The Impact of Dodd-Frank: The Consumer Financial Protection Bureau

October 5, 2011

Dodd-Frank(Editor’s note: On July 21, 2010, the Dodd–Frank Wall Street Reform and Consumer Protection Act was signed into law.  Dodd-Frank represented the largest financial regulatory reforms since the Great Depression, and many are still trying to figure out exactly how they are impacted by the 850-page Act.  Throughout the month of October, we’ll be looking at some of the major features of this complex law.)

Although Dodd-Frank operates primarily through direct regulation, it does contain one unique feature that doesn’t quite comport: the Consumer Financial Protection Bureau (CFPB).

Operating as an independent regulatory agency within the Federal Reserve System, the CFPB is a new creation of Dodd-Frank that is responsible for exactly what its name implies: consumer financial protection.

Nevertheless, no new federal regulations on consumer protection were explicitly created for the CFPB.

Instead, the CFPB’s regulatory power stems from existing federal regulation, the enforcement responsibilities of which were transferred to the CFPB by Dodd-Frank.

For example, the Fair Debt Collection Practices Act, the Fair Credit Reporting Act, and the Truth in Lending Act (to name a few) are all now enforced by the CFPB.

This does not mean that federal regulations will be the same, though.

In fact, the creation of the CFPB represents a monumental shift in federal consumer protections.

Aside from the fact that regulation enforcement is centralized under the CFPB, the Bureau also has administrative rulemaking authority.

Section 1022 of Dodd-Frank permits the director of the Bureau to “prescribe rules and issue orders and guidance, as may be necessary or appropriate to enable the Bureau to administer and carry out the purposes and objectives of the Federal consumer financial laws, and to prevent evasions thereof.”

Translation?

Like any other federal agency, the CFPB can (and in some circumstances, is required to) make rules to enforce the federal laws it is responsible for.

This is significant because of the discretion that the CFPB enjoys in its rulemaking.

For example, the Bureau may prescribe rules “identifying as unlawful unfair, deceptive, or abusive acts or practices in connection with any transaction with a consumer for a consumer financial product or service, or the offering of a consumer financial product or service.”

That section is fairly loaded, and its full implications may not be immediately grasped.

With that grant of authority, the CFPB can unilaterally determine what business practices are unfair, deceptive, or abusive, and prohibit them.

While the Bureau does not have absolute authority to decide exactly what constitutes “unfair, deceptive, and abusive,” the sections defining those traits which immediately follow the above section still leave the CFPB with a considerable amount of discretion.*

In addition, although “consumer financial product” may at first only seem to apply to lenders and creditors, Dodd-Frank’s definition section for the Bureau is extremely expansive.

This means that this rulemaking authority extends over such entities as debt collectors, consumer credit reporting firms, and “such other financial product or service as may be defined by the Bureau.”**

This also means merchants selling consumer goods who offer their own financing (i.e. car sales, retailers that issue branded credit cards) are also subject to CFPB rulemaking.

This seems like quite a bit of power for one agency to have, and many members of Congress are already looking to weaken the agency while it’s still in its infancy.

The CFPB has a check on its power that other agencies do not, however:  the Financial Stability Oversight Council (composed of high-ranking federal officials such as the Secretary of the Treasury and the Chairman of the SEC).

If the Council determines by a two-thirds vote that a regulation would “put the safety and soundness of the United States banking system or the ability of the financial system of the United States at risk,” the Council can block the regulation from going into effect.

Even with this limitation, many are still calling for the CFPB to be defanged.

However, because a permanent director has yet to be confirmed (much of the enforcement provisions require a permanent director), it is unknown exactly how strong of a bite the Bureau will have as it now stands.

With the Senate to vote on the nominee for the CFPB director this week, we may shortly have an answer.

*To be considered “unfair,” the practice must “(1) cause or is likely to cause substantial injury to consumers which is not reasonably avoidable by consumers; and (2) such substantial injury is not outweighed by countervailing benefits to consumers or to competition.”

A practice is considered “abusive” if it “(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 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 interests 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 consumer.

**See 12 U.S.C. § 5481(15)(A)(xi) for the criteria for the Bureau defining its ownfinancial product or service.”