Reform Plan Proposes to Restructure Financial Industry

Ellen Taverna, Project Manager and Counsel, Consumer Protection Project

Ellen Ryan, Project Manager and Counsel, Consumer Protection Project

Americans continue to suffer from the economic crisis facing our nation. Not only did the financial crisis create multi-billion dollar company bailouts, extensive job losses and a troubled housing market, but it also exposed the many inadequacies in consumer and investor protection of our financial services industry. In hopes to restore confidence in the integrity of our financial system and help prevent future economic damage to American consumers and businesses, President Obama, joined by Treasury Secretary Timothy Geithner, recently unveiled a comprehensive regulatory reform plan to restructure the financial sector.[1]

The administration’s reform plan lists the protection of consumers and investors from financial abuse as one of its five main objectives.[2] One of the key ways the administration proposes to protect consumers is the creation of a new Consumer Financial Protection Agency (CFPA). The CFPA’s top priority would be the protection of consumers and it would be given the “authority and accountability to make sure that consumer protection regulations are written fairly and enforced vigorously.” [3] It would oversee financial products and services such as bank accounts, annuities, mortgages, and credit cards, as well as the institutions that provide these services. The CFPA would also have enforcement authority to write rules for banks, bank affiliates, and nonbank firms and enforce the rules through orders, fines, and penalties. [4]

While the CFPA would have supervisory authority over nonbanking institutions, the plan does clarify that “states should be the first line of defense.”[5] However, if a state enforcement agency brings an action against any institution within the CFPA’s jurisdiction for a violation of one of the agency’s regulations, the CFPA could intervene in the action for all purposes, including appeals.[6] The CFPA would work with the newly proposed Financial Consumer Coordinating Council, comprised of the heads of the Securities and Exchange Commission, the Federal Trade Commission (FTC), the Department of Justice, and other state and federal regulators, to conduct periodic reviews of the effectiveness of enacted regulations and promote consistency within the agencies. The Coordinating Council would “establish mechanisms for state attorneys general, consumer advocates and others to make recommendations to the Council on issues to be considered or gaps to be filled.” The Council would report to Congress, and make recommendations for regulatory improvements.[7]

Most importantly from the states’ perspective, while the CFPA would be charged with setting high federal minimum standards for these consumer protection and fair lending laws, it would allow the states to impose tougher requirements if necessary. The plan also proposes that “federally chartered institutions be subject to nondiscriminatory states consumer protection and civil rights laws to the same extent as other financial institutions.”[8] According to the plan, “the states would be able to enforce these laws, as well as regulations of the CFPA, with respect to federally chartered institutions, subject to appropriate arrangements with prudential supervisors.”[9] As for state banks supervised by a federal prudential regulator, the CFPA will be the primary consumer compliance supervisor at the federal level.”[10]

The CFPA would also assist the states in unifying and strengthening standards for registering, licensing and improving the quality of financial service providers and intermediaries, which may include debt collectors, debt counselors and mortgage modifications outfits.[11] With these registration systems, the reform plan asserts that the state enforcement agencies “should be able to weed out bad actors wherever they may operate.” [12] In order to meet the challenge of vigilantly enforcing these bad actors, the plan stresses that there must be adequate funding at the state and federal levels.

So it can perform its functions effectively, the plan calls for providing various tools to the CFPA. The CFPA would seek to collect information through the authority of its supervisory process as well as through data collection statutes and use the data to develop regulations, improve compliance, and promote community development. Since complaints are one of the best ways to measure consumer concerns, the CFPA would be given the duty to collect and track complaints about consumer financial services and assisting complaint resolution with respect to federally supervised institutions.[13] However, “the states would retain primary responsibility for tracking and facilitating resolution of complaints against other institutions, and the CFPA should seek to coordinate exchanges of complaint data with state regulators.”[14] The Agency would play a leading role in improving efforts for financial literacy and education literacy and education initiatives government-wide and “engage in a wide variety of activities to help financial institutions, community based organizations, government entities and the public understand and address financial service issues that affect low- and middle-income people across various geographic regions.”[15] The CFPA would also collect data and study mandatory arbitration clauses in consumer financial services and products contracts to ascertain to whether they promote fair adjudication and effective redress for consumers.[16] The plan also proposes to give the FTC the necessary financial and technical resources to effectively do its job to protect consumers in areas such as debt negotiation and mortgage foreclosure rescue and loan modification fraud and “to conduct rulemakings for unfair and deceptive practices under standard notice and comment procedures, and to obtain civil penalties for unfair and deceptive practices.”[17] However, the FTC as the primary authority for financial product and services protections would be moved to the CFPA, and “the FTC should retain backup authority with the CFPA for the statutes for which the FTC currently has jurisdiction.”[18]

The plan goes on to explain in detail the proposals for regulatory, legislative and administrative actions by the CFPA to reform consumer protection based on principles of “transparency, simplicity, fairness, accountability, and access for all.”[19] The Agency would have authority to define standards for simple “plain vanilla” products, such as mortgages that would have to be offered “prominently” by companies. [20] It also proposes the Agency define standards for such products and require firms to offer them alongside whatever other lawful products a firm chooses to offer. To encourage the fair treatment of consumers, the CFPA would have the authority to regulate unfair, deceptive, or abusive acts or practices and impose duties of care that financial intermediaries, such as stock brokers and financial advisers, must follow.[21] The regulatory authority given to the CFPA would be applied fairly and consistently to regulation to similar financial products. For example, the CFPA would regulate overdraft protection plans more like credit card cash advances. An important component of the CFPA’s mission would be to promote access to financial services, especially for households and communities that traditionally have had limited access.[22] The CFPA would be given “primary fair lending jurisdiction over federally supervised institutions and concurrent authority with the states over other institutions.”[23]

Most likely the reform plan will be reworked by Congress if it is turned into legislation. The CFPA is modeled after the Financial Product Safety Commission proposed in S. 566, which was introduced in March 2009 by Sens. Richard Durbin (D-Ill.) and Charles Schumer (D-N.Y.). The House version, H.R. 1705, was introduced by Rep. William Delahunt (D-Mass.). The U.S. House Financial Services Committee has already held two hearings to evaluate the Administration’s regulatory reform plan and consumer financial products regulation.


[1] http://www.ustreas.gov/initiatives/regulatoryreform/.

[2] Financial Regulatory Reform, A New Foundation: Rebuilding Financial Supervision and Regulation at p. 3-4.

[3] Id. at 56.

[4] Id. at 59

[5] Id.

[6] Id. at 59-60.

[7] Id.at 73.

[8] Id. at 61.

[9] Id.

[10] Id.

[11] Id.

[12] Id.

[13] Id. at 62.

[14] Id.

[15] Id.

[16] Id. at 63.

[17] Id.

[18] Id.

[19] Id.

[20] Id. at 66.

[21] Id.at 67-68.

[22] Id. at 69.

[23] Id. at 70.

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