CFPA Webinar Powerpoint Presentation (CRR Revision) (DNF)

Consumer Protection – The Arguments Too many cooks in the kitchen: disparate authority creates unequal regulation for similar products or services  Conflicting Missions: some regulat

The Consumer Financial Protection Agency and Other Financial Regulatory Reforms

John P Kromer Clinton R Rockwell Jon David Langlois Washington, DC Los Angeles, CA Washington, DC

 Consumer Financial Protection Agency (“CFPA”)

 History & Outlook

 Key elements

 Other Reform Proposals

 Financial Stability Council

 Too Big To Fail

CFPA – History and Outlook

 Legislative Timeline – So Far

 Late June – Administration sent proposal and Frank quickly introduced

H.R 3126

 Summer – House & Senate hearings held

 September 25 – Frank released discussion draft of H.R 3126 (with some changes from Administration proposal)

 October – H.R 3126 reported out of House FinServ and EnCom

committees

 November 10 – Dodd released discussion draft as part of a larger financial regulatory reform bill

 December 11 – House Passed H.R 4173, the Wall Street Reform and

Consumer Protection Act

 February 2010 – still no markup expected in the immediate future for

Consumer Protection – The Arguments

 Too many cooks in the kitchen: disparate authority

creates unequal regulation for similar products or

services

 Conflicting Missions: some regulators are also

responsible for institution safety & soundness, and

consumer protection has taken a back seat

 Separating safety and soundness regulation from

consumer protection regulation will hurt both missions

 Will create conflicting and overly burdensome

compliance directives from the CFPA and the safety

and soundness regulator – whose directive rules?

The CFPA – House Proposal

Financial Protection Agency (“CFPA”)

 Generally, the CFPA is tasked with regulating and

enforcing the “enumerated” consumer protection laws

 Enumerated laws include, among others, the Fair Credit Reporting Act, the Federal Debt Collection Practices Act, the Homeowners Protection Act, the Home Mortgage

Disclosure Act, the Real Estate Settlement Procedures Act, the SAFE Act, the Truth in Lending Act, the Equal Credit Opportunity Act and unfair and deceptive trade acts and practices for mortgages

The CFPA – House Proposal

 Title IV of H.R 4173 establishes the Consumer Financial

Protection Agency (“CFPA”)

 The CFPA would regulate "covered persons" and "related

persons" engaging in a "financial activity" or providing "consumer financial products or services.“

 "Covered Persons" are those who engage directly or indirectly

in a financial activity, in connection with the provision of a consumer financial product or service They would also include independent contractors, including attorneys, appraisers, or accountants, who knowingly or recklessly violate

a consumer law or regulation or breach of duty

 "Related persons" include, among others, directors, officers, controlling stockholders, shareholders, and joint venturers

 A “service provider” means any person who provides a material service to a covered person in the provision of a consumer financial product or service, and includes persons who facilitate the design of, or operations relating to the

provision of the product or service, have direct interaction with the consumer, or process transactions

The CFPA – House Proposal

 Applies to “financial activities” which include, among other

things:

 Deposit-taking activities;

 Extending credit and servicing loans, including acquiring,

purchasing, selling, brokering, or servicing loans or other

 Providing real estate settlement services;

 Acting as an investment or financial adviser (with some

exceptions);

 Money transmitting;

 Sale, provision or issuance of stored value products;

 Acting as a custodian of money or any financial instrument

The CFPA – House Proposal

 Single Director vs Board of Directors

 H.R 4173 provides for a transitional structure

 initially headed by a single director, but after 2 years transfers to a 5-member presidentially appointed

commission

 Director (and subsequently, the Commission), will be advised by a Consumer Financial Protection Oversight Board on strategies, actions, and policies, including whether CFPA regulations are in line with prudential, market, or systemic objectives of the other regulators

The CFPA – House Proposal

 appropriations from the Federal Reserve Board

 Assessments on entities regulated by CFPA

 separately for depository and non-depository institutions and based on the size, complexity, and compliance

record of the institution

The CFPA – House Proposal

 General Powers of the CFPA

 Examination power of all covered entities

 To be done in coordination with examinations already conducted by the functional regulators and state bank supervisors

 Enforcement power over the enumerated consumer protection laws

 includes ability to take action based upon consumer complaints

 May take action to prevent an unfair, deceptive or abusive act or practice related to the "offering" of a consumer financial product or service although such action must be consistent with the FTC Act

 Carve out: insured depositories and credit unions with assets under $10 billion will not be subject to CFPA-only examinations,

 CFPA may include an examiner in every aspect of the primary regulator examination, and the primary regulator must provide reports

to the CFPA The CFPA may also, under certain circumstances, remove the primary regulator from an enforcement action.

