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Member Alert - Consumer Financial Protection Agency (CFPA)

Overview

June 17th – The Obama Administration released a regulatory reform white paper.
June 30th – The Obama Administration proposed legislative text to create a Consumer Financial Protection Agency as the first step in its proposed regulatory reform process.
July 9th – House Financial Services Committee Chairman Barney Frank (D-MA) introduced a bill (H.R. 3126) that closely tracks the Obama draft.

Timing

The Obama Administration considers the CFPA a high priority.
Multiple congressional hearings have been held / scheduled throughout July to consider the proposed agency.
Frank had originally hoped to have his bill reported out of his committee before the August congressional recess, but in response to mounting external and internal pressure, he has agreed to postpone marking up the bill until September.
Senate Banking Committee Chairman Chris Dodd (D-CT) has promised to take up the proposal in the fall once health care reform is completed.
Although Frank and Dodd had both promised to have something on the President’s desk before the end of the year, consideration of the proposal could slip into next year.

CFPA Summary (based on the H.R. 3126)

Will debt buyers be covered by the proposed CFPA?

Yes. The CFPA would be given responsibility over any banking or financial institutions engaged “directly or indirectly” in a financial activity. A “financial activity” is defined to expressly include “acquiring, brokering or servicing loans or other extensions of credit”, as well as “the collection of a debt related to any consumer financial product or service”. Further, the CFPA is expressly charged with regulating activity under various specifically enumerated statutes, one of which is the FDCPA.

How will the CFPA be organized?

The CFPA would be organized as a typical, independent, regulatory agency with five commissioners appointed by the President and confirmed by the Senate for staggered five year terms. One of these commissioners would be from the agency responsible for chartering and regulating banks. There are, however, two important differences:

There would be no limit on the number of commissioners from any one party, which is in contrast to the FTC and other independent agencies which have no more than three commissioners from any one party.

The CFPA could collect fees directly from covered persons (such as DBA members) to cover the amounts expended by the CFPA subject to rules the CFPA would be required to prescribe to govern any annual fee assessments and collections. However, the CFPA is also authorized to receive a “such sums as necessary” direct appropriation from the Congress.

Will the Federal Trade Commission continue to have jurisdiction over debt buyers?

Only to an extent. The CFPA will have primary authority over the FDCPA, but the FTC would retain so-called “backstop” authority. What this apparently means is that the FTC would be limited, with respect to debt buyers, debt collectors and all other covered entities, to proposing enforcement action to the CFPA. If the CFPA fails to act on the FTC’s proposal within 120 days, the FTC would be able to institute its own action.

What powers will the CFPA have over the debt industry?

Administrative Enforcement Authority. The CFPA would have administrative enforcement authority, including subpoenas (CIDs) and other discovery tools, adjudicated hearings, and cease and desist authority.

Civil Penalty Authority. The CFPA would have civil penalty litigation authority, in its own name, with fines of $5,000 per day, per violation for a Final Order or “condition”; $25,000 per day for a “reckless” violation; and up to $1,000,000 per day for knowing violations. The CFPAA includes some mitigating factors that the CFPA and/or the court would be required to take into account before imposing such fines.

APA Rulemaking Authority. The CFPA would be given APA rulemaking authority. The CFPA would be able to exercise that rulemaking authority with respect to any statute for which it has responsibility, including the FDCPA, as well as to address any other unfair, deceptive or “abusive” acts or practices.

Examination Authority. The CFPA would have examination authority to inspect the books and records of the entities which the CFPA would regulate.

Condition Reports. The CFPA would be able to require reports regarding the “financial condition” of covered persons for purposes of assessing the entity’s ability to meet its obligations to consumers.

Research Powers. The CFPA would have comprehensive research powers to gather and compile information regarding covered organizations and their business conduct and practices, even if the CFPA has not launched an investigation.

Victims’ Relief Fund. The CFPA would be authorized to establish a victims’ relief fund from fees and assessments, to be available for disbursement to consumers who are “victimized” by violations of consumer protection laws.

Arbitration Clauses. The CFPA is authorized, by rule, to restrict the use of mandatory arbitration clauses.

Regulation of Sales Practices. The CFPA is expressly tasked with reviewing and regulating advertising, consumer notices and disclosures, operational standards and other sales practices.

“Plain Vanilla” Offerings. The CFPA would be required to define “standard offerings” (“plain vanilla” offerings) for various financial products and services as well as publish rules for disclosure of the differences between these offerings and “alternative products” where those are offered by a company.

Compensation. The CFPA would be able to conduct rulemaking regarding the metrics of compensation for those employees who communicate directly with a consumer regarding a financial product or service. Brokers or salesman have been identified as examples of such employees. The CFPA would not be able to set specific limits on the compensation for these employees but could prescribe rules for commissions and other types of compensation standards.

Annual Assessments. As noted earlier, the CFPA would be required to obtain an annual assessment from all entities regulated by the CFPA to cover the CFPA’s annual expenses.