From the Patton Boggs Financial Services Public Policy Practice Group
 

As the multi-year Dodd-Frank Act rulemaking phase of Financial Regulatory Reform begins, the Patton Boggs Financial Services Public Policy Practice Group is pleased to share with you a series of short discussions about the major decisions that Congress left to the regulators. The regulatory phase provides avenues for stakeholders to share their comments and concerns about proposed rules and to educate regulators on the impact of their potential rules.

The Patton Boggs Financial Services Public Policy Practice Group is well-positioned to effectively advocate on an array of substantive and policy issues that will come before the regulators. Please let us know if you have questions about this topic or other issues addressed in the financial regulatory reform legislation.

The Bureau of Consumer Financial Protection (Bureau), a new federal regulatory agency, was a cornerstone of President Obama’s financial regulatory reform proposal and it became one of the most controversial and hotly debated provisions in the Dodd-Frank Act. The Bureau’s charge is to become, with certain exceptions, the chief federal regulator for all consumer financial products and services in the United States with the authority to define financial products, proscribe certain conduct and enforce its regulations.

FIVE KEY QUESTIONS
That Congress Left to the New Bureau of Consumer Financial Protection

1. Is the Bureau’s rulemaking authority as broad as it seems?
   YES. The Bureau’s Director “may prescribe rules and issue orders or guidance, as may be necessary or appropriate to enable the Bureau to administer and carry out the purposes and objectives of the Federal consumer financial laws, and to prevent evasions thereof.” Simply put, the Bureau’s principal mission is to ensure “that all consumers have access to markets for consumer financial products and services and that those markets for financial consumer markets and services are fair, transparent, and competitive.” This broad mandate means that virtually any consumer financial product or service, or any person offering such product or service, is likely to come under scrutiny and, potentially, regulation, even if the legislation does not explicitly provide for it. This includes an array of products and services offered by banks, credit unions, mortgage lenders, pawn brokers and other lenders. The Bureau will have the authority to adopt rules defining the types of financial consumer products, services and entities it will regulate and which ones will be exempted.
    
2. Which products and services will the Bureau regulate?
   The Bureau’s oversight authority over financial products and services is broad, encompassing a number of categories. These categories go well beyond traditional deposit-taking activities in banks and credit unions and extend to any nondepository covered person, such as debt collection, check cashing and financial advisory services. The Bureau must adopt a complex set of rules and guidelines to effectuate this regulatory scheme and consult with the Federal Trade Commission (FTC) when appropriate. The legislation explicitly excludes the business of insurance and electronic conduit services from Bureau oversight.
    
3. What entities will the Bureau regulate and which entities will it exempt?
   In addition to large banks and credit unions, the Bureau’s authority extends to any nondepository covered person, which is broadly defined as anyone who engages in offering or providing a consumer financial service or product who:
   
   
   • “offers or provides origination, brokerage, or servicing of loans secured by real estate” for home mortgages or foreclosure relief;
   • provides private educational loans;
   • engages or is likely to engage in conduct posing a risk to consumers;
   • offers payday loans; or
   • “is a larger participant of a market for other consumer financial products as defined by rule . . .”

   The Bureau must adopt a rule in connection with this last category in consultation with the FTC and within one year of the yet-to-be determined date on which all financial consumer protection is fully vested in the Bureau. The Bureau will have to establish rules to facilitate its supervision of these entities, that could include requiring background checks on all principal offices, directors or key personnel to ensure that the entity is able to perform its obligations. The legislation also sets forth a number of specific exemptions from the Bureau’s oversight authority, such as persons regulated by the U.S. Securities and Exchange Commission, retailers, accountants and auto dealers.
   
   Additionally, the Bureau may adopt rules to exempt any class of covered persons, service providers or financial products from its jurisdiction as it finds “necessary or appropriate to carry out the purposes and objectives of this title.” In so doing, the Bureau must take the following factors into consideration: 1) the total assets of the class of covered persons under review; 2) the volume of transactions; and 3) the extent to which existing law protects consumers. While Congress provided the Bureau with this starting point, the weight that each of these, or other factors, will have in the rulemaking process remains largely within the Bureau’s discretion. The Bureau’s Director will inevitably play an important role in setting the course that the Bureau will take in exercising its exemptive authority.
    

