Friday, September 25, 2009

Frank Circulates Draft Legislation on Consumer Financial Protection

House Financial Services Chair Barney Frank is circulating draft legislation establishing a new independent federal consumer financial protection agency with power to prohibit unfair and deceptive practices in connection with a consumer financial transaction for a product or service and to mandate disclosure to consumers of the costs, benefits, and risks associated with any financial product or service. Broadly, the Director of the new agency would have a legislative mandate to promote transparency, simplicity, fairness, accountability, and equal access in the market for consumer financial products or services.

The Consumer Financial Protection Agency Act (HR 3126) would establish the independent Consumer Financial Protection Agency, with a Director appointed by the President and subject to Senate confirmation. The Act also creates a Consumer Financial Protection Oversight Board composed of federal financial regulators to advise the Director on overall strategy and the consistency of regulation. The intent of the new CFPA is to give consumer protection an independent seat at the table in the federal financial regulatory system. The Act also creates a Consumer Advisory Board to advise the Director and provide information on emerging practices in the consumer financial products or services industry.

The draft is in line with the Obama Administration’s call for a single regulatory agency with the authority and accountability to make sure that consumer protection regulations are written fairly and enforced vigorously. The CFPA should reduce gaps in federal supervision and enforcement; improve coordination with the states; set higher standards for financial intermediaries; and promote consistent regulation of similar products.

The Act covers persons engaged in a financial activity in connection with the provision of a consumer financial product or service and service providers to such persons. The legislation grants the CFPA consolidated authority over the closely related functions of writing rules, supervising and examining institutions’ compliance, and administratively enforcing violations.

The legislation orders the creation of an CFPA unit to analyze and report on market developments for consumer financial products or services, including market areas of alternative products or services with high growth rates and risk. This unit must also examine consumer awareness and understanding of disclosures and communications regarding consumer financial products or services. Even if disclosures are fully tested and all communications are properly balanced, product complexity itself can lead consumers to make costly errors. The Administration believes that a careful regulatory approach can tilt the scales in favor of simpler, less risky products while preserving choice and innovation.

The Director must also establish a central database for collecting and tracking information on consumer complaints about financial products or services and the resolution of those complaints. In performing these functions, the Director must coordinate with the federal financial regulators and share data relating to the complaints.

The legislation specifically orders the Director to coordinate with the SEC and CFTC to promote consistent regulatory treatment of, and enforcement related to, consumer and investment products, services, and laws.

The Act imposes extensive reporting duties on the Director. For example, the Director must submit a report to the President and the appropriate congressional oversight committees at the beginning of each regular session of Congress. The report must list the significant regulations and orders adopted by the Director, as well as other significant initiatives he or she conducted; and any plans for future regulations or initiatives. The report must also contain an analysis of complaints about consumer financial products or services that the Agency collected in its complaints database during the preceding year.

The Act does not alter or affect the authority of the SEC to adopt rules, initiate enforcement proceedings, or take any other action with respect to a person regulated by the Commission. Moreover, the Director has enforcement powers with respect to a person regulated by the SEC. But the draft directs the SEC to consult and coordinate with the Director regarding any rulemaking, including any advance notice of proposed rulemaking, with respect to an investment product or service that is the same type of product as, or that competes directly with, a consumer financial product or service that is subject to the CFPA’s jurisdiction. There are similar limitations and coordination provisions in place for the CFTC.

In adopting disclosure regulations on the risks, costs, and benefits of financial products or services, the Director must take into account disclosure requirements under other laws in order to enhance consumer compliance and reduce regulatory burden. The draft allows the Agency, in its discretion, to provide model disclosures to facilitate compliance. If the CFPA does set out model disclosures, the legislation provides that any person complying with the model disclosures will per se be in compliance with the disclosure requirements.

The CFPA must also establish standards and procedures for approval of pilot disclosures to be provided to consumers in connection with the provision of a financial product or service.