Bankruptcy

A Primer on the Consumer Financial Protection Agency

By Katie Porter

 With a financial reform billpassed in both the Senate and the House, it seems that a Consumer Financial Protection Agency is going to become a reality. It's interesting to look back at the original development of the idea and then see where we are now--and of course opening up comments for speculation on what the final agency will, and should, look like. If nothing else, the evolution of the names for the agency have been interesting--and remain unsettled! (It's a "Bureau" in the Senate bill, and an "Agency" in the House bill). For simplicity here, I call it the CFPA.

In 2007, Elizabeth Warren wrote a piece in the journal, Democracy, called Unsafe at Any Rate. At 9 pages long, it's well worth reading. It's a good reminder of the core principles underlying the need for such an agency and it underscores how a metaphor, exploding toasters are like credit cards, can help an academic idea take hold in the policy world. Prof. Warren later co-authored a full-length law review article with Prof. Oren Bar-Gill called Making Credit Safer, which among other things describes in more detail some of the behavioral economics research that supports the need for such an agency.

Now, in 2010, three years later, a consumer financial protection agency is part of both the House and Senateversions of the financial reform bill. Prof. Jeff Sovern, an expert in consumer law, has prepared a very helpful Powerpoint slideshow that highlights key differences in the bills. Here are some of the key differences:

1) Structure and Leadership: The House bill proposes a Director for the first 30 months of the bill, to be succeeded by a Commission of 5 members. The Director would have "strong competencies and experienced related to consumer financial protection." The Senate Bill would be headed by a Director only, with no requirement on that person's background. All people would be appointed by the President and confirmed by the Senate.

2) Autonomy: The House bill envisions a free-standing agency. The Senate bill has the CFPA housed in the Fed. While the Senate bill prohibits the Federal Reserve Board of Governors from intervening, Pat McCoy has previously explained on Credit Slips that the bill proposes a Financial Stability Oversight Council made up of banking regulators who could set aside regulations of the CFPA by a two-thirds vote. The House bill establishes a similar "Board" of banking regulators but doesn't seem to give it override power. Both bills would also establish a Consumer Advisory Board to consist of members who represent industry and consumers.

3) Mission: Both statutes put the CFPA in charge of the full alphabet soup of consumer laws, including not just the Truth in Lending act, but also RESPA, ECOA, FCRA, FDCPA, HMDA, etc. Since many of these laws don't have much substantive bite, at least as previously interpreted and enforced, the real action may be the new powers given to the CFPA. The bills allow the CFPA to regulate or enforce against "unfair, deceptive, or abusive acts." The bills then define those terms in somewhat different ways, which could prove important as the CFPA tests its boundaries.

4) Enforcement: The CFPA would have subpoena power, could conduct hearings (with appeals to go to the Courts of Appeals), issue temporary cease and desist orders, and bring actions in federal court for "all appropriate legal and equitable relief." The latter seems to include things like rescission of contracts, refunds, payment of damages, and civil penalties.

5) My favorite part--the Research unit! Both bills provide for the creation of research units to study topics including consumer awareness of disclosure, consumer awareness of costs, risks, and benefits of consumer financial products, and experiences of underserved consumers. The industry obviously has some of this data and it would be a tremendous advance to put that information in the hands of lawmakers.

There are lots more details to these bills, including some substantive provisions on mortgages and preemption rules, but I'll stop for now. Comments welcome on what the reconciliation process will--and should--bring about for the final shape of the CFPA.

Full post as published by Credit Slips on June 03, 2010 (boomark / email).