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Nutter Bank Report, Special Edition, Analysis of Treasury's Proposal to Establish Financial Protection Agency

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07.08.2009 | Legal Update

The U.S. Treasury Department last week delivered to Congress a 152-page draft bill, the Consumer Financial Protection Agency Act of 2009 (Act), that would establish the Consumer Financial Protection Agency as a new agency in the executive branch of the federal government to be responsible for protecting consumers in a wide range of financial transactions.

In general, the CFPA would assume all of the consumer protection responsibilities that the federal banking agencies now have, and would be required to write rules on specified matters while being permitted to write rules on a wide range of other matters. The new agency would have monitoring and a wide range of enforcement powers. In addition, state officials would be specifically authorized to enforce CFPA rules and, with certain exceptions, to apply state consumer protection laws to national banks and federal savings banks.

Among other measures, the proposed legislation would:

  • require banks and other financial services providers to make “balanced” communications to consumers of the potential benefits and risks of banking or financial transactions, while prominently disclosing significant risks and costs;
  • require the CFPA to write rules to ensure that banks and other financial services providers deal fairly with consumers, which may include restrictions on compensation practices;
  • require banks and other financial services providers to make available in electronic form to customers who are consumers information relating to banking and financial transactions with those customers including costs, charges and usage data;
  • require the CFPA to write more effective home mortgage disclosure rules unless the Federal Reserve and HUD do so first; and
  • permit, but not require, the CFPA to write rules requiring that banks and other financial services providers offer basic or “standard” consumer financial products before offering more complex ones.

1.   Scope and Coverage

The law would apply to any “covered person,” a term defined to include any person who engages directly or indirectly in a “financial activity” (as defined below), in connection with providing a “consumer financial product or service” (as defined below). The term “covered person” would include any bank, savings association or credit union, among other persons, but generally would not cover insurance companies, insurance agents or producers, securities firms including broker-dealers subject to SEC regulation, or commodities firms subject to CFTC regulation.

The proposed legislation defines “financial activity” to include, among other activities, accepting deposits, making loans, brokering or servicing loans, performing appraisals, providing check-guaranty services, providing or maintaining consumer report information, debt collection activities, providing real estate settlement services including title insurance, certain consumer leasing activities, certain investment advisory services (not subject to regulation by the CFTC or the SEC), financial advisory services, financial data processing, money transmitting, sale or issuance of stored value, acting as a money services business, and certain custodial activities. The CFPA would have the power to define other activities as financial activities, and thereby expand the scope of businesses that are covered persons, subject to certain exceptions.

The term “financial product or service” is defined to mean any product or service that, directly or indirectly, results from or is related to one or more financial activities, and the term “consumer financial product or service” means any financial product or service to be used by a consumer primarily for personal, family, or household purposes.

2.  Consumer Financial Protection Agency

As indicated, the CFPA would be established as a new agency in the executive branch of the federal government to be responsible for protecting consumers in a wide range of financial transactions including deposit and loan transactions.

  • Purposes

The CFPA’s mission would be to ensure that consumers “have, understand, and can use the information they need” to make responsible decisions about consumer financial products or services, that consumers are protected from “abuse, unfairness, deception, and discrimination,” that markets for consumer financial products or services “operate fairly and efficiently with ample room for sustainable growth and innovation,” and that traditionally underserved consumers and communities have access to financial services. In carrying out its functions, the CFPA would seek to promote “transparency, simplicity, fairness, accountability, and access in the market for consumer financial products or services.”

  • Governance

The CFPA would be governed by a five-member Board of Directors. Four would be appointed by the President, and would require Senate approval. Board members would be individuals who have “strong competencies and experiences related to consumer financial products or services.” The fifth member would be the Director of the National Bank Supervisor (proposed to replace the Office of the Comptroller of the Currency). From among the appointed Board members, the President would designate one member to serve as the Director, who would be the chief executive of the CFPA. Board members, including the Director of the CFPA, would each serve five-year terms.

  • Examinations and Reports

The CFPA would be authorized to examine, and require reports from, covered persons on a periodic basis for purposes of ensuring compliance with the requirements of applicable consumer protection laws.

