The Consumer Financial Protection Agency: Do We Need More Acronyms?

Alan Greenspan and I don't just share initials (yeah, I know) but an unshakable belief in the ability of a well-greased market to oil its own gears appropriately. Except unlike the other AG, I also believe that you shouldn't load up a Kindergarten classroom on Pop Rocks and Coke and leave them alone with scissors and switchblades. Unfortunately, when Mr Greenspan was teaching the class, he forgot to lock the scissors in his desk drawer and here we are.

So I may be slightly more affectionate towards regulation than said other AG because I, like markets, tend to get out control when I've had too many Pop Rocks.

That being said, I also believe that there is little productive to be found in recent regulatory suggestions. As I believe I've already said, putting the same regulatory agencies (FDIC, SEC, PCAOB, Fed, etc) that were asleep at the wheel while things were going sour under their noses (bank failures, Madoff, KPMG, Bear Stearns) is akin to hiring Al-Qaeda to rebuild the World Trade Center. Unfortunately, I'm not sure that creating a new regulatory Frankenstein is the best idea either.

Elizabeth Warren (yes, that Elizabeth Warren) of the Congressional Oversight Panel recently guest posted over at The Baseline Scenario on why she favors a single regulatory body (CFPA) that may be found here. Warren also told the House "the credit markets are broken" in recent testimony and says the CFPA may be the wisest way to work out the financial kinks.

Other supporters include Chris Dodd (heyyyy! Remember that guy?!). Talk about a den of vipers! The head of the Senate Banking Committee only wants a single regulator so he only has to cut one sweet check.

What's on the table here with the CFPA and what all are we handing over? On the bright side (if there is one in this), Federal Reserve regulators might be able to take a vacation, which means a whole bunch of them will probably be laid off.

Via The CIA Memory Hole:

Under the Act, the CFPA would be headed by a board consisting of four members appointed by the President, subject to the advice and consent of the Senate, for five-year staggered terms and subject to removal only for cause. The board also would have one ex officio member, the Director of the National Bank Supervisor4 (proposed in the White Paper to be a new government agency, which would be established under subsequent legislation, in charge of prudential regulation of all federally chartered insured depositories).5 The Agency would be funded through appropriations and potentially through fees assessed by the CFPA against covered entities.6

The CFPA would be established to “seek to promote transparency, simplicity, fairness, accountability, and access in the market for consumer financial products and services” to ensure that consumers are able to make educated decisions regarding financial products and services; that they are “protected from abuse, unfairness, deception, and discrimination”; that markets operate efficiently and fairly; and that “traditionally underserved consumers and communities have access to financial services.”7

To implement these goals, the CFPA would have authority over a vast array of financial activities, including deposit taking, mortgages, credit cards and other extensions of credit, investment advising by entities not subject to registration or regulation by the Securities and Exchange Commission or the Commodity Futures Trading Commission, loan servicing, check-guaranteeing, collection of consumer report data, debt collection, real estate settlement, money transmitting, financial data processing, and others.8 The CFPA would not have authority over insurance activities other than mortgage, title, and credit insurance.9 The range of entities engaged in financial activities that would be subject to the CFPA also is expansive under the Act, including banks, credit unions, and mortgage brokers to name a few. The proposed legislation defines those covered by the Act to be

any person who engages directly or indirectly in a financial activity, in connection with the provision of a consumer financial product or service [used primarily for personal, family, or household purposes]; or any[one who] provides a material service to, or processes a transaction on behalf of, [such] a person.10

Additionally, the Act would consolidate in the CFPA consumer protection regulatory and enforcement authority, which is currently shared by a number of federal agencies. The Act would transfer to the CFPA the “consumer financial protection functions”11 and many of the employees performing those functions from the Board of Governors of the Federal Reserve System (Federal Reserve), the Office of the Comptroller of the Currency (OCC), the Office of Thrift Supervision (OTS), the Federal Deposit Insurance Corporation (FDIC), the Federal Trade Commission (FTC), and the National Credit Union Administration (NCUA).12 However, according to the guidelines of the White Paper, these agencies, with the exception of the OTS,13 would retain safety and soundness supervisory and examination powers outside the purview of consumer protection over certain regulated entities.14

