Consumer Financial Protection Agency/Bureau

1. Consumer Financial Protection Agency/Bureau Jeff Sovern St. John’s University School of Law

2. House Bill: http://financialservices.house.gov/Key_Issues/Financial_Regulatory_Reform/FinancialRegulatoryReform/hr4173eh.pdf • http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=111_cong_bills&docid=f:s3217as.txt.pdf • http://democrats.senate.gov/calendar/2010-05.html

3. Consumer Financial Protection Agency/Bureau Jeff Sovern St. John’s University School of Law

4. House Bill: http://financialservices.house.gov/Key_Issues/Financial_Regulatory_Reform/FinancialRegulatoryReform/hr4173eh.pdf http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=111_cong_bills&docid=f:s3217as.txt.pdf http://democrats.senate.gov/calendar/2010-05.html

5. Some Caveats Doesn’t include all the Senate amendments Quotes are sometimes from the bill in one house but not the other when the text was similar but not identical.

6. Outline CFPA/B’s structure and autonomy CFPA/B substantive provisions What can the CFPA/B do? Enforcement Preemption provisions Miscellaneous provisions Omitting provisions of House Mortgage Reform and Anti-Predatory Lending Act except to the extent that they also appear in the Senate CFPB act.

7. Structure Under the House Bill • Initially a Director, nominated by the President and confirmed by the Senate with “strong competencies and experiences related to consumer financial protection.” • 30 months after the bill is enacted, the director is succeeded by a Commission of 5 members, appointed by the president and confirmed by the Senate, with “strong competencies and experiences related to consumer financial protection.” • Commissioners have five-year staggered terms; no more than three of the same political party. • Removable only for cause.

8. Structure under the Senate bill CFPB to be housed in the Fed CFPB to be headed by Director appointed by President and confirmed by the Senate. No requirement that Director be consumer protection expert. Director to have 5-year term and can be removed for cause.

9. Autonomy under the Senate bill • “Notwithstanding the authorities granted to the Board of Governors under the Federal Reserve Act, the Board of Governors may not— (A) intervene in any matter or proceeding before the Director, including examinations or enforcement actions, unless otherwise specifically provided by law; (B) appoint, direct, or remove any officer or employee of the Bureau;” • “No rule or order of the Bureau shall be subject to approval or review by the Board of Governors. The Board of Governors may not delay or prevent the issuance of any rule or order of the Bureau.”

10. House Bill establishes Consumer Financial Protection Oversight Board The Board shall ‘advise” the director. Board includes Chairs of Fed Board of Governors, FDIC, NCUA, FTC, liaison committee of representatives of state agencies to the Financial Institutions Examination Council, Secretary of HUD, the head of the agency responsible for chartering and regulating national banks, and five others which can include consumer protection experts, depositary institutions that primarily serve underserved communities, etc.

11. Senate bill provides for Financial Stability Oversight Council On petition of a member agency of the FSOC, the Council may, by a 2/3 vote, set aside a final regulation prescribed by the Bureau, or any provision thereof, if the Council decides that the regulation or provision 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.

12. Financial Stability Oversight Council Members • Secretary of the Treasury, Chairperson; • the Chairman of the Board of Governors; • the Comptroller of the Currency; • the Chairman of the SEC; • the Chairperson of the CFTC; • an independent member appointed by the President, by and with the advice and consent of the Senate, having insurance expertise; • the Chairperson of the FDIC; • the Director of the Federal Housing Finance Agency; • And the Director of the CFPB

13. Funding House Bill Senate Bill Fed Board of Governors transfers “funds in an amount equaling 10 percent of the Federal Reserve System’s total system expenses” to the CFPA. The CFPA can also assess fees on “covered persons.” Fed to provide to CFPB 10-12% of the Fed’s total operating budget CFPB to receive civil penalties it collects.

14. Both bills would establish Consumer Advisory Board Members to include experts in financial services, community development, fair lending and civil rights, and consumer financial products Members to represent the interests of “covered persons” (i.e., the industry) and consumers. Senate bill provides that at least 6 members to be appointed upon the recommendation of the regional Fed Bank presidents.

15. The CFPA would enforce, among other statutes: House version Senate version • TILA • EFT Act • ECOA • FCRA • FDCPA • Gramm-Leach-Bliley’s privacy provisions • HMDA • RESPA • Truth in Savings All that plus: Fair Credit Billing Act Consumer Leasing Act HOEPA Which is seemingly included under the reference to TILA in the House bill

16. CFPA powers: • CFPA may bring actions “to prevent a person 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.” • CFPA can prescribe “regulations identifying as unlawful unfair, deceptive, or abusive acts or practices 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.”

