On July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act). This alert is a brief summary of the scope of the authority of the new Bureau of Consumer Financial Protection (the Bureau) with respect to the financial products and services that it may regulate and the entities that will be subject to its jurisdiction. For financial services providers that have not been subject to extensive supervision and examination, the Dodd-Frank Act will present a sea change to their business environment.

The Dodd-Frank Act establishes the Bureau as an independent agency within the Federal Reserve Board. The Bureau will be headed by a Director nominated by the President and confirmed by the Senate. Although nominally a bureau within the Federal Reserve, the Dodd-Frank Act provides safeguards to facilitate the Bureau’s independence, such as preventing the Federal Reserve from intervening in the Bureau’s affairs or removing or directing Bureau employees. 

The sections of the Dodd-Frank Act relating to the establishment of the Bureau are effective upon the enactment.  However, the sections of the Dodd-Frank Act discussed in this Alert generally will be effective upon the transfer date. The Secretary of the Treasury will determine the transfer date, which will not be earlier than 180 days or later than 18 months from the date of enactment.

Authority to Prevent Unfair, Deceptive or Abusive Acts or Practices

The Bureau is authorized to issue rules for consumer protection that govern a wide range of financial institutions, including non-depository institutions, that offer consumer financial products or services.  It will also assume responsibility for interpreting and implementing the federal consumer protection and fair lending laws. Those include, among others, the Truth-in-Lending Act, Equal Credit Opportunity Act and the Real Estate Settlement Protection Act.  The Bureau will not take over responsibility for rule making or enforcement of the Community Reinvestment Act, which will remain with depository institution regulators. 

The Bureau will have the primary authority to enforce Federal consumer financial law and may initiate enforcement proceedings upon referral from a Federal agency that is authorized to enforce a Federal consumer financial law. The Bureau may also take any action authorized under the Dodd-Frank Act to prevent a covered person or service provider 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, or in the offering of a consumer financial product or service. Under the Dodd-Frank Act, the Bureau will have the authority to declare as unfair, deceptive, or abusive any act or practice that (i) materially interferes with the ability of a consumer to understand a term or condition of a consumer financial product or service or (ii) takes unreasonable advantage of a lack of understanding on the part of the consumer of the material risks, costs, or conditions of the product or service, the inability of the consumer to protect their interests in selecting or using a consumer financial product or service, or the reasonable reliance by the consumer on a covered person to act in the interests of the consumer. The Dodd-Frank Act’s definition of “abusive” is vague and, without the benefit of established precedent, as is the case with unfair and deceptive acts, may be construed broadly by the Bureau. 

In addition, the Bureau may prescribe rules to ensure that the features of any consumer financial product or service are fully, accurately, and effectively disclosed to consumers to allow them to understand their costs, benefits, and risks. In connection with such rule making, the Bureau must take into account “available evidence about consumer awareness, understanding of, and responses to disclosures or communications about the risks, costs, and benefits of consumer financial products or services.” The Bureau may also develop model disclosure forms, validated through consumer testing, the use of which will provide a safe harbor to be deemed in compliance with the disclosure requirements.

 

Scope of Covered Financial Services Providers

One of the objectives of the Bureau is to consolidate consumer financial protection functions currently handled by the Office of the Comptroller of the Currency, Office of Thrift Supervision, Federal Deposit Insurance Corporation, Federal Reserve, National Credit Union Administration, Department of Housing and Urban Development, and Federal Trade Commission.

The Bureau will have compliance examination and enforcement authority regarding insured banks, thrifts and credit unions with more than $10 billion in assets.  Smaller depository institutions, those with $10 billion or less in assets, will be subject to the Bureau’s rule-writing authority, and existing depository institution regulatory agencies will retain examination and enforcement authority for such institutions.  In addition, the Bureau’s examiners may participate in examinations along with the depository institution regulator on a “sampling basis.” The supervisory status of uninsured U.S. branches and agencies that offer consumer financial products is uncertain.  A plain reading of the Dodd-Frank Act suggests that the Bureau will have direct examination authority for all U.S. branches and agencies.

The Bureau will also have authority to regulate non-depository institutions that offer consumer financial products and services including, among others, all mortgage-related businesses, payday lenders, student lenders, debt collectors and consumer reporting agencies.  The regulation of non-depository institutions will also include any covered person who, based on complaints collected through the system provided for under the Dodd-Frank Act, the Bureau has reasonable cause to determine the covered person has engaged in conduct that poses risks to consumers. A covered non-depository institution may also include a larger participant of a market for other consumer financial products or services, as defined by rule. The language applying the Dodd-Frank Act to a “larger participant,” is sufficiently broad and may be interpreted to include participants in consumer financial product markets who do not actually offer consumer financial products or those participants who do not deal directly with consumer financial products. The Bureau’s authority also extends to a service provider for any non-depository institutions covered by the Dodd-Frank Act.

