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

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The Consumer Financial Protection Agency and
Other Financial Regulatory Reforms John