The new financial regulatory reform law created the first significant regulatory agency of the Obama Presidency - the Consumer Financial Protection Bureau (CFPB).
The CFPB will be housed in and funded by the Federal Reserve Board, but will be completely independent of all other federal agencies. Two policy impulses led to its creation: (1) concern that the real estate market collapsed in part because many consumers had been misled into accepting subprime mortgages they could not afford; and (2) a general concern that consumer financial protection laws were ineffectual, because their disclosure-based approach was inadequate and because the bank regulatory agencies had treated their consumer protection responsibilities like an unwanted step-child.
The law centralizes in the CFPA authority to adopt substantive restrictions on the sale of financial products to consumers, as well as power to require enhanced disclosures to consumers. It also extends the CFPB's regulatory authority to many different types of non-depository institutions that had not previously been regulated at the federal level. In addition to its power to adopt consumer protection rules for all regulated institutions, the CFPB also received direct enforcement authority over the country's largest banks and all covered non-bank entities. Finally, the law significantly curtails the scope of federal preemption, so that the States may enforce both CFPB rules and their own laws that provide greater protection than federal rules.
The CFPB's enforcement authority is modeled on that of the Federal Trade Commission. The agency is empowered to prevent regulated entities from committing an "unfair, deceptive, or abusive act of practice" involving a consumer financial product. The concepts of "unfairness" and "deception" form the heart of the FTC's consumer protection jurisdiction. "Unfairness" is defined as an act that causes substantial injury to consumers that they cannot reasonably avoid and that is not outweighed by countervailing benefits. The law thus tracks Section 5 of the FTC Act almost word for word. The term "deception" is not defined, but it is likely that the CFPB will look to the meaning of that term as applied by the FTC (a material representation, omission, or practice likely to mislead consumers acting reasonably). Finally, the statute defines "abusive" in a manner that reflects an informational and disclosure approach to consumer protection that is similar to the FTC approach.
Regulated entities thus can anticipate that the CFPB will pursue investigations and agency adjudications proceedings in a manner similar to the FTC, except that the new agency can impose a civil penalty of up to $1 million per day.
John F. Cooney is a partner in the Washington, D.C., office of Venable.