  • Fees and Assessments on Covered Persons

The CFPA would be required to recover the amount of funds it spends annually through the collection of annual fees or assessments on covered persons. The CFPA would issue regulations to govern the collection of fees and assessments. The regulations would specify the basis of fees or assessments (such as the outstanding volume of consumer credit accounts, total assets under management, or consumer financial transactions), the amount and frequency of fees or assessments, and such other factors as the CFPA deems appropriate.

  • Civil Penalty Fund

The proposed legislation would establish in the Treasury a fund to be known as the “Consumer Financial Protection Agency Civil Penalty Fund.” If the CFPA obtains a civil penalty against any person in any judicial or administrative action, the CFPA would deposit the amount of any penalties collected into the Civil Penalty Fund. Amounts in the fund would be available to the CFPA for payments to victims of activities for which civil penalties have been imposed.

3.    Matters Required or Permitted to Be Covered in CFPA Rules

  •  In General

In writing rules, the CFPA would be required to consider the potential benefits and costs to consumers and covered persons, including the potential reduction of consumers’ access to consumer financial products or services resulting from rules, and consult with the federal banking agencies, or other federal agencies, as appropriate, regarding the consistency of a proposed rule with prudential, market, or systemic objectives administered by those agencies.

Nutter Notes:  The CFPA, by rule or order, could exempt any covered person or any consumer financial product or service or any class of covered persons or consumer financial products or services from any law or rule, as the CFPA deems necessary or appropriate.  In issuing an exemption by rule or order, the CFPA would be required to take into consideration the total assets of the covered person, the volume of transactions involving consumer financial products or services in which the covered person engages, the extent to which the covered person engages in one or more financial activities, and the extent to which existing laws or regulations which are applicable to the consumer financial product or service provide adequate protection.

  • Ensuring Fair Dealing

The CFPA would be required to issue rules imposing duties on covered persons and their employees, agents and independent contractors who deal or communicate directly with consumers in the provision of consumer financial products or services to ensure fair dealing with consumers. In issuing the rules, the CFPA would be required to consider whether the covered person, employee, agent, or independent contractor represents implicitly or explicitly that it is acting in the interest of the consumer with respect to any aspect of the transaction; whether the covered person, employee, agent, or independent contractor provides the consumer with advice with respect to any aspect of the transaction; whether the consumer’s reliance on any advice from the covered person, employee, agent, or independent contractor would be reasonable and justifiable under the circumstances; whether the benefits to consumers of imposing a particular duty would outweigh the costs; and any other factors the CFPA considers appropriate.

Nutter Notes:  The CFPA would be permitted to issue rules establishing duties regarding compensation practices applicable to covered persons and their employees, agents, and independent contractors who deal or communicate directly with consumers in the provision of consumer financial products or services for the purpose of promoting fair dealing with consumers. However, the CFPA could not prescribe a limit on the total dollar amount of compensation paid to any person.

  • Prohibiting Unfair, Deceptive or Abusive Practices

The CFPA would be authorized to issue rules identifying as unlawful certain unfair, deceptive, or abusive acts or practices in connection with any transaction with a consumer for a consumer financial product or service, and to take a variety of other actions to prevent a person from committing or engaging in an unfair, deceptive, or abusive act or practice in connection with any transaction with a consumer for a consumer financial product or service.

Nutter Notes:  The CFPA would have no authority to declare an act or practice unfair unless the CFPA has a reasonable basis to conclude that the act or practice causes or is likely to cause substantial injury to consumers which is not reasonably avoidable by consumers, and such substantial injury is not outweighed by countervailing benefits to consumers or to competition.

  • Balanced Disclosures and Communications

Subject to CFPA rules, covered persons would be required, with respect to disclosures or communications regarding any consumer financial product or service, to make or provide to consumers “balanced” communication of the benefits of the product or service with communication of significant risks and costs. Covered persons would also be required to prominently disclose the significant risks and costs, in reasonable proportion to the disclosure of the benefits, and communicate significant risks and costs in a clear, concise, and timely manner designed to promote a consumer’s awareness and understanding of the risks and costs, as well as a consumer’s ability to use the information to make financial decisions.

