United States: Dodd-Frank Wall Street Reform and Consumer Protection Act: Consumer Financial Protection User Guide

This is the fourth in a series of user guides that will be published by Morrison & Foerster. The user guides provide an in depth discussion on specific topics raised by the Dodd-Frank Act. For our Dodd-Frank overview and brief alerts, please see our dedicated website at: http://www.mofo.com/resources/regulatory-reform/

This User Guide addresses various provisions of the Consumer Financial Protection Act ("CFPA" or "Act"), Pub. L. No. 111-203, Title X, 124 Stat. 1955 (2010), that may have immediate impact on lenders and other financial institutions. The Act is one title of the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd- Frank Act"), which was signed by President Obama on July 21, 2010.

Earlier User Guides discussed the provisions of the CFPA that apply to residential mortgage origination, http://www.mofo.com/files/Uploads/Images/ResidentialMortgage.pdf, residential mortgage servicing, http://www.mofo.com/files/Uploads/Images/100830User_Guide_Mortgage_Servicing.pdf, and federal preemption, http://www.mofo.com/files/Uploads/Images/100723UserGuide.pdf.

A future User Guide will analyze the CFPA provisions regarding the organization, jurisdiction, and authority of the Consumer Financial Protection Bureau.

1. OVERVIEW

1.1 Summary of this User Guide

The CFPA amends a variety of the existing consumer financial protection laws. The authority to issue regulations under most of the existing consumer financial protection laws will be transferred to the new Bureau of Consumer Financial Protection. The CFPA also adds new obligations with respect to:

• Privacy, including credit reporting and telemarketing;

• Fair lending, student lending, and the Truth-in-Lending Act;

• Deposit accounts, electronic fund transfers, and expedited funds availability;
• Remittance transfers;
• Arbitration clauses;
• Exchange facilitators; and
• Debt collection.

This User Guide will discuss the foregoing provisions to the extent that they are not discussed in our other User Guides.

1.2 Key Terms

We will use some key terms throughout this User Guide, as follows:

• "Bureau" refers to the new Bureau of Consumer Financial Protection that will be established under the CFPA.

• "Covered Person." Under section 1002(6) of the Act, the term "Covered Person" is defined as any person that offers or provides a "Consumer Financial Product or Service" and any affiliate of such a person if the affiliate acts as a service provider to such person. The definition includes banks as well as non-banks.

• The term "Consumer Financial Product or Service" is defined expansively to cover a wide range of financial services for use by consumers primarily for personal, family, or household purposes. The term includes, among other things, the extension of credit, servicing loans, or brokering loans; deposit-taking activity; issuing stored value cards; payment processing; check cashing; credit reporting; and debt collection. The term does not include insurance, securities, and commodities trading, real estate brokerage, tax preparation, practicing law, and certain other activities. See Act § 1002; see also Act § 1027.

Comment: The term "primarily for personal, family, or household purposes" is frequently used to define the scope of various consumer credit protection laws. See, e.g., 15 U.S.C. § 1602(h) [Truth-in-Lending Act's definition of "consumer," when used in reference to a credit transaction] and 12 C.F.R. § 226.2(a)(12) [Regulation Z's definition of "consumer credit"]. There is a considerable body of case law regarding this term, and that case law likely will be referenced in defining a "Consumer Financial Product or Service" for purposes of the CFPA.

• "Designated Transfer Date." Many of the provisions discussed in this User Guide will be effective on the Designated Transfer Date, which will be July 21, 2011. On this date, many functions relating to the existing consumer financial protection laws will be transferred to the Bureau. See Act § 1062 (explaining the Designated Transfer Date); § 1061 (explaining the transfer of functions to the Bureau).

" "Enumerated Consumer Laws." The Act transfers to the Bureau the authority to administer certain consumer financial protection laws and the rules implemented thereunder. These so-called "Enumerated Consumer Laws" are

The Enumerated Consumer Laws do not include the Fair Housing Act, the Community Reinvestment Act, or the Federal Trade Commission Act ("FTC Act") (although, as discussed below, the Bureau will be authorized to enforce rules made under the FTC Act).

• The term "Federal Consumer Financial Law" means the provisions of the CFPA (such as the prohibition on unfair, deceptive, and abusive practices in CFPA section 1031), the Enumerated Consumer Laws, and any rule or order prescribed by the Bureau. The term expressly does not include the FTC Act.

1.3 Highlights of this User Guide

1.3.1 Transfer of Enumerated Consumer Laws

One of the primary objectives of the CFPA is to transfer the authority to administer the Enumerated Consumer Laws to the Bureau.

