority regarding “unfair” consumer financial acts as are presently imposed on the FTC2. Before declaring an act to be “unfair,” the CFPB must determine that “(1) the act or practice causes or is likely to cause substantial injury to consumers which is not reasonably avoidable by consumers; and (2) such substantial injury is not outweighed by countervailing benefits to consumers or to competition.”
The Act also directs the CFPB to utilize the analysis recently developed by the FTC for determining whether an act is “abusive.”3 Before declaring an act to be “abusive,” the CFPB must find that it “(1) materially interferes with the ability of a consumer to understand a term or condition of a consumer financial product or service; or (2) takes unreasonable advantage of (a) a lack of understanding on the part of the consumer of the material risks, costs, or conditions of the product or service; (b) the inability of the consumer to protect the interests of the consumer in selecting or using a consumer financial product or service; or (c) the reasonable reliance by the consumer on a covered person to act in the interests of the consumer.”
The Act directs the CFPB to investigate and respond to consumer complaints and authorizes the agency to require covered persons to respond to such investigations. The new law also allows consumers to make information and document requests directly to covered persons. Failure to respond to such requests, made either by the CFPB or consumers, is a “prohibited act “ that can subject violators to substantial penalties issued in administrative proceedings or in state or federal court actions.
One of the most significant aspects of the Act is the implementation of extensive penalties for violations. Among the penalties available to the CFPB to respond to Act violations are:
- A full range of legal and equitable relief, including rescission or reformation of contracts, refund of monies or return of real property, restitution, disgorgement or compensation for unjust enrichment, payment of damages or other monetary relief, public notification regarding the violation, including the costs of notification, and limitations on the activities or functions of the person.
- Civil penalties ranging from $5,000 to $1 million per day for each violation, depending on the violator’s subjective knowledge and intent
- Referrals of criminal violations to the U.S. Attorney
- Recovery of the government’s attorneys fees and costs
Enforcement actions for violations of the Act may be brought against covered persons as well as their affiliates, related parties and other parties that provided “substantial assistance” to a covered person in engaging in an “unfair, deceptive or abusive act.”
Unlike other federal statutes that preempt enforcement actions brought by state authorities on the same or similar grounds, the Act expressly authorizes state attorneys general to pursue civil or criminal enforcement actions based on violations of federal consumer financial laws, requiring only notification procedures to allow state and federal agencies to coordinate their efforts.
In the Act’s six to 18 month implementation period, agencies that are currently responsible for enforcing existing consumer financial laws and supervising and monitoring companies under their respective statutory jurisdictions will continue to enforce those laws and regulate those companies. Upon a designated “transfer date” announced by the CFPB, these responsibilities will be shifted to the new agency.
1 Section 5(a) of the FTC Act prohibits ‘‘unfair or deceptive acts or practices in or affecting commerce.’’ 15 U.S.C. § 45(a).
2 Section 5(n) of the FTC Act provides: “The Commission shall have no authority … to declare unlawful an act or practice on the grounds that such act or practice is unfair unless the act or practice causes or is likely to cause substantial injury to consumers which is not reasonably avoidable by consumers themselves and not outweighed by countervailing benefits to consumers or to competition. 15 U.S.C. § 45(n).
3 The “abusive” standard appears to have its roots in rules initially promulgated by the FTC pursuant to the Telemarketing and Consumer Fraud and Abuse Prevention Act (“TCPA”), 15 U.S.C. § 6101-6108. Although there does not appear to be any statutory or case authority addressing this new standard, the FTC has employed the “abusive” standard derived from the TCPA to prohibit advance fees from being charged to consumers for credit repair services, recovery services, advance fee loans, and, most recently, debt relief services.
Loeb & Loeb's Financial Reform Task Force monitors key issues surrounding approval of the Dodd-Frank Wall Street Reform and Consumer Protection Act that are relevant to a broad spectrum of firm clients in the financial services industry. The multidisciplinary Task Force is comprised of attorneys across core practice areas - including general corporate, private equity, securities, mergers and acquisitions, consumer protection and banking and finance - who are focused on analyzing the historic legislation and interpreting the significant business implications for financial institutions and commercial companies nationwide. For more information about the content of this alert, please feel free to contact any member of our Financial Services Team.
This client alert is a publication of Loeb & Loeb LLP and is intended to provide information on recent legal developments. This client alert does not create or continue an attorney client relationship nor should it be construed as legal advice or an opinion on specific situations.
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