17. What does this mean? • House bill defines unfair and deceptive as consistent with the standards set forth in the FTC Act and the FTC Policy Statements. • Senate bill does not define deceptive. • Senate bill limits the power to declare acts unfair using the FTC Act language, but adds: “In determining whether an act or practice is unfair, the Bureau may consider established public policies as evidence to be considered with all other evidence. Such public policy considerations may not serve as a primary basis for such determination.”

18. House bill limit on “abusive:” • The Director and the Agency may determine that an act or practice is abusive only if the Director finds that— (A) the act or practice is reasonably likely to result in a consumer’s inability to understand the terms and conditions of a financial product or service or to protect their own interests in selecting or using a financial product or service; and (B) the widespread use of the act or practice is reasonably likely to contribute to instability and greater risk in the financial system.

19. Senate bill limit on “abusive:” The Bureau shall have no authority under this section to declare an act or practice abusive in connection with the provision of a consumer financial product or service, unless the act or practice— (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.

20. House Bill Fair Dealing Regulation “The Director shall prescribe regulations imposing duties on a covered person, or an employee of a covered person, or an agent or independent contractor for a covered person, who deals or communicates directly with consumers in the provision of a consumer financial product or service, as the Director deems appropriate or necessary to ensure fair dealing with consumers.” The bill includes some considerations to take into account on this issue. This seems to extend to compensation –though the CFPA can’t impose a limit on the amount of compensation. This is enforceable by the CFPA or states only via administrative proceedings.

21. Arbitration provisions The CFPA/B may “prohibit or impose conditions or limitations on the use of any agreement” for a consumer financial product or service providing for “arbitration of any future dispute between the parties if the Director finds that such a prohibition or imposition of conditions or limitations are in the public interest and for the protection of consumers.”

22. Limitations on prepayment penalties added to TILA • Non-qualified mortgages may not have prepayment penalties. • Qualified mortgages may have prepayment penalties but only for first three years and amount is limited to 3% of balance in first year, 2% in second, and 1% in third. Lender must also offer borrower a mortgage without a prepayment penalty • House defines qualified mortgages as fixed-rate. Senate adds that they must be fully-amortizing and not permit negative amortization; APR and points and fees can’t exceed certain limits

23. Bills amend TILA re mortgage origination fees • “For any consumer credit transaction secured by real property or a dwelling, no loan originator shall receive from any person and no person shall pay to a loan originator, directly or indirectly, compensation that varies based on the terms of the loan (other than the amount of the principal).” • “For any consumer credit transaction secured by real property or a dwelling, a loan originator may not arrange for a consumer to finance through the rate any origination fee or cost except bona fide third party settlement charges not retained by the creditor or loan originator.”

24. Exception to origination fee provision: “[A] loan originator may arrange for a consumer to finance through the rate an origination fee or cost if--     ``(i) the loan originator does not receive any other compensation, directly or indirectly, from the consumer except the compensation that is financed through the rate;    ii [additional requirements that vary in the bills]

25. Bills require mortgage lenders to determine that borrower can repay the loan “No creditor may make a loan secured by real property or a dwelling unless the creditor, based on verified and documented information, determines that, at the time the loan is consummated, the consumer has a reasonable ability to repay the loan, according to its terms, and all applicable taxes, insurance, and assessments.”

26. Bills describe how to verify ability to repay • A determination under this subsection of a consumer's ability to repay a loan described in paragraph (1) shall include consideration of the consumer's credit history, current income, expected income the consumer is reasonably assured of receiving, current obligations, debt-to-income ratio or the residual income the consumer will have after paying non-mortgage debt and mortgage-related obligations, employment status, and other financial resources other than the consumer's equity in the dwelling or real property that secures repayment of the loan. • A creditor shall verify amounts of income or assets that such creditor relies on to determine repayment ability, including expected income or assets, by reviewing the consumer's Internal Revenue Service Form W-2, tax returns, payroll receipts, financial institution records, or other third-party documents that provide reasonably reliable evidence of the consumer's income or assets.

27. Senate bill provides a presumption that the consumer can repay, but the lender has to use the fully indexed rate to get the presumption Any creditor with respect to any consumer loan secured by real property or a dwelling is presumed to have complied with this subsection with respect to such loan if the creditor--     ``(A) verifies the consumer's ability to repay as provided in paragraphs (1), (2), (3), and (4); and     ``(B) determines the consumer's ability to repay using the maximum rate permitted under the loan during the first 5 years following consummation and a payment schedule that fully amortizes the loan and taking into account current obligations and all applicable taxes, insurance, and assessments.

