What is the CFPB?

The financial crisis of 2007-08 triggered a substantial adjustment in the federal government’s regulation of the banking and lending industry; one notable result being the establishment of the Consumer Financial Protection Bureau (CFPB) under the Dodd-Frank Act (the Act) in 2010. The general goal of the CFPB is to protect consumers by restricting unfair, deceptive, or abusive practices, promoting financial literacy among consumers, researching consumer behavior, and monitoring financial markets to detect risks to consumers. Proper compliance with the CFPB’s continuously developing regulations can be elusive. Violations can result in fines, penalties, or civil liability in addition to bad publicity for an alleged violator. It is therefore important for all business entities to understand the scope of the regulations, proactively ensure compliance, and be prepared to deal with enforcement action from the CFPB.

The CFPB’s Regulatory Scope – What laws do they enforce?

The CFPB is the administrator for all federal consumer financial laws, including previously existing consumer financial statutes as well as those created by the Dodd Frank Act. Among the previously existing laws transferred to the CFPB’s authority include:

• The Alternative Mortgage Transaction Parity Act of 1982 (12 U.S.C. 3801);
• The Consumer Leasing Act of 1976 (15 U.S.C. 1667);
• The Electronic Fund Transfer Act (15 U.S.C. 1693);
• The Equal Credit Opportunity Act (ECOA) (15 U.S.C.1691);
• The Fair Credit Billing Act (15 U.S.C.1666);
• The Fair Credit Reporting Act (15 U.S.C. 1681);
• The Home Owners Protection Act of 1998 (12 U.S.C. 4901);
• The Fair Debt Collection Practices Act (15 U.S.C. 1692);
• Subsections (b) through (f) of section 43 of the Federal Deposit Insurance Act (12 U.S.C. 1831t(b) – (f)), requiring disclosure when a depository institution lacks federal deposit insurance;
• Sections 502 through 509 of the Gramm-Leach-Bliley Act, protecting the disclosure of nonpublic personal information;
• The Home Mortgage Disclosure Act of 1975 (12 U.S.C. 2801);
• The Home Ownership and Equity Protection Act of 1994 (15 U.S.C. 1601);
• The Real Estate Settlement Procedures Act of 1974 (RESPA);
• The S.A.F.E. Mortgage Licensing Act of 2008 (12 U.S.C. 5101);
• The Truth in Lending Act (TILA)(15 U.S.C. 1601);
• The Truth in Savings Act (12 U.S.C. 4301);
• Section 626 of the Omnibus Appropriations Act, 2009, mandating a rulemaking on unfair and deceptive mortgage lending practices; and
• The Interstate Land Sales Full Disclosure Act (15 U.S.C. 1701)

The Act grants the CFPB the authority to enforce some provisions of the Federal Trade Commission Act, a role previously held by the Federal Trade Commission (FTC). The CFPB now exercises the FTC’s former authority to prescribe rules, issue guidance, conduct studies, and issue reports under any law now governed by the CFPB, including:

• Telemarketing Sales Rule (16 CFR Part 310);
• Use of Prenotification Negative Option Plans (16 CFR Part 425);
• Rule Concerning Cooling-Off Period for Sales Made at Homes or at Certain Other Locations (16 CFR Part 429);
• Preservation of Consumers’ Claims and Defenses (16 CFR Part 433);
• Credit Practices (16 CFR Part 444);
• Mail or Telephone Order Merchandise (16 CFR Part 435);
• Disclosure Requirements and Prohibitions Concerning Franchising (16 CFR Part 436);
• Disclosure Requirements and Prohibitions Concerning Business Opportunities (16 CFR Part 437).

The CFPB’s Regulatory Scope – Who do they regulate?

The range of entities under the scope of the CFPB’s regulatory authority is broader than some may think. The Act states that the CFPB will regulate anyone who engages in offering or providing a consumer financial product of service. The phrase “financial products and services,” is more inclusive than classic banking services like loans and lines of credit. 12 U.S.C. § 5481 broadly defines a financial product or service as one that is “offered or provided for use by customers primarily for personal, family, or household purposes.” The Act also specifically enumerates categories of financial products and services that are included in the definition:

• Extending credit and servicing loans
• Extending or brokering leases of personal or real property
• Providing real estate appraisal or settlement services
• Deposit-taking activities
• Selling, providing, or issuing stored value or payment instruments
• Providing payment processing services
• Financial advisory services
• Credit reporting services
• Debt Collection

An entity that engages in any of these activities is regulated by the CFPB and is subject to any of the laws within the CFPB’s authority. Although the CFPB has broad authority to regulate, there are numerous parties who are excluded from coverage either because they do not engage in offering a consumer financial product or service, or are not separately subject to an enumerated consumer law. These parties include:

• Merchants, retailers, and sellers of non-financial goods or services;
• Persons regulated by the Securities Exchange Commission or state security commissions;
• Entities regulated by a state insurance regulator;
• Real estate agents, brokers, and appraisers;
• Accountants and Tax preparers;
• Attorneys
• Tax-Exempt Organizations

The CFPB’s Regulatory Powers

The CFPB has exclusive authority to promulgate regulations, issue orders, assess existing regulations, and provide guidance to administer the federal consumer financial laws. When promulgating a regulation, the CFPB is subject to some consultation and review by other federal agencies. The CFPB must consult with federal banking regulators or other federal agencies to confirm the consistency of the rule with the objectives of those agencies. The CFPB is also granted many powers to support its rulemaking function. An example of this is the CFPB’s general authority to monitor risks to consumers, and from this the CFPB may require covered entities to file reports and participate in interviews and surveys.

The CFPB has authority to prohibit acts or practices of regulated entities on the grounds that they are unfair, deceptive, or abusive. This authority adds on to the previously existing Unfair or Deceptive Acts or Practices Act (UDAP), initially grounded in § 5 of the FTC Act. The Act adds the term “abusive,” and defines such an act or practice as one 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 an 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 interest 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 customer. (Dodd Frank Act § 1031[d]).

The addition of the term “abusive,” endeavors to protect average consumers who lack an understanding of the complexity of the product or service that is attributable to the actions of the regulated entity.

The CFPB also diverts resources to educate and empower consumers to make more informed financial decisions. The CFPB has established the Office of Financial Education to provide opportunities for consumers to have financial counseling, information on credit history and scores, mainstream banking services, and strategies for debt reduction. The CFPB also provides offices to accommodate the needs of particular classes of consumers, such as service members or the elderly.

How Does the CFPB Regulate?

The CFPB has primary examination authority over certain depository institutions and non-depository entities. Though the statutory framework for examining these different types of institutions is largely the same, the supervision authority is found in separate portions of the Act. The frameworks states that the purpose of supervision and examination is to assess compliance with consumer finance laws, obtain information about activities and compliance systems or procedures, and detect risks to consumers.

The CFPB has stated in their Supervision and Examination Manual that there are three main principals that drive their supervision process:

• Focus on consumers; the CFPB will focus on risk to consumers when it evaluates the policies and practices of a financial institution.
• Data Driven; the supervision function rests firmly on analysis of available data about the activities of the entities it supervises, the markets in which they operate, and risks to consumers posed by activities in these markets. Supervision staff (examiners and analysts) will use data from a wide range of sources: data from the entities through direct observation during monitoring and examination; information provided by the CFPB’s research, Markets and Regulations, Consumer Education divisions, and other state and federal regulatory agencies.
• Consistency; the CFPB will apply consistent standard of supervision to all types of entities, to the extent possible. To accomplish this, the CFPB will use the same procedures to examine all supervised entities that it regulates.

The CFPB enforces regulations by employing examiners who carry out the supervision and examination process to ensure that regulated entities are complying. Examiners will coordinate throughout the supervision and examination process with supervision managers, analysts, experts, attorneys from the Office of General Counsel, and other CFPB divisions. In accordance with CFPB policy, examiners and supervision managers will generally do the following in the course of an examination:

• Collect and review available information (from within the CFPB, from other Federal and state agencies, and from public sources), consistent with statutory requirements;
• Request and review supplementary documents and information from the entity to be examined;
• Develop and obtain internal approval for a preliminary risk focus and scope for the onsite portion of the examination;
• Go onsite to observe, conduct interviews, and review additional documents and information;
• Consult internally if the examination indicates potential unfair, deceptive, or abusive acts or practices; discrimination; or other violations of law;
• Draw preliminary conclusions about the regulated entity’s compliance management and its statutory and regulatory compliance;
• Consult internally about follow-up corrective actions that the institution should take, whether through informal agreement or a formal enforcement action, if warranted by findings;
• Draft the examination report;
• Obtain appropriate internal review and approval for the examination work and draft examination report;
• Share the draft report with the prudential regulator and obtain and consider any comments they may offer, consistent with statutory requirements; and
• After final internal clearance, finalize and transmit the report to the supervised entity.

The examination activities carried out by the CFPB are the primary means by which federal consumer financial regulations are enforced. These examinations can lead to the discovery of violations that may result in action from the CFPB. The various enforcement actions that are possible will be explored in part II of this blog series.

This post is Part I of a series of blog posts analyzing the CFPB’s regulatory authority, the manner in which they are enforced, and how to defend an action from the CFPB. Please check back later for further blogs in this series which will provide more in-depth analysis of how the regulations affect financial service entities.