Several weeks ago, on June 17, 2009, the Obama Administration unveiled details of its proposal to reform financial regulation. The proposal, which has been highly publicized, recommends that Congress and regulatory agencies adopt a comprehensive series of changes that would increase the role of the federal government in almost every aspect of the financial services industry. For example, if adopted as proposed, the proposal would:
- Create several new federal agencies, offices, and councils, including a new Consumer Financial Protection Agency (CFPA), dedicated to policing consumer financial products and services
- Install the Federal Reserve as an overarching regulator for any type of financial firm identified as being systemically significant, giving it authority over certain entities that historically have been subjected to little or no oversight
- Impose heightened consolidated supervisory standards, including capital, liquidity, and prudential requirements, on all large interconnected financial firms
- Drastically scale back the preemption powers of federally chartered financial institutions
- Regulate the markets for over-the-counter (OTC) derivatives and impose requirements on the securitization of debt
- Require Securities and Exchange Commission (SEC) registration of advisers to hedge funds, venture capital funds, and other private investment funds
The first part of the proposal to be fleshed out was the proposed new CFPA through the release by the Administration on June 30 of proposed legislation to establish the agency. The CFPA is designed solely to regulate the offering of consumer financial products and services (except as to instruments regulated by the SEC or CFTC). Its proposed authority is very broad, with a proposed mandate to promulgate, interpret and enforce rules implementing all existing federal consumer financial services and fair lending laws. More importantly, its authority would extend not only to banks, thrifts and credit unions, but also to mortgage lenders, title insurers, money service businesses, marketers and issuers of prepaid cards or stored value, consumer reporting agencies, debt collectors, certain lessors, certain investment advisors, and those that engage in financial data processing. To do that, the proposed legislation transfers all of the authority over these products and services from the federal bank regulatory agencies and the FTC to the CFPA. While the FTC would retain some back up authority (as would the bank regulators) this will be a substantial change in the regulatory landscape.
Furthermore, the CFPA is proposed to:
- Obligate providers of financial products and intermediaries to ensure that disclosures are "reasonable" and disclose the risks and costs to consumers of any consumer product, in reasonable proportion to the benefits of the produc
- Set standards (including compensation standards) to prevent any person from engaging in any unfair, deceptive or abusive act or practice in connection with any consumer financial product or service transaction
- Prescribe rules, orders and guidance regarding sales practices (including manner, setting and circumstances) of any consumer financial product or service.
- Set standards for relatively simple, "plain vanilla" products, and require providers and intermediaries to offer them along with their other products.
- Restrict or ban mandatory arbitration clauses
- Enforce fair lending and other laws to ensure that underserved consumers have access to financial services
Also significant is how the proposed legislation would affect the preemption powers of federally chartered financial institutions. Under the proposal, states would have the ability to adopt consumer protection and disclosure laws more stringent than the federal laws administered by the CFPA and federal law specifically would not preempt those state law. Additionally, states would have examination and enforcement authority over federally chartered institutions with respect to state and federal consumer protection laws. The only federal law provisions that are essentially left unchanged are those that give financial institutions the ability to export interest rates from one state to another. The proposed law also does not impose any federal usury limit. Nevertheless, this proposal almost certainly will increase the cost of providing products and services to consumers. It also may undermine the ability to provide uniform financial products and services on a multistate basis, and reduce the appeal of a federal banking charter.
Because the proposal is so broad, and for the first time separates the supervision of banks from the compliance function, it has already attracted significant opposition. We believe, however, that given the continued public dissatisfaction with the bank bailouts, and the perception that banks were to blame for a large part of the crises, some form of this proposal to create a CFPA will be enacted. It would be advisable therefore to review the proposal and determine how it may affect your business and your compliance regime. Following the proposal through the Congressional process also will be important in the next several months.