For the laws transferred, the Act establishes a standard examination and enforcement scheme. Specifically, the existing federal regulators retain their authority to enforce these laws (together with the other laws that comprise the Federal Consumer Financial Law) against depository institutions and their affiliates,2 but the Bureau has primary enforcement authority against banks and credit unions with assets in excess of ten billion dollars (as well as against their affiliates). The other federal regulator can make a written recommendation that the Bureau take enforcement action and, if the Bureau does not do so within 120 days, the other federal regulator can initiate the enforcement

action. See Act § 1025(c). The Bureau has exclusive authority to require reports and conduct examinations of those large institutions (and their affiliates) with respect to compliance with these laws. See Act § 1025(b)(1).

In contrast, the existing federal agencies have exclusive enforcement authority over depository institutions with assets of ten billion dollars or less, but the Bureau can make enforcement recommendations. See Act § 1026(d).

The Bureau will have supervisory authority over those non-bank Covered Persons that are engaged in the origination, brokerage, or servicing of real estate loans to consumers primarily for personal, family, or household purposes; loan modification or foreclosure relief services for those loans; larger participants in a market for other consumer financial products or services; those non-bank Covered Persons whose consumer financial products or services are deemed to pose risks to consumers; offerors or providers of private education loans; and offerors or providers of payday loans. For these non-bank Covered Persons, the Bureau will share enforcement authority with the Federal Trade Commission ("FTC"), subject to a memorandum of understanding to be negotiated between the two agencies by January 21, 2012. In addition, the Bureau will have the authority to require reports and conduct examinations for those persons, and to impose registration, recordkeeping, and other requirements. See Act § 1024.

The Bureau and the FTC will share residual enforcement authority with respect to other Covered Persons and persons subject to the specific Enumerated Consumer Law, but the CFPA does not specifically require the Bureau and FTC to negotiate a memorandum of understanding or other enforcement agreement with respect to these other persons. The Bureau alone will have authority to issue regulations under the Enumerated Consumer Laws, except as noted. See Act § 1024, § 1061.

For example, as discussed in more detail below, the ECOA is amended to permit the Bureau to enforce the ECOA "with respect to any person subject to [the ECOA]," and to permit the FTC to enforce the ECOA "[e]xcept to the extent the enforcement . . . is specifically committed to" the Banking Agencies, NCUA, SEC, Secretary of Transportation, Secretary of Agriculture, Farm Credit Administration, or Small Business Administration. That is, the enforcement jurisdiction of the Bureau and FTC overlap with respect to those persons not committed to a specific federal regulator.

Until the memorandum of understanding is negotiated between the two agencies, and perhaps even for some time afterwards, it appears as though non-depository entities, the jurisdiction of which is not specifically committed to a specific federal regulator, will be subject to an uncertain enforcement scheme involving both the FTC and the Bureau.

Throughout this Guide, we will refer to this general enforcement scheme, or will note exceptions, as appropriate.

Comment: The transfer of rulemaking and enforcement powers to the Bureau as summarized above likely will result in significant changes to the framework for consumer financial services in the United States. The Bureau is an independent governmental body whose sole purpose is the regulation of the offering and provision of consumer financial services under the federal consumer financial laws. In contrast with the Banking Agencies, the Bureau has no other function. Its primary purpose is the protection of consumers, and, given its current leadership, the Bureau is likely to implement its charter with focused determination.

1.3.2 Privacy and Credit Reporting

The CFPA imposes new obligations on financial institutions to provide consumers with electronic access to their account information, subject to the rules of the Bureau. See Act § 1033.

The Fair Credit Reporting Act ("FCRA") is amended to require the disclosure of credit scores, as well as certain related information, in adverse action notices. See Act § 1100F. The Bureau also is required to conduct a study on the efficacy of "educational" credit scores sometimes provided to consumers by credit bureaus.

The CFPA transfers rulemaking authority under Title V of GLBA and the FCRA to the Bureau, with the exception of the data security, red flags, and data disposal rules, which remain with the FTC and prudential regulators. See Act § 1093, § 1088.

The FCRA also is amended to add enforcement and rulemaking authority for the Commodity Futures Trading Commission ("CFTC") and the Securities and Exchange Commission ("SEC"). The SEC and CFTC also are directed to make rules under the Identity Theft Red Flags Rule provisions, and the CFTC is directed to make an Affiliate Marketing Rule. See Act § 1088. The CFTC already has begin to implement these new requirements. See 74 Fed. Reg. 66,018 (Oct. 27, 2010).

The CFPA adds enforcement authority for the Bureau under the FCRA, but the FTC maintains its enforcement power as well, consistent with the general enforcement scheme established by the CFPA. In 2009, the FTC increased its civil penalty authority to $3,500 to adjust for inflation, but by restating the administrative enforcement provisions of the FCRA, the CFPA has effectively reduced the FTC's civil penalty authority back to $2,500. See Act § 1088.

The Telemarketing and Consumer Fraud and Abuse Prevention Act ("TCFAPA"), under which the FTC has made its Telemarketing Sales Rule ("TSR"), is amended to add rulemaking and enforcement power for the Bureau, but banks remain exempt from the TSR's terms. See Act § 1100C.

1.3.3 Lending

The CFPA amends the ECOA to require lenders to request and collect data about applicants for business credit— specifically whether they are small businesses or woman- or minority-owned businesses. The Bureau is authorized to issue regulations to carry out and create exceptions to the new requirements. These amendments to ECOA become effective on July 21, 2011. See Act § 1071.

The ECOA also is amended to add general rulemaking authority for the Bureau, except that the FRB will continue to exercise rulemaking authority in the case of motor vehicle dealers. In addition, the statute of limitations has been increased from two years to five years. See Act § 1085.

1.3.4 Remittance Transfers

This is an especially important provision of the CFPA that establishes an entirely new regulatory scheme for persons that provide remittance transfers, including banks. A "remittance transfer" is an electronic transfer of funds by a consumer located in any state to a recipient in a foreign country. This provision adds a new section 919 to the Electronic Fund Transfer Act ("EFTA") to require certain disclosures and to impose new error resolution provisions with respect to remittance transfers. These provisions are to be implemented by rules to be made initially by the FRB. Rulemaking authority will transfer to the Bureau on the Designated Transfer Date. See Act § 1073.

1.3.5 Pre-Dispute Arbitration Clauses

Numerous sections of the Dodd-Frank Act (of which the CFPA is just one title) address pre-dispute arbitration. For example, section 1414 amends the Truth-in-Lending Act to prohibit pre-dispute arbitration clauses with respect to residential mortgage loans and open-end consumer credit plans secured by principal dwellings. See http://www.mofo.com/files/Uploads/Images/ResidentialMortgage.pdf. In addition, section 1057(d), concerning the transfer of federal agency employees to the Bureau, prohibits the use of pre-dispute arbitration in certain agreements or in certain circumstances involving employment agreements. The CFPA directs the Bureau to conduct a study of the use of agreements providing for arbitration of future disputes between consumers and Covered Persons in connection with the offering or providing of consumer financial products or services, and permits the Bureau to prohibit or impose conditions or limitations on the use of any such agreements. See Act § 1028.

1.3.6 Exchange Facilitators

The term "exchange facilitators" refers to persons who facilitate like-kind exchanges of property for tax purposes. Exchange facilitators are not currently regulated as such under federal law, but some states impose licensing requirements. The Bureau is required to conduct a study of consumers who use exchange facilitators for transactions that are primarily for personal, family, or household purposes; prepare a report; and issue regulations to protect consumers. See Act § 1079.

1.3.7 Debt Collection

The CFPA adds rulewriting authority for the Bureau under the Fair Debt Collection Practices Act ("FDCPA"), except with respect to motor vehicle dealers. Prior to the passage of the CFPA, no agency was permitted to write rules under the FDCPA. See Act § 1089.

1.3.8 Other Amendments to Existing Law

The CFPA amends other federal banking laws, including the FDI Act, the FTC Act, HPA, and HOEPA, to transfer the appropriate authority provided under those acts to the Bureau. Some noteworthy provisions: the Bureau can enforce FTC trade regulation rules and the HPA, subject to the limitations discussed above. Previously, enforcement powers under the HPA were limited to the federal banking agencies. See Act § 1095.

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Footnote

1 The Mortgage Reform and Anti-Predatory Lending Act is Title XIV of the Dodd-Frank Act and the CFPA is Title X of the Dodd-Frank Act. We discuss the Mortgage Reform and Anti-Predatory Lending Act in more detail in our residential mortgage origination and servicing user guides. See http://www.mofo.com/files/Uploads/Images/ResidentialMortgage.pdf (origination user guide); http://www.mofo.com/files/Uploads/Images/100830User_Guide_Mortgage_Servicing.pdf (servicing user guide). 2 In most instances, the existing federal regulators include the Federal Deposit Insurance Corporation, Federal Reserve Board ("FRB"), and Office of the Comptroller of the Currency ("Banking Agencies"); National Credit Union Administration ("NCUA"); Secretary of Transportation; Secretary of Agriculture; Farm Credit Administration; Securities and Exchange Commission ("SEC"); and Small Business Administration. On July 21, 2011, the Office of Thrift Supervision will be disbanded and its functions and rulemaking authority generally will be transferred to the Office of the Comptroller of the Currency. The supervision of savings and loan holding companies and certain related rulemaking authority will be transferred to the FRB. See Dodd-Frank Act §§ 311, 312.

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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