Review and Analysis of Administration Proposal to Create a Consumer Financial Protection Agency

By W. Bernard Mason

Proposal
A major piece of President Obama's financial regulatory reform plan is the proposed creation of a new, separate federal agency to "protect consumers of credit, savings, payment, and other consumer financial products and services, and to regulate providers of such products and services". The Administration proposes that this entity should be independent "with stable, robust funding". This agency would have sole rule-making authority for consumer financial protection statutes. It would have supervisory and enforcement authority and jurisdiction over "insured depositories and the range of other firms not previously subject to comprehensive federal supervision". Under this proposal, the agency's rules would serve as a "floor, not a ceiling", permitting the states to adopt and enforce stricter laws, and it would require the agency to coordinate enforcement efforts with the states.

As envisioned in the Administration's proposal, the Consumer Financial Protection Agency (CFPA) would be overseen by a board representing "a diverse set of viewpoints and experiences", with at least one member being the "head of a prudential regulator". Funding is proposed to come "in part from fees assessed on entities and transactions across the financial sector, including bank and non-bank institutions and other providers of covered products and services".
The proposal would authorize this agency to require that all disclosures and communications with consumers be reasonable, balanced, and clear and conspicuous in their identification of costs, penalties, and risks. The agency would be authorized to define standards for "plain vanilla" products that are simpler and have straightforward pricing, and would be further authorized to require all providers of these services to offer these services prominently, alongside the other products they choose to offer. Where efforts to improve transparency and simplicity prove inadequate to prevent unfair treatment and abuse, the agency would be authorized to place restrictions on product terms and provider practices. The agency would be authorized to impose appropriate "duties of care" on financial intermediaries. The agency would be responsible for enforcing fair lending laws and the Community Reinvestment Act.

The Administration's proposal would require the CFPA to consider the costs to consumers of existing or new regulations, including any reduction in consumers' access to financial services, as well as the benefits. It would also require the CFPA to review regulations periodically to assess whether they should be strengthened, adjusted, or scaled back. The CFPA would also be required to consult with other federal regulators to promote consistency with prudential, market, and systemic objectives.The CFPA would assume from the federal prudential regulators all responsibilities for supervision of compliance with consumer regulations. The CFPA's jurisdiction would extend to bank affiliates that are not currently supervised by a federal regulator. The CFPA would also have supervisory and enforcement authority over nonbanking institutions, although the states would be viewed as the first line of defense. The CFPA would have the full range of supervisory authorities over nonbanking institutions, including supervision, information collection and on-site examination.The Administration proposes that federally chartered institutions be subject to nondiscriminatory state consumer protection and civil rights laws to the same extent as other financial institutions. The states would be able to enforce its laws with respect to federally chartered institutions, in coordination with prudential supervisors.

Issues and Obstacles
The first issue to be addressed and settled is whether separation of consumer protection and safety and soundness supervision is a more desirable and effective structure. Many argue that the supervision of bank operations cannot be separated from regulation of the products and services they provide. Federal Reserve Chairman Bernanke, FDIC Chairman Bair, and Comptroller of the Currency Dugan have all publicly stated this view. Supervision by two separate agencies, with differing missions, could put institutions in conflicting positions. Further, adverse observations in one discipline often point to problems in the other; separating these functions could make problem resolution more difficult and less timely. Additionally, creation of another government agency will add further financial burden to the consumer, the service provider, and the taxpayer. A further argument presented is the fear that a single agency focused on consumer protection will stifle innovation in the provision of financial services. Additionally, opponents of the proposal argue that the CFPA would place undue burden on small institutions. Two further arguments have been presented, neither possessing adequate support: (1) the safety and soundness regulators already possess the authority proposed for the CFPA; and, (2) the CFPA would be a redundant layer of bureaucracy. The Administration proposal addresses both of these objections by citing the failure of the current regulatory regime to fully utilize existing authority and by explaining that this action would consolidate and streamline existing consumer protection authority, not duplicate it.

This cost of operation represents a separate issue. If a separate agency were to be created, how would its operations be funded? The Administration calls for a "stable" funding source. Appropriation (the method put forth in H.R. 1705 proposing creation of a Financial Products Safety Commission) could be subject to political manipulation, and would be a further burden on all taxpayers. Some have proposed a fee-based revenue system. This could be either a simple assessment based upon the number of covered accounts or products currently maintained by the service provider, or it could be a transaction-based fee assessed each time a covered product is "sold" or used. Filing fees have been suggested, as well as priced services such as charges for compliance examinations. These fees would be less subject to manipulation, but would present other weaknesses. Assessments or user fees provide regulated entities with leverage over the agency budget. Transaction-based fees can be volatile.

If a new consumer agency were created, remaining issues would be the scope of its jurisdiction; i.e., the entities and products to be covered. One controversial area is the provision of insurance products. A suggestion has been made to include within the CFPA's authority those insurance products that are central or ancillary to credit transactions, such as credit, title, and mortgage insurance. This would provide the agency with jurisdiction over the entire credit transaction. Others argue that the states have effectively regulated the insurance industry and it should be completely excluded from consideration in this proposal, just as investment products under SEC regulation have been. A further argument is one of basic fairness if some products, such as insurance, investments and money market funds, are excluded while banking products are subjected to greater scrutiny.

Another issue will be the scope of the agency's mandate. Disagreement exists as to whether the CFPA should have the authority to restrict or prevent the offering of specific products, or whether it should merely ensure that adequate disclosure of products is achieved. Should the CFPA mandate the offering of "plain vanilla" products, or merely provide a regulatory safe harbor for offering them? Additional resistance exists regarding the concept of setting a federal "floor" on consumer protection, opening the door to increased state supervision and the prospect of a "hodge-podge" of regulations to be addressed by multi-state operators. It also reverses the concept of federal preemption that has particularly consumed the legal staff of the OCC for many years.

A separate concern over CFPA mission and mandate is the issue of CRA review and administration. While the proposal suggests CFPA will have sole authority over CRA, some argue that CRA and safety and soundness are intertwined - having credit and investment being promoted by an entity with no responsibility for safety and soundness could prove to be an unworkable situation. CRA explicitly states that the affirmative obligation to serve is to be exercised "consistent with safe and sound operation". Further, support for community economic development is not a consumer protection issue. Also, the enforcement mechanism for CRA - consideration of the CRA evaluation at the time of a merger, acquisition, etc. - must remain with the prudential supervisor.Clearly, there are issues presented in the Administration's proposal that must be addressed whether a new agency is created or whether consumer protection remains with one or more existing prudential regulators. The concept of regulating products, not providers, would be a departure from past practice. It would introduce the federal regulatory scheme into previously state-regulated or non-regulated entities. Conversely, it would statutorily mandate state regulation and enforcement of consumer protection matters as an "add-on" to federal oversight. It would give a federal imprimatur to certain "plain vanilla" products (perhaps mandate their usage and perhaps require pre-approval of "riskier" products) and potentially introduce a hierarchy of regulatory oversight depending upon the types of products offered by providers. The proposal introduces the possibility of the federal government restricting or banning certain products or dictating their structure. It proposes to oversee the communication occurring between customer and provider.

House Financial Services Committee Chairman Barney Frank has stated that final mark-up of a House bill, addressing the consumer protection aspect of the Administration's proposal, will be completed in July.

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W. Bernard Mason is the Regulatory Relations Liaison for The Risk Management Association. He may be contacted at bmason@rmahq.org.