  • Sales Practices

The CFPA would be authorized to prescribe rules and issue orders and guidance regarding the manner, setting, and circumstances of sales of any consumer financial products or services to ensure that the risks, costs, and benefits of the products or services, both initially and over the term of the products or services, are fully and accurately represented to consumers.

  • Combined Mortgage Loan Disclosures

Within one year after the date that consumer protection responsibilities are transferred to the CFPA, the CFPA would be required to propose for public comment rules and model disclosures that combine the disclosures currently required under the Truth in Lending Act and the Real Estate Settlement Procedures Act into a single, integrated disclosure for mortgage loan transactions covered by those laws, unless the CFPA determines that any proposal issued by the Federal Reserve and HUD carries out the same purpose.

  • Standard Consumer Financial Products or Services

The CFPA would be permitted – but not required – to adopt rules or issue guidance requiring the offer of a “standard consumer financial product or service” at or before the time an “alternative consumer financial product or service” is offered to a consumer, including warnings to consumers about the heightened risks of alternative consumer financial products or services and providing consumers a meaningful opportunity to decline standard consumer financial products or services.

Nutter Notes:  In general, a “standard consumer financial product or service” is one that is or can be readily offered by covered persons that also offer alternative consumer financial products or services, is transparent to consumers in its terms and features, poses lower risks to consumers, facilitates comparisons with alternative consumer financial products or services, and contains the features or terms defined by the CFPA for the particular product or service. An “alternative consumer financial product or service” is a consumer financial product or service that is of the same type or class as a standard consumer financial product or service, but that contains different or additional terms, fees or features.

  • Pilot Disclosures

The CFPA would be required to establish standards and procedures for approval of pilot disclosures to be provided or made available by covered persons to consumers in connection with the provision of a consumer financial product or service. Pilot disclosures would be required to be limited in time and scope and reasonably designed to contribute materially to consumer awareness and understanding of disclosures or communications about the risks, costs, and benefits of consumer financial products or services. The CFPA’s procedures must require public disclosure of pilots, but the CFPA could limit disclosure to the extent necessary to encourage covered persons to conduct effective pilots.

  • Mandatory Arbitration

The CFPA would be authorized to issue rules prohibiting or imposing conditions or limitations on the use of agreements between a covered person and a consumer that require the consumer to arbitrate any future dispute between the parties arising under any consumer law if the CFPA finds that such prohibition, conditions, or limitations are in the public interest and for the protection of consumers.

  • Consumer Rights to Access Information

Subject to CFPA rules, and with certain exceptions, a covered person would be required to make available to a consumer information in the control or possession of the covered person concerning the consumer financial product or service that the consumer obtained from the covered person including information relating to any transaction, series of transactions, or to the consumer’s account, including costs, charges and usage data. The information would be required to be made available in an electronic form usable by consumers.

Nutter Notes:  The text of the proposed legislation is silent as to whether the information must be made available in any case, or only upon a request by a consumer. The words “made available in electronic form” suggest that making it available through a secure web site or providing it by e-mail would be satisfactory.

4.    State Law, State Enforcement and Preemption

  •  State Action to Enforce the Act and CFPA Regulations

The proposed legislation provides that any state attorney general may bring a civil action in the name of the state on behalf of individuals residing in the state in any federal district court or state court having jurisdiction over the defendant, to secure monetary or equitable relief for violation of any provision of the Act or any CFPA regulation. The proposed legislation provides that nothing in it should be construed to modify, limit or supersede the operation of any provision of any existing federal consumer protection law that relates to the authority of a state attorney general or state regulator to enforce the law.

Nutter Notes:  Before initiating any action in court or administrative proceeding against any covered person to enforce any provision of the Act or CFPA rule, a state attorney general or state regulator would be required to provide to the CFPA a copy of the complaint to be filed and written notice describing the action or proceeding. If prior notice is not practicable, the state attorney general or state regulator would be required to provide a copy of the complaint and notice to the CFPA immediately upon commencing the action or proceeding.

  • Visitorial Standards

The proposed legislation would permit any state attorney general to bring a court action to require a national bank or federal savings association to produce records relative to an investigation of violations of state or federal consumer laws, to enforce any applicable federal or state law, to the extent authorized by the law, or to seek relief and recover damages for residents of the state.