28. The presumption of the ability to repay does not apply to negative amortization loans, loans with balloon payments, or loans with points and fees of more than 3% no presumption of compliance shall be applied to a loan--     ``(A) for which the regular periodic payments for the loan may--     ``(i) result in an increase of the principal balance; or     ``(ii) allow the consumer to defer repayment of principal.     ``(B) the terms of which result in a balloon payment, where a `balloon payment' is a scheduled payment that is more than twice as large as the average of earlier scheduled payments; or     ``(C) for which the total points and fees payable in connection with the loan exceed 3 percent of the total loan amount

29. Both bills provides for complaint database The database will collect and track information on consumer complaints about consumer financial services. Single toll-free number to make such complaints and route the calls to the appropriate agency or state.

30. Miscellaneous Senate Bill provisions Permits consumers to get credit scores without charge when they are denied credit or a job because of their credit score. Establishes student loan ombudsman for borrowers

31. Both bills provides for research unit. Research topics include: Consumer financial counseling and education (House bill only) Consumer awareness of disclosures Consumer awareness of costs, risks, and benefits of consumer financial products Experiences of underserved consumers

32. CFPA/B to have the power to issue regulations, orders, and guidance • In promulgating regulations, CFPA to consider the potential benefits and costs to consumers, covered persons, [House bill: and the Federal Government, including the potential reduction of consumers’ access to consumer financial products or services, resulting from such regulation]; • And consult with various entities [House bill: the Federal banking agencies, State bank supervisors, the Federal Trade Commission, or other Federal agencies, as appropriate, regarding the consistency of a proposed regulation with prudential, consumer protection, civil rights, market, or systemic objectives administered by such agencies or supervisors and whether such regulation will have an inconsistent effect on nondepository institution covered persons and depository institution covered persons].

33. Bills exclude from CFPA jurisdiction: • Credit by retailer or provider of services to enable purchase by consumer from that retailer or service provider who doesn’t sell debt to another. • Debt collection efforts by such retailer or service provider. • Those regulated by various other federal agencies. • Real estate brokers and agents. • Lawyers engaged in the practice of law (House excepts lawyers providing foreclosure prevention services; Senate excepts lawyers providing consumer financial products or services)

34. House Bill excludes from CFPA jurisdiction: Auto dealers but not to the extent that the dealer operates a line of business that involves the extension of retail credit or retail leases involving motor vehicles, and in which the dealer routinely extends credit or makes leases and doesn’t routinely assign the debt to a third party. Pawnbrokers

35. Limits under the bills CFPA/B can’t impose usury limits. House bill rejects “plain vanilla” requirement: “The Director may not prescribe any regulation, issue any order or guidance, or take any other action, including any enforcement action, the effect of which would be to require a covered person to offer to any consumer a specific financial product or service.”

36. Bills require CFPA/B, in promulgating regulations, to consult with House: Federal banking agencies, State bank supervisors, the Federal Trade Commission, or other Federal agencies, as appropriate, regarding the consistency of a proposed regulation with prudential, consumer protection, civil rights, market, or systemic objectives administered by such agencies or supervisors. Senate: Just Federal banking agencies and other Federal agencies, as appropriate.

37. Disclosure Rules The CFPA can promulgate disclosure regulations, including model disclosures. Any such model disclosures shall be a safe harbor. House: The CFPA can “issue exemptions, no action letters, and other guidance to promote compliance with disclosure requirements . . ..” Senate: CFPB can issue guidance in general. The CFPA/B is to propose a combined TILA-RESPA disclosure.

38. Enforcement provisions • CFPA to have subpoena power. • CFPA can conduct hearings. Appeals from CFPA determinations to go to Court of Appeals. • CFPA can issue temporary cease and desist order if the violation “is likely to cause the person to be insolvent or otherwise prejudice the interests of consumers before the completion of the proceedings.” Appeals of such orders go to federal district courts. • CFPA can bring actions in federal district court or state court for “all appropriate legal and equitable relief including a permanent or temporary injunction as permitted by law.” • State attorneys general can enforce the statute or regulations issued under the statute.

39. Enforcement provisions Remedies in court proceedings can include: (A) rescission or reformation of contracts; (B) refund of moneys or return of real property; (C) restitution; (D) disgorgement or compensation for unjust enrichment; (E) payment of damages; (F) public notification regarding the violation, including the costs of notification; (G) limits on the activities or functions of the person; and (H) civil money penalties.

