The Obama Administration's draft legislation for the Consumer Financial Protection Agency Act of 2009 was sent to the Congress on June 30, 2009. The proposed legislation would make sweeping changes to the way consumer financial products and services are regulated. The legislation would establish the Consumer Financial Protection Agency (the “Agency”), whose mission would be “to promote transparency, simplicity, fairness, accountability, and access in the market for consumer financial products or services.” As noted in our memo on regulatory restructuring, A New Foundation for Financial Regulation?, the Agency would be vested “with vast new powers delineated in such a way that future jurisdictional turf wars are inevitable.”
Scope of the Agency's Powers
The proposed legislation would authorize the Agency to regulate “consumer financial products or services,” defined as “any financial product or service to be used by a consumer primarily for personal, family or household purposes.” This is a vague and extraordinarily broad mandate, and will likely be the subject of intense debate during the coming months.
The legislation would provide the Agency with broad authority to issue rules to ensure consumer protection. This authority would include prescribing rules regarding disclosures, sales practices, minimum operational standards, and requirements to offer standard products and services. For example, the Agency would be authorized to prohibit pre-dispute arbitration, propose model mortgage loan disclosure language, and require disclosure allowing consumers to compare financial products or services.
The proposed Agency would be headed by a five-member board, which would include the Director of the National Bank Supervisor (the head of a proposed federal agency formed by the merger of the OCC and OTS) and four members appointed by the President with the advice and consent of the Senate. One of the four appointed board members would be designated by the President to serve as the Director of the Agency. Board members, with the exception of the Director of the National Bank Supervisor, would serve staggered five-year terms. This structure is similar, but not identical, to an “independent” commission structure (e.g., the Securities and Exchange Commission and the Federal Trade Commission). The proposed legislation suggests, although it is far from clear, that the Director of the Agency would be able to operate as a chief executive, including acting alone in accordance with authority delegated by the Agency. The legislation also provides the Agency with the powers to organize itself and to appoint personnel to be reassigned from several existing banking agencies. The proposed legislation would also create a Consumer Advisory Board, appointed by the Agency, which would include experts in financial services, community development and consumer financial products or services. The Consumer Advisory Board would be charged with providing the Agency with information on emerging practices in the consumer financial products or services industry.
The Agency would be authorized to collect fees from the providers of financial products and services it regulates, and would establish a Victims' Relief Fund funded by civil fines and penalties collected through enforcement proceedings.
Information Gathering, Examination and Enforcement Powers
The proposed legislation would grant the Agency broad authority to collect information, conduct investigations and bring enforcement proceedings. The Agency would also be empowered to require written reports from regulated entities to ensure compliance with consumer protection laws and rules adopted pursuant to the proposed legislation. The Agency would be authorized to issue subpoenas for the production of documents and testimony, and to issue civil investigative demands for the production of documents, written reports or answers to questions, and oral testimony. Information gathered by the Agency could be widely shared with other agencies, the states and the Congress. The legislation explicitly provides that no rules governing the confidentiality of materials provided to the Agency shall prevent disclosure to Congress.
The proposed legislation would authorize the Agency to bring administrative proceedings. It would also be empowered to bring enforcement actions in federal district courts seeking a wide range of sanctions, including injunctions, penalties, rescission, refunds, restitution, compensation for unjust enrichment, and limitations on activities.
Power to the States
Throughout the proposed legislation, the role of state law enforcement with respect to consumer financial products is featured as a recurring theme. An entire Subtitle in the Act is devoted to the preservation of state law. The proposed legislation contemplates that federal standards would act as a floor, not a ceiling, and explicitly encourages states to enact stricter laws. The legislation provides that any state consumer law of general application would apply to national banks, and that state attorneys general would be authorized to bring actions in federal courts to enforce federal laws. The authority of states in these areas under existing law is not clear.
It is difficult to predict with any certainty the exact form of any final legislation. Davis Polk is monitoring developments with respect to the Consumer Financial Protection Agency and will issue additional newsflashes from time to time.