The CFPA – House Proposal

 Specific Powers of the CFPA

 prohibit or impose conditions or limitations on the use of mandatory

arbitration clauses;

 regulate consumer disclosures, including the costs, benefits, and risks

associated with any consumer financial product or service.

 implement a combined TILA/RESPA disclosure (unless HUD and the Fed

do it first).

 implement rules governing duties owed by a covered person, its

employees, agents and independent contractors to a consumer when that person deals or communicates directly with the consumer in the provision

of a consumer financial product or service

 regulate the manner, setting, and circumstances for sales practices.

 monitor compensation practices to promote fair dealing with consumers.

 Adopt rules on appraisal independence requirements.

 Adopt rules on disclosure of overdraft fees and charges

 The CFPA may not, however, require that any particular product or

service be offered to any consumer

The CFPA – House Proposal

 Preemption determinations under this subparagraph may be made by a court or by regulation or order of the OCC in accordance with applicable law on a case-by-case basis (meaning, a determination made by the OCC, in consultation with the CFPA, concerning the impact of a particular state law on any national bank subject to that law)

 Effectively repeals the Watters decision and removes preemption protection for operating

subsidiaries of national banks and thrifts

 Codifies the holding in Cuomo and expressly gives state attorneys general visitorial

powers over national banks and federal thrifts

 Specifying that interest rate exportation of national banks is not affected;

 Removes Chevron deference for OCC determinations relating to applicability of state laws, while generally preserving Chevron deference for interpretations of the National

Bank Act; and

 Clarifies that a state law is not inconsistent if it provides greater protection than what is

Other Reform Proposals

Some other key reform proposals include:

Other Reform Proposals – Systemic Risk

 Called the “Financial Stability Improvement Act” in HR 4173

 Key Elements

 In general, the bill subjects entities that are identified as

systemically risky to increased scrutiny and regulation

 Also sets up a process for resolving such institutions in case of a failure

 Sets up the Financial Services Oversight Council (“FSOC”) to

monitor financial markets and identify systemic risk issues and

threats

 FSOC can recommend that regulators impose stricter prudential standards on specific companies, and bill gives regulators the authority to implement and enforce such standards (and the Board to take prompt corrective action)

 FSOC can take actions to mitigate systemic risks, including modifying prudential standards, terminating certain activities, and restricting ability to offer products or activities

 Also attempts some consolidation of regulators to close “gaps” in regulation

Other Reform Proposals – Too Big to Fail

 House bill (as reported from Financial Services

Committee)

 FDIC may only lend to failing company for

purpose of unwinding it

 FDIC may not provide the kind of “open bank

assistance” to holding companies that it can

now provide their subs

 Senate Banking Committee expected to adopt

similar provisions

 Administration says both bills will ensure that

government may only assist individual institution

to ensure orderly failure

Other Reform Proposals – Credit Risk Retention

 Up to 5% on FHA or GSE loans

 Less if good underwriting/due diligence or safer

product (as established by federal banking agency and SEC regs)

 More than 5% if underwriting/due diligence is

Other Reform Proposals – Mortgage Reform

 HR 4173 includes the “Mortgage Reform and Anti-Predatory

Lending Act” (H.R 1728)

 Key Elements

 Places new standards on the origination of mortgage loans – a

“duty of care”

 Sets up new underwriting requirements to ensure loans meet the

“duty of care” standards

 Imposes new minimum standards for mortgage loans

 Prohibits certain loan practices for all loans, and additional

practices for “high cost” mortgages

 Requires new disclosures

 Imposes new requirements on mortgage servicers

 Implements new requirements on appraisal practices

 Does NOT repeal the RESPA reform rule

Other Reform Proposals – “Volcker Rule”

 broadens limitations on growth of liabilities at the largest financial firms, akin to the current deposit cap

 When announced, the President intended that the

proposal be included in the regulatory reform legislation

 No details on the plan yet

Other Reform Proposals – “Responsibility Fee”

 In January, Administration announced a “Financial Crisis

Responsibility Fee”

 Would remain in place for greater of 10 years or until TARP has

been fully repaid

 Fee would be levied on financial firms with more than $50b in

consolidated assets (no small or community banks)

 Covers insured depository institutions, BHCs, THCs, insurance

and other companies owning insured depository institutions, or

securities broker-dealers as of Jan 14, 2010 (or who became one

of these after such date)

 Covers domestic firms and U.S subsidiaries of foreign firms

 Fee is assessed at about 15 basis points of covered liabilities per year

 Exempts FDIC-assessed deposits, and reduced for insurance

policy reserves

Other Reform Proposals – SAFE Act

 Dual track: State Licensing and Federal Registration

 States have begun licensing MLOs

 HUD has issued Proposed Regulations applicable to

State licensing system

 Federal Banking Agencies are in process of finalizing

regulation

Other Reform Proposals – SAFE Act

 Unlevel playing field between State and Federal

systems

 Licensing of loan modification specialists

 Overlap of State and Federal systems for bank

subsidiaries

 Implementation issues

For further information contact:

John P Kromer, Esq Clinton R Rockwell

Washington, DC 20037

jlanglois@buckleysandler.com