4. What are unfair and abusive practices and how will the Bureau regulate them?
   The Bureau may, but is not required to, adopt rules making it unlawful for persons and entities subject to its authority to engage in any “unfair, deceptive, or abusive” act or practice in connection with the offering or provision of a consumer product or service. Unlike many federal agencies, the Bureau will have the authority to prosecute violations of its rules by, among other things, bringing administrative actions to obtain cease and desist orders or filing civil actions in U.S. District Courts. The standard for determining that an act or practice is unfair is subjective in that the Bureau must have “a reasonable basis to conclude” that: 1) an act or practice causes or is likely to cause substantial and reasonably unavoidable injury to consumers and 2) the substantial harm to consumers does not outweigh the benefits to consumers or competition. While the Bureau may consider “established public policies,” these policies may not be the primary basis for any decision. In determining that an act or practice is abusive, the Bureau must show that it “materially interferes” with the consumer’s ability to understand a term or condition of the product or service to the point that the transaction takes unreasonable advantage of the consumer’s “reasonable” reliance on the provider of the product or service to act in the interest of the consumer.
    
5. How will the Bureau coordinate its supervisory and enforcement authority over the very large banks, savings associations and credit unions?
   The Dodd-Frank Act grants the Bureau exclusive authority to require reports from, conduct examinations of, and enforce federal consumer laws against the nation's largest insured banks, savings associations and credit unions (those with assets in excess of $10 billion). The transfer of this authority from the prudential regulators (the FDIC and the NCUA) and state bank regulatory authorities to the Bureau ushers in a new regulatory regime for these “very large” institutions. To minimize the regulatory burden on these institutions, the legislation requires the Bureau to coordinate its rulemaking activities with the prudential regulators and state regulators. It is not clear, however, how this will work in practice. The Bureau will develop guidelines for the content of its required reports and use its discretion in determining what information it will require to effectively monitor these institutions and in what form the information must be presented.
   
   

DID YOU KNOW?

Several Other Interesting Facts About the Bureau of Consumer Financial Protection’s Regulatory Authority

1. Consumer interest rate caps. The Dodd-Frank Act expressly prohibits the Bureau from establishing a usury rate limit on any extension of credit to consumers.
    

2. Effective date of Bureau authority. The designated transfer date is the date upon which the Bureau is officially vested with its consumer protection authority. This date must be set jointly by the heads of a number of financial regulatory and consumer protection agencies (i.e., the Federal Reserve, FDIC and FTC) by September 19th. The date must then be published in the Federal Register and fall sometime between late January and July 2011.
    

3. Related Person liability: The Dodd-Frank Act extends liability for potentially illegal acts by a financial service provider to “any shareholder, consultant, joint venture partner, or other person” that the Bureau may by rule (or on a case-by-case basis) determine “materially participates in the conduct of affairs” of the service provider.
    

4. Interchange fee regulation. The provisions mandating regulation of interchange transaction fees are included in this title but the Bureau is not charged with developing or administering them. Instead, the Federal Reserve must adopt new rules by the end of April 2011 after evaluating whether the amount of any interchange fee is “reasonable and proportional to the costs incurred by the issuer with respect to the transaction.” Issuers with less than $10 billion in assets, debit and general use prepaid cards provided in connection with government administered payment programs, as well as certain reloadable prepaid cards that are not marketed as gift cards, are exempted.
   

ABOUT PATTON BOGGS

Widely-recognized as the nation’s number-one public policy firm, Patton Boggs is at the intersection of government and business. Our professionals are known for their skill in assessing how actions on Capitol Hill and the Executive Branch will affect companies on Main Street and Wall Street. Our experience, both broad and deep, extends to the legislative and regulatory issues that affect financial services businesses throughout the United States and the world—insight and “capitol intelligence” that is critical in today’s tumultuous global marketplace. Our knowledge and experience working both with (and within) various government agencies, enables us to seek an array of policy solutions, particularly when the client requires more than conventional resolution strategies.

For more information on this topic or other Financial Services Public Policy issues,
please contact:

Don Moorehead, Partner, Vice Chairman, Patton Boggs and Co-Chair, Private Capital and Investment Practice Group

Micah S. Green, Partner, Co-Chair Financial Services and Tax Practice
 

Jonathan Babu, Associate

Todd Cranford, Of Counsel

Eric Foster, Partner

Vincent Frillici, Senior Policy Advisor

Joshua Greene, Partner

Laurence E. Harris, Senior Counsel

Matthew Kulkin, Associate

Erin McGrain, Associate

Neil Potts, Associate

Travis Seegmiller, Associate

Lindsey Weber, Associate

Kirsten Wegner, Associate

 

 

www.pattonboggs.com

 

This information is not intended to constitute, and is not a substitute for, legal or other advice. You should consult appropriate counsel or other advisers, taking into account your relevant circumstances and issues. While not intended, this update may in part be construed as an advertisement under developing laws and rules.
 

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