40. Enforcement provisions • “Any person that violates, through any act or omission, any provision of this title, any enumerated consumer law, or any regulation prescribed or order issued by the Director” shall pay civil penalties of up to $5,000 a day for violation; up to $25,000 a day for reckless violations; and up to $1 million a day for knowing violations. Senate bill has similar language. • Mitigating factors include: (A) the size of financial resources and good faith of the person charged; (B) the gravity of the violation or failure to pay; (C) the severity of the risks to or losses of the consumer, which may take into account the number of products or services sold or provided; (D) the history of previous violations; and (E) such other matters as justice may require.

41. Exemptions for CFPA examinations as to insured depositary institutions or credit unions with assets of $10 billion or less • FDIC or NCUA to examine them for compliance with CFPA regs. • House: CFPA has discretion to include examiner on examination team. • Senate: CFPB may “include examiners on a sampling basis of the examinations” • House: The CFPA can recommend that the examining agency initiate an enforcement action. If the agency doesn’t within 120 days, the CFPA can bring an enforcement action. • House: The CFPA can also investigate complaints received via its consumer complaint system.

42. House Bill enforcement provisions No private right of action to enforce rights conferred by the statute (but existing private rights of action aren’t affected). Would some provisions be enforceable under state UDAP laws?

43. Preemption rules: • State laws inconsistent with the statute are preempted but state laws that give consumers more protection than the statute are not inconsistent. • For purposes of preemption, state consumer financial laws are defined as “a State law that does not directly or indirectly discriminate against national banks [savings associations] and that directly and specifically regulates the manner, content, or terms and conditions of any financial transaction . . . or any account related thereto, with respect to a consumer.” • State consumer financial laws that would discriminate against national banks or savings associations in comparison with state banks are preempted.

44. Preemption rules • House: A State consumer financial law is preempted if it “prevents, significantly interferes with, or materially impairs the ability of an institution chartered as a national bank [savings association] to engage in the business of banking.” • Senate: preempted if in accordance with the decision of the Supreme Court in Barnett Bank of Marion County, N.A. v. Nelson, Florida Insurance Commissioner, et al, 517 U.S. 25 (1996). • Both: “Any preemption determination under this subparagraph may be made by a court or by regulation or order of the Comptroller of the Currency [or OTS for thrifts] in accordance with applicable law, on a case-by-case basis.”

45. Preemption rules “When making case-by-case determination pursuant to this section that a State consumer financial law of another State has a substantively equivalent terms as one that the Comptroller [or OTS]is preempting, the Comptroller [or OTS] shall first consult with the Consumer Financial Protection Agency and shall take such Agency’s views into account when making the determination.”

46. Preemption rules “A court reviewing any determinations made by the Comptroller [or OTS]regarding preemption of a State law by this Act shall assess the validity of such determinations depending upon the thoroughness evident in the agency’s consideration, the validity of the agency’s reasoning, the consistency with other valid determinations made by the agency, and other factors which the court finds persuasive and relevant to its decision.”

47. Preemption rules • “No regulation or order of the Comptroller of the Currency [or OTS] prescribed under subsection (b)(1)(B) [finding under the House bill that a state consume financial protection law prevents, significantly interferes with, or materially impairs the ability of an institution chartered as a national bank to engage in the business of banking and under the Senate bill that preemption is in accordance with Barnett], shall be interpreted or applied so as to invalidate, or otherwise declare inapplicable to a national bank [savings association], the provision of the State consumer financial law unless substantial evidence, made on the record of the proceeding, supports the specific finding [House: that the provision prevents, significantly interferes with, or materially impairs the ability of a national bank; [savings association] to engage in the business of banking; Senate: that Barnett applies].”

48. House bill preemption rules • “Notwithstanding any other provision of law, the Comptroller of the Currency [OTS} may not prescribe a regulation or order pursuant to subsection (b)(1)(B) until the Comptroller of the Currency, after consultation with the Consumer Financial Protection Agency, makes a finding, in writing, that a Federal law provides a substantive standard, applicable to a national bank [savings association], which regulates the particular conduct, activity, or authority that is subject to such provision of the State consumer financial law.”

49. Bills tackle Waters case: “Notwithstanding any provision of this title, a State consumer financial law shall apply to a subsidiary or affiliate of a national bank [savings association] to the same extent that the State consumer financial law applies to any person, corporation, or other entity subject to such State law.”

50. Bills Codify Marquette Usury Exportation “No provision of this title shall be construed as altering or otherwise affecting the authority conferred by section 5197 of the Revised Statutes of the United States (12 U.S.C. 85) for the charging of interest by a national bank [savings association] at the rate allowed by the laws of the State, territory or district where the bank is located, including with respect to the meaning of ‘interest’ under such provision.”