The CFPA also would be the primary federal regulator, examiner, and rulemaker15 with enforcement authority under many of the federal consumer protection laws, including
(A) the Alternative Mortgage Transaction Parity Act16;
(B) the Community Reinvestment Act17;
(C) the Consumer Leasing Act18;
(D) the Electronic Funds Transfer Act19;
(E) the Equal Credit Opportunity Act20;
(F) the Fair Credit Billing Act21;
(G) the Fair Credit Reporting Act22 (except with respect to sections 615(e), 624, and 62823);
(H) the Fair Debt Collection Practices Act24;
(I) the Federal Deposit Insurance Act, subsections 43(c) through (f)25;
(J) the Gramm-Leach-Bliley Act, sections 502 through 50926;
(K) the Home Mortgage Disclosure Act27;
(L) the Home Ownership and Equity Protection Act28;
(M) the Real Estate Settlement Procedures Act (RESPA)29;
(N) the S.A.F.E. Mortgage Licensing Act30;
(O) the Truth in Lending Act (TILA)31; and
(P) the Truth in Savings Act.32

The CFPA would be required to monitor the market and the innovation of new products and services. In order to do so, the Act would provide the Agency the authority to examine covered persons, including national banks, federal credit unions, and federal savings and loan associations.33 Under current law, examination powers generally rest exclusively in the institutions’ primary regulators.

Rather than explicitly imposing new regulation on financial activities and products, the Act primarily (though, not exclusively34) leaves such decisions to be made by the CFPA through future rulemaking and guidance. The Agency would have the authority to promulgate rules and issue guidance and orders to meet the objectives of the CFPA Act.35 The standard rulemaking procedures provided by the Act would require the Agency to weigh the costs and benefits to both consumers and industry, including the potential effect the rule would have on the availability of financial products and services.36 The Agency also would have to “consult with the Federal banking agencies ... regarding the consistency of a proposed rule with prudential, market, or systemic objectives administered by such agencies.”37 Within three years38 of any CFPA “significant rule or order” becoming effective and after a public comment period, the Agency must publish a report assessing the effectiveness of the rule or order.39 The Act does not specify what would be considered “significant,” presumably leaving these determinations to the Agency.

The Act imposes additional procedures upon specific types of rulemaking. For instance, the Agency would be authorized to promulgate rules on unfair or deceptive practices in connection with consumer financial services and products. However, the Agency could only promulgate a rule deeming an act unlawfully unfair if

the Agency has a reasonable basis to conclude that the act or practices 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.40

Other examples of specific rulemaking authority for which the CFPA Act would impose requirements in addition to the Act’s standard rulemaking procedures outlined above include disclosure requirements;41 minimum standards for the prevention and detection of “unfair, deceptive, abusive, fraudulent, or illegal transactions”;42 provision of “standard consumer financial products or services” that may serve as a comparison to similar, but less traditional products or services;43 and imposition of duties, including compensation practices, on covered persons.
That's enough of that, I'm getting sick to my stomach.

On the other hand, perhaps this is a good thing. Are they positioning to overthrow the Fed?

"However, according to the guidelines of the White Paper, these agencies, with the exception of the OTS,13 would retain safety and soundness supervisory and examination powers outside the purview of consumer protection over certain regulated entities" sounds like a coup to me. The recommendation makes it sound as though the CFPA proposes the FDIC, OCC, NCUA, FTC, OTS and Fed live out their lives limp and useless, pushing paper across the great wide government pasture. Huh?

Is this necessarily a good thing? While I may not agree with the regulatory alphabet soup, it is far easier for one agency to be corrupt than it is for six agencies to be the same kind of corrupt (of course, this is not to say that the Fed is corrupt) together.

You can tell here that I'm only slightly disappointed in the government's track record when it comes to regulation.

Save the FZVA!

Jr Deputy Accountant

Some say he’s half man half fish, others say he’s more of a seventy/thirty split. Either way he’s a fishy bastard.