Nutter Notes:  The U.S. Supreme Court last week struck down a regulation of the Office of the Comptroller of the Currency that bars states from going to court to enforce state laws against national banks. In Cuomo vs. Clearing House Association, the Court held that the OCC exceeded its statutory authority when it crafted a regulation that bars states from “prosecuting enforcement actions” in court against national banks. At the same time, the Court held that a lower court applying the OCC’s preemption regulations properly enjoined the issuance of a subpoena by the New York State Attorney General to a national bank because such a subpoena, not in connection with a judicial enforcement action, would have amounted to an impermissible visitation by a state official.

  • Preemption Rules Clarified

The proposed legislation provides that, in general, state consumer protection laws, including laws relating to unfair or deceptive acts or practices, consumer fraud, and repossession, foreclosure, and collection, would apply to national banks and federal savings associations, as well as their subsidiaries and affiliates. Those state laws would not apply to national banks or federal savings associations, or their subsidiaries and affiliates, if they discriminate against them or are inconsistent with provisions of federal law, but only to the extent of the inconsistency. A state consumer law would not be inconsistent with federal law if the protection the state consumer law affords consumers is greater than the protection provided under federal law as determined by the CFPA.

Nutter Notes:  The proposed legislation provides no preemption shield for national banks and federal savings associations that acquire loans and other assets after they are originated. Specifically, the proposed legislation provides that state consumer law applicable to a transaction at the inception of the transaction may not be preempted under federal law solely because a national bank or federal savings bank subsequently acquires the asset or instrument that is the subject of the transaction.

5.    Data Collection

  • Collection of Deposit Account Data

The proposed legislation would require that, for each branch, automated teller machine, and other deposit taking facility, a financial institution maintain records of the number and dollar amounts of deposit accounts of customers. The customers’ addresses would be required to be geo-coded so that data is collected regarding the census tracts of the residence or business location of the customers.  In maintaining records on deposit accounts, the financial institution would be required to record whether the deposit account is for a “residential” or commercial customer.

Nutter Notes:  It is not clear in the draft legislation whether “residential” customer means any consumer or only those consumers who have mortgage loans with the institution. The following information would be required to be publicly disclosed on an annual basis: the address and census tract of each branch, automated teller machine, and other deposit taking facility, the type of deposit account, and data on the number and dollar amounts of the accounts, presented by census tract location of “residential” and commercial customers.

  • Collection of Small Business Loan Data

In the case of any application by a small business to a financial institution for credit, the financial institution would be required to inquire as to whether the business is a women- or minority-owned business, without regard to whether the application is received in person, by mail, telephone, electronic mail or other form of electronic transmission, or by any other means, and whether or not the application is in response to a solicitation by the financial institution.

Nutter Notes:  Where feasible, no loan underwriter or other officer or employee of a financial institution, or any affiliate of a financial institution, involved in making any determination concerning an application for credit would be permitted to have access to the collected information. If a financial institution determines that a loan underwriter or other officer or employee involved in making any determination concerning an application for credit should have access to the information, the financial institution would be required to provide notice to the applicant along with a related notice that the financial institution would be barred from discriminating on the basis of the information.

Nutter Bank Report

Nutter Bank Report is a monthly electronic publication of the Banking and Financial Services Group of the law firm of Nutter McClennen & Fish LLP. Chambers and Partners, the international law firm rating service, has ranked Nutter’s Banking and Financial Services practice among the top banking practices in the nation. The 2009 Chambers and Partners review says that a “real strength of this practice is its strong partners and . . . excellent team work.” Clients praised Nutter banking lawyers as “practical, efficient and smart.” Visit the U.S. rankings at ChambersandPartners.com. The Nutter Bank Report is edited by Matthew D. Hanaghan. Assistance in the preparation of this issue was provided by Lisa M. Jentzen. The information in this publication is not legal advice. For further information, contact:

Kenneth F. Ehrlich
kehrlich@nutter.com
Tel: (617) 439-2989

Michael K. Krebs
mkrebs@nutter.com
Tel: (617) 439-2288







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