Consumer Law

How the New Consumer Financial Protection Law Will Affect FTC Authority

By Jeff Sovern

Guest Post by Dee Pridgen

As consumer advocates celebrate the new Consumer Financial Protection Law, which certainly contains many good things for consumers, I wanted to take some time to figure out how this legislation will affect the nation?s first national consumer protection agency, the Federal Trade Commission.  While the FTC has neither been abolished (as has the Office of Thrift Supervision), nor suffered mandatory transfer of functions and personnel to the new Bureau of Consumer Financial Protection (as have the bank regulatory agencies), its authority and power in the area of financial services has been diminished, and it did not gain the quid pro quo hoped for in terms of streamlining the outmoded Magnuson-Moss rulemaking procedures.

The new law creates the Bureau of Financial Protection (BCFP) with sweeping powers to regulate in the consumer financial sector.  All the consumer financial protection functions of the Federal Reserve Board, Comptroller of the Currency, Federal Deposit Insurance Corporation, National Credit Union Administration, Department of Housing and Urban Development and a few other government entities are transferred to the BCFP. The FTC loses authority to promulgate rules, issue guidelines, or conduct studies or issue reports under the federal consumer credit lawsbut it retains its authority to enforce the credit laws with respect to entities under its jurisdiction (i.e., nonbanks).  [Section 1061(b)(5).]  However, the FTC will now share enforcement authority of the credit laws (e.g., TILA, ECOA, FDCPA, etc.) with respect to nonbanks with the BCFP.   The FTC and the Bureau will negotiate an agreement for coordination regarding enforcement actions.  The BCFP will issue regulations in these areas in lieu of the Federal Reserve Board, which previously had that authority.   Unlike the other regulatory agencies affected, no employee of the FTC will be mandated to transfer to the new agency.  However, the FTC will likely be less active in the financial services area because the new agency will have broader authority.  The FTC also retains all of its authority under the FTC Act with regard to economic sectors outside of financial services.

The House version of the bill had contained a provision amending the FTC Act to substitute Administrative Procedure Act (APA) rulemaking in place of the burdensome and underutilized Magnuson Moss rulemaking mandated by the FTC Act.  This provision would also have given the FTC the authority to seek civil penalties in court for violations of the FTC Act, and would have given it authority to go after ?aiders and abettors? as well as the main violators.  I testified in favor of these provisions at a Senate hearing in March of this year but alas this much needed reform did not make the final cut.  In an interesting turn of events, however, the FTC is authorized to issue rules using APA rulemaking with regard to one group of persons, auto dealers. Automobile dealers are excluded from the provisions of the new law in general, but apparently could be subject to streamlined regulation under the FTC Act by the FTC. [Section 1029(d).]  It is hard to see how such a narrow provision will really be of much use to the FTC, nor will it be effective in plugging the loophole created for automobile dealers under the new Act.

The substantive standards governing the BCFP?s regulatory activities are based on the time-honored language of the FTC Act, but with some new additions.  The BCFP will be able to issue rules or go to court to prevent a ?covered person or service provider from committing or engaging in an unfair, deceptive, or abusive act or practice under Federal law in connection with any transaction with a consumer for a consumer financial product or service, or the offering of a consumer financial product or service.? [Section 1031].    Note this broad language mirrors that of the FTC Act which prohibits ?unfair or deceptive acts or practices in or affecting commerce.?  Also, the new law essentially adopts the FTC?s long-standing ?unfairness? policy in that it defines ?unfair? as an

?act or practice [that] causes or is likely to cause substantial injury to consumers which is not reasonably avoidable by consumers; and

such substantial injury is not outweighed by countervailing benefits to consumers or to competition.? 

Public policy may also be considered in determining whether an act or practice is unfair.  [Section 1031(c)].

    An ?abusive? practice is a new term not found in the FTC Act, which means a practice that:

(1) materially interferes with the ability of a consumer to understand a term or condition of a consumer financial product or service; or

(2) takes unreasonable advantage of

(A) a lack of understanding on the part of the consumer of the material risks, costs, or conditions of the product or service;

(B) the inability of the consumer to protect the interests of the consumer in selecting or using a consumer financial product or service; or

(C) the reasonable reliance by the consumer on a covered person to act in the  interests of the consumer. 

It will be interesting to see how the interpretation and application of the new prohibition against ?abusive? credit practices will play out.  This is uncharted territory that hopefully will result in better consumer protection in the financial sector.  Nonetheless I am somewhat saddened that the FTC appears to have gotten pushed aside in the dawn of this new day for consumer protection.

Full post as published by CL&P Blog on July 23, 2010 (boomark / email).