In connection with its regulation of non-depository institutions and non-depository institution service providers, the Bureau will have the authority to require reports, conduct examinations, require certain record-keeping requirements, prescribe other rules to ensure that such entities are legitimate entities and are able to perform their obligations to consumers and refer suspected violations of law, including tax noncompliance, to other agencies. For those non-depository institutions that are not engaged in any mortgage-related businesses, payday lending or student lending and are not a “larger participant” of a market for other consumer financial products or services or a service provider for any such entity, the Dodd-Frank Act contemplates the application of the reporting and examination requirements only if the Bureau determines that the covered person has engaged in conduct that poses risks to consumers.

The Bureau’s authority is limited by various exclusions provided for under the Dodd-Frank Act. Subject to certain limitations, the following persons and activities will be excluded from the jurisdiction of the Bureau: 

  • merchants, retailers and other sellers of non-financial goods or services;
  • real estate brokerage activities;
  • manufactured home retailers and modular home retailers; 
  • accountants and tax preparers;
  • attorneys; 
  • persons regulated by state insurance regulators;
  • employee benefit and compensation plans;
  • persons regulated by a state securities commissioner;
  • persons regulated by the Securities and Exchange Commission (SEC); 
  • persons regulated by the Commodity Futures Trading Commission;
  • persons regulated by the Farm Credit Administration;
  • activities relating to charitable contributions; and 
  • auto dealers.

    The statute establishes conditions that will apply to the availability of the excluded activities listed above. For example, the exclusion for merchants and retailers is subject to the condition that any such person is not engaged in offering or providing any consumer financial product or service, or is otherwise subject to any enumerated consumer law. Similarly, the exclusion for auto dealers is conditioned on the auto dealer not offering or extending credit to consumers, including operating a line of business which involves the extension of retail credit or retail leases involving motor vehicles. Accordingly, an entity that seeks to take advantage of an exclusion should review the applicable conditions carefully.

    Scope of Covered Financial Services and Products

    A covered person under the Dodd-Frank Act is any person that engages in offering or providing a consumer financial product or service. “Consumer” financial products and services include those financial products and services offered or provided for use primarily for personal, family or household purposes. The Dodd-Frank Act defines a “financial product and service” to include, but not limited to, the following:

    • extending, servicing, acquiring, purchasing, selling and brokering loans or other extensions of credit (other than solely extending commercial credit to a person who originates consumer credit transactions);
    • extending or brokering certain leases of personal or real property that are the functional equivalent of purchase finance arrangements; 
    • providing certain real estate settlement services except for performing appraisals of real estate or personal property;
    • engaging in deposit-taking activities, transmitting or exchanging funds, or otherwise acting as a custodian of funds or any financial instrument for use by or on behalf of a consumer;
    • selling, providing or issuing stored value or payment instruments and selling such instruments in certain circumstances;
    • providing check cashing, check collection, or check guaranty services; 
    • providing certain payments or other financial data processing products or services; 
    • providing certain financial advisory services other than those regulated by the SEC or state securities regulators;
    • providing credit counseling or debt management services;
    • collecting, analyzing, maintaining, or providing consumer report information or other account information subject to certain exceptions;
    • collecting debts related to any consumer financial product or service; and 
    • other financial products or services as may be defined by the Bureau, including a service permissible for a bank or financial holding company.

      The Dodd-Frank Act specifically excludes the business of insurance and electronic conduit services from the definition of consumer financial products and services. The “business of insurance” means the writing of insurance or the reinsuring of risks by an insurer, including all acts necessary to such writing or reinsuring and the activities relating to the writing of insurance or the reinsuring of risks conducted by persons who act as, or are, officers, directors, agents, or employees of insurers or who are other persons authorized to act on behalf of such persons.

      The creation of the Bureau represents a dramatic change for insured depository institutions, particularly those with $10 billion or more of assets, which will now have still another regulator to factor into its regulatory relations mix. A primary concern raised by the banking industry is that a dedicated consumer protection agency will not have sufficient appreciation for the safety and soundness implications of its actions. The Dodd-Frank Act contains various procedures designed to minimize that potential problem and it remains to be seen as to how much of a problem it will prove to be going forward.  However, depository institutions have long been subject to extensive regulation and supervision, including with respect to consumer protection laws. Consequently, the introduction of the Bureau is more a matter of who and how they are regulated with respect to such matters, not whether they are regulated.

      The stronger impact will likely be felt by non-depository financial services providers covered by the Dodd-Frank Act who, over time, may become subject to considerable additional regulatory burdens such as federal registration requirements, federal examinations, disclosure requirements and extensive new record-keeping and reporting requirements. The Dodd-Frank Act does not preempt state consumer protection laws except to the extent that they conflict.  Moreover, state laws providing greater protection are expressly preserved, so that non-depository financial services providers may have increased state law compliance burdens as well. Consequently, although much of the debate in Congress related to the Bureau involved its effect on the depository institutions industry, the greater impact may well be on non-depository providers.

      Please contact any member of Kilpatrick Stockton’s Financial Institutions Team concerning the scope of jurisdiction of the new Bureau and the timetable for implementation of the new protections for consumer financial services and products contained in Title X of the Dodd-Frank Act.

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