On June 30, 2009 the Obama administration proposed the Consumer Financial Protection Agency Act of 2009 (“CFPA” or “Act”) as the cornerstone of its entire financial regulatory reform effort.1 Since then, both House and Senate sub-committees have considered legislation closely modeled after the President’s proposal.2 The House passed legislation to create a Consumer Financial Protection Agency and the Senate recently began its debate over the measure.3 Most observers expect the CFPA will pass, in one form or another, sometime next year.

Regulatory reform does not usually make front-page news. That may explain why the debate over the CFPA remains largely unnoticed by the general public. Lawyers outside the banking sector might also be forgiven for not paying attention, but they might soon regret that decision. This seemingly modest regulatory reform effort could (if passed) change not only how banks and other financial institutions operate, but also the rules and future legal liability for a surprising number of non-financial businesses that fall within the CFPA’s jurisdiction and enforcement powers. The new Agency’s powers include the authority to:

• ban products or services outright,
• mandate consumer disclosures,
• establish sales and marketing procedures and operational standards,
• create duties, including fiduciary duties,
• establish minimum requirements for consumer access to information,
• make acts or practices unlawful,
• cancel or rescind agreements,
• ban the use of mandatory arbitration clauses,
• sue for money damages, and more.

After briefly outlining the perceived regulatory shortcomings that proponents designed the CFPA to address, this article will detail the key provisions of the CFPA Act and the powerful new Agency it creates, including the Agency’s scope, general and specific authorities, enforcement powers, and use in civil litigation.

Reasons for Change
Regulation of consumer financial products and services is fragmented, overlapping, confusing, and ineffectual.4 Under the current system responsibility for protecting consumers from inappropriate financial products or services depends on the identity of the party offering the product or service, rather than the characteristics of the product or service. Thus, the regulator for a savings and loan (Office of Thrift Supervision) differs from the regulator assigned to supervise nationally chartered banks (Office of the Comptroller of the Currency). The current system arose by historical accident rather than by a well-conceived plan.5 At least six different federal agencies and scores of state agencies share responsibility for overseeing financial products and services offered to consumers.6 Congress and the courts’ use of expansive federal preemption have only exacerbated problems inherent in the current fractured regulatory system. Broad federal preemption of state consumer protections without replacement with equivalent new federal measures has created gaps in consumer coverage.7 According to supporters of the CFPA Act, those two factors spawned four structural deficiencies with the current system of consumer financial regulation.8

First, consumer protection is an “orphan mission” because no single agency sees consumer financial protection as its primary mission.9 As one critic put it, “the result is that because consumer protection is everyone’s responsibility, it becomes no one’s responsibility and accountability and performance suffer therewith.”10

Second, most federal banking agencies with consumer protection responsibility also have conflicting missions. Bank regulators naturally view bank safety and soundness as their primary job.11 Abusive, deceptive, and unfair consumer practices can be highly profitable. As a result bank regulators might view questionable banking practices less critically. When that happens consumer protection almost always loses out.12

Third, because no single agency has overall responsibility for consumer financial safety, no agency has the incentive to invest the substantial time and resources necessary to develop deep expertise in consumer protection.

Fourth, under the present system financial institutions can and do select their own regulators from overlapping state and federal agencies. This has created a “race to the bottom” as banks and other financial institutions “charter shop” for the agency with the weakest consumer protection regulations.13

The CFPA Act addresses three of these problems by creating a single federal agency with broad jurisdiction and authority focused solely on consumer financial protection. The CFPA addresses the fourth structural problem by adopting a novel, yet controversial approach to federal preemption that sets a “floor” of consumer protection rather than a “ceiling.”

The Agency
The CFPA Act establishes an independent umbrella federal agency known as the Consumer Financial Protection Agency (“Agency”). The Agency will be run by a single Director appointed by the President subject to the advice and consent of the Senate. Once approved the Director may only be removed for cause before the expiration of a five year term.14

Mandate and Objectives
The Agency is to “promote transparency, simplicity, fairness, accountability, and equal access in the market for consumer financial products and services.”15 The Director may exercise (note regulation is discretionary) all of the powers and enforcement authority granted under the Act to ensure that (1) consumers have, and use information they need to make responsible decisions; (2) consumers are protected from abuse, unfairness, deception, and discrimination; (3) markets operate fairly and efficiently; and (4) traditionally underserved communities receive equal access to financial services.16

Covered Persons
The CFPA Act applies to:

(A) Any person who engages directly or indirectly in a financial activity, in connection with the provision of a consumer financial product or service; or

(B) Any person who in connection with the provision of a consumer financial product or service, provides a material service to, or processes a transaction on behalf of a person described in... (A).17 (Emphasis added.)

The definition is intended to be extremely broad. Coverage depends on two questions. First, is the product or service used primarily for personal, family, or household purposes? The statute provides no guidance regarding the degree to which a product or service must be used for personal, family, or household purposes. Courts will have to draw this critical line.

Second, is the consumer product or service a “financial activity.” The Act provides better guidance on this key term, and it is exceedingly broad. Thirteen separate categories of products or services qualify as financial activities.18 The Act also contains a catch-all clause empowering the Director to determine that “any other activity” is a “financial activity” based on three factors set forth in the Act.19 Together, these terms implicate a huge range of consumer products and services.

Finally, a “Covered Person” need only have minimal connections to the financial activity. The Act applies to anyone who advertises, markets, solicits, sells, discloses, delivers, maintains or provides services in connection with a consumer financial product or service.20 Finally, for businesses that deal directly with consumers, the Act applies to the business and any “Related Persons” (broadly defined to include employees, agents, and in certain cases independent contractors).21

Exemptions
If read literally the scope of the Act is incredibly broad. For that reason, many groups have lobbied for exemptions from the Act. The list grows by the day. According to the latest statutory language,22 the following businesses are generally exempt from the Act:

• Financial/Investment Advisors so long as they are registered by the SEC or
• Commodity Futures Trading Commission.
• Traditional Insurance Businesses
• Automobile Dealers (but not under the Senate proposal by Chairman Dodd)
• Attorneys
• Accountants and Tax Preparerseal Estate Brokers and Agents
• Pension, 401(k) and 529 Plans
• Providers
• Merchants, Retailers and other Non-financial Businesses that extend credit directly to consumers for goods or services sold directly
• Ministerial Service Providers

General and Specific Authorities
The Agency will have broad jurisdiction, consolidating virtually all federal power related to consumer financial products and services.23 In addition to federal authority transferred from other agencies, the Director may also exercise rule-making authority and issue such rules and regulations as appropriate to fulfill the Agency’s mandate and objectives. The Act also grants additional “specific authorities” to the Director described below.

Power to Ban Unfair, Deceptive, or Abusive Acts or Practices
The Director possesses “organic” authority to issue rules, regulations, or even outright bans on unfair, deceptive or abusive consumer products or services.24 The Federal Trade Commission has the same authority and will retain and share that authority with the CFPA in the future.25 They must consult with the federal banking agencies concerning the “consistency of the proposed regulation with prudential, market, or systemic objectives administered by such agencies.”26

Disclosure Requirements
The Director may issue rules to insure “the timely, appropriate, and effective disclosure to consumers of the costs, benefits, and risks associated with any consumer financial product or service.”27 The Director must take into consideration disclosure requirements found in other laws in order to enhance compliance and reduce the burden on consumers. The Agency may develop model disclosures or issue guidance to covered persons regarding particular disclosures. The use of a model disclosure provided by the Agency will constitute per se compliance with the Act. Finally, within one year after the effective date of the Act, the Agency will prepare model-combined disclosures currently required pursuant to the Truth-in-Lending Act and the Real Estate Settlement Procedure Act, if needed.28

Sales and Marketing of Financial Products
The Agency may issue rules, orders, and guidance regarding how consumer financial products and services are marketed to consumers. Specifically, the Agency may issue regulations to make sure that the risks, costs, and benefits of various financial products and services are fully and accurately represented to consumers both at the time of acquisition and during the lifetime of the product or service at issue.29

Operational Standards to Deter and Detect Fraud
Subject to exceptions for entities subject to state and federal banking regulators, the Director can encourage states to adopt and enforce operational standards designed to allow businesses to deter and detect unfair, deceptive, abusive, fraudulent, or illegal transactions in the provision of consumer financial products or services.30

Duties
The Director may, (after considering various factors)31 impose duties, including fiduciary duties, upon any covered persons who deal or communicate directly with consumers so long as those duties are appropriate or necessary to ensure fair-dealing with consumers.32 The Director may also establish duties regarding compensation practices applicable to covered persons or their employees, agents, or independent contractors who deal or communicate directly with consumers. Only the Agency may enforce these duties and then only through an administrative proceeding.33 Attorneys are expressly excluded from this section.34

Consumer’s Right to Access Information
Covered persons must provide consumers with access to information in a usable electronic form regarding any transaction, series of transactions, or accounts, including costs, charges, and usage data within the control or possession of the covered person.35 The Agency will adopt standards to promote standardized formats for information. There are a number of exceptions including confidential commercial information, information necessary to prevent fraud or money laundering or to detect and report potentially unlawful conduct, or that is required to be kept confidential by law, or that cannot be retrieved in the ordinary course of business.

Unlawful Acts
The Act makes it unlawful for a person to advertise, market, offer, sell, enforce, or attempt to enforce, any term, agreement, change in terms, fee or charge in connection with a consumer financial product or service that is not in conformity with any regulations or orders issued by the Director.36

Enforcement
The Act provides the Director with ample tools and remedies to enforce the CFPA’s broad rule making authorities. Any covered person who violates the Agency’s rules or orders will be subject to a variety of stiff legal and equitable remedial powers, including but not limited to rescission or reformation of contracts, restitution/refund, money damages and penalties.37 The Director also has broad authority to investigate possible violations of the Act, including by demanding production of documents, written reports and answers to questions, and oral testimony from witnesses.38 If an investigation turns up criminal activity, the Director may refer any criminal matters to the Department of Justice for prosecution.39 The Director may institute administrative cease and desist proceedings to stop ongoing violations of its authority.40

Litigation
Within three years from the discovery of a violation of any rules or orders issued by the Agency, the Director may institute a civil action in state or federal court.41 Although the Act does not create a private cause of action for individual plaintiffs, it does authorize every state attorney general to bring a lawsuit in state or federal court for monetary or equitable damages for violations of the CFPA Act and any violation of a state’s consumer protection laws.42 The Act expressly disallows punitive damages, but does authorize the Director, a state attorney general, or state bank supervisor to recover the costs incurred in connection with prosecuting an action to enforce provisions of the CFPA.43 Finally, states can pursue CFPA claims by hiring private law firms, even pursuant to contingent fee agreements.44

Preemption
Finally, the CFPA only narrowly preempts state consumer laws. All of the Agency’s rules, regulations, orders, and guidance preempt only those state consumer laws that offer less protection to consumers. Thus, the CFPA will not cause consumers to lose important state law rights. The CFPA will provide a nationwide minimum standard, or “floor” protecting consumers, rather than a “ceiling” that takes away state consumer protections. Not surprisingly, the financial industry is working hard to remove this consumer protective view of preemption.45

Michael A. Lee is a partner at Susman Godfrey LLP, where he has served as lead counsel on behalf of both plaintiffs and defendants in claims involving antitrust, breach of fiduciary duty, consumer fraud, and other complex cases.

Endnotes
1. The Administration’s larger reform effort as well as rationale for the proposed CFPA is described in a 90-page document prepared by the Department of Treasury, Financial Regulatory Reform, known as the “President’s White Paper,” available at http://www.financialstability.gov/docs/regs/ FinalReport_web.pdf. 2.The House Financial Services Committee chaired by Barney Frank (D) Mass., approved H.R. 3126 as amended on October 22, 2009. At press, time the Senate was considering a nearly identical bill sponsored by Senate Banking Committee Chairman Chris Dodd (D) Ct., available at, http://banking.senate.gov/public/_files/AYO09D44_xml.pdf. Because the final version of CFPA legislation remains a moving target until presented to the President for his signature, the remainder of this article will reference H.R. 3126 as approved by the House Financial Services Committee, available at, http://www.house.gov/apps/list/speech/financialsvcs_dem/markup_100809.shtml. Readers should check the final language of the legislation if it passes for subsequent changes. 3. On December 11, 2009 the full House passed the CFPA Act, now part of H.R. 4173 in a party-line 223-202. The Bill also contained other pieces of the Administration’s financial regulatory reform efforts (Financial Stability Improvement Act, Corporate and Financial Institution Compensation Fairness Act, Over-the-Counter Derivatives Markets Act, Private Fund Investment Advisers Registration Act, Accountability and Transparency in Rating Agencies Act, Investor Protection Act). The CFPA Act starts at Title IV of H.R. 4173, available at http://thomas.loc.gov/cgi-bin/bdquery/z?d111:HR4173:/. 4. See President’s White Paper, page 2. 5. See FINANCIAL REGULATION: A Framework for Crafting and Assessing Proposals to Modernize the Outdated U.S. Financial Regulatory System, Statement of Gene L. Dodaro, Comptroller General of the United States, United States Government Accountability Office, GAO-09-314T, January 21, 2009, available at, GAO-09- http://www.gao.gov/new.items/d09314t.pdf . 6. See, FINANCIAL REGULATION. 7. Traditionally, responsibility for protecting consumers from deceptive or misleading financial products or services rested with individual states via anti-fraud and unfair deceptive litigation brought by state AGs on behalf of citizens of individual states against financial institutions located in their state. However, recent federal statutes created federal agencies or delegated federal authority specifically intended to supplant state consumer protections laws without replacing all of those protections with equivalent federal provisions. See, http://www.consumerlaw.org/issues/legislative/content/RestoretheRoleofStates091609.pdf. 8. See, Adam J. Levitin, “The Consumer Financial Protection Agency, PEW Financial Reform Project, Briefing Paper #3: The CFPA,” Aug 6, 2009, available at, http://www.pewfr.org/admin/task_force_reports/files/CFPA-FINAL.pdf. 9. See, Testimony of Lauren Saunders, National Consumer Law Center, To U.S. House of Representatives Subcommittee on Monetary Policy Committee on Financial Services at p. 32 (July 16, 2009),
available at, http://www.consumerlaw.org/issues/legislative/content/Testimony7-16-09.pdf 10. See, Adam J. Levitin (PEW Financial Reform Project Briefing Paper No. 3). 11. Briault, Clive, Revisiting the Rationale for a Single National Financial Services Regulator (February 2002). Financial Services Authority Occasional Paper No. 16. Available at SSRN: http://ssrn.com/abstract=427583 or DOI: 10.2139/ssrn.427583. 12. See, Testimony of Lauren Saunders, National Consumer Law Center, page 32. 13. Since there are multiple federal and state agencies with authorization to charter financial institutions, agencies must compete for business with other agencies. This creates a powerful incentive for regulators to lower standards. Although regulators usually will not admit this is a problem, it is indisputable that charter fee revenue often accounts for a majority of an agency’s budget. In a particularly egregious example just prior to the economic meltdown, two of the largest subprime mortgage originators in the United States–Washington Mutual and Countrywide–switched chartering agencies to become thrifts. Thrifts are regulated by the less stringent regulations of the Office of Thrift Supervision (“OTS”). The OTS even rewarded their loyalty by asserting broad federal preemptive authority over state consumer protection laws that the banks opposed. The OTS subsequently used its actions on their behalf as a marketing tool to attract other depository institutions. 14. CFPA Act § 112. H.R. 3126 calls for a governing structure with a single powerful director. Both the President’s proposal as well as the Senate version would have the Agency run by a board composed of four members appointed by the President and confirmed by the Senate. 15. H.R. 3126 § 121 (a). 16. Id. § 121. 17. Id. § 101(8)(A)-(B). 18. Id. § 101(18). 19. Id. § 101(18)(N). 20. Id. § 101(29). 21. Id. § 101(30). 22. See the amendments to H.R. 3126 (note 2 above) for the latest language regarding exemptions from the Act. 23. While that is an impressive list of authority, the Director and Agency will be subject to significant limitations. The CFPA Act does not create a single new cause of action; prohibit or punish any currently available financial practices, products or services; impose usury caps; and allow for the recovery of punitive damages for violations of the Act. In addition the CFPA Act leaves all future rulemaking to future regulators of the new Agency. 24. H.R. 3126 § 131. 25. 15 U.S.C. § 57a. Presumably, the CFPA will focus on consumer products and services while the FTC regulates other products or services within
its jurisdiction. 26. H.R. 3126 § 131(D). 27. Id.§ 132(a). 28. Id. § 132(d). 29. Id. § 133. 30. Id. § 135(A). 31. The Director must consider the following factors in prescribing such duties: (1) whether the covered person explicitly or implicitly represents that they are acting in the best interest of the consumer; (2) whether the covered person provides advice to the consumer; (3) the consumer’s justifiable reliance under the circumstances; (4) the benefits to the consumer from imposing the duty outweigh the cost; and (5) any other factor the Director deems appropriate. 32. H.R. 3126 § 136(a)(1). 33. Id. § 136(b)(2). 34. Id. § 136(c). 35. Id. § 137. 36. Id. § 139. 37. Id. § 155. 38. Id. § 152 (c). 39. Id. § 156. 40. Id. § 153 (b). 41. Id. § 154 (a). 42. Id. § 142. 43. Id. § 155 (b). Indeed 24 state attorneys general sent a letter to the President strongly supporting the formation of the CFPA. See, http://www.responsiblelending.org/mortgage-lending/policy-legislation/states/2009-state-ags-cfpa-sign-on-letter-aug-17.pdf. 44. The Chamber of Commerce used this possibility to stir up opposition to the measure. See, http://www.chamber post.com/2009/09/state-attorneys-general-and-the-cfpa.html. “While the Chamber has a number of serious concerns about the proposed Consumer Financial Protection Act, not least among them is the probability of increased litigation from some state attorneys general, who, with new federal authority to enforce the CFPA, will be hiring private plaintiffs’ lawyers on contingency fee contracts.” 45. During the mark-up to H.R. 3126 the CFPA opponents partially succeeded in expanding the preemptive scope of the CFPA to the extent that enforcement of state consumer protection laws prevent or significantly interfere with the operation of certain federally insured banks. See the Watt/Moore amendment to H.R. 3126, available at, http://www.house.gov/apps/list/speech/financialsvcs_dem/cfpa_wattandmoore101509.073.pdf. The Senate bill attempts to regain ground lost during the House markup and retains the original narrow preemptive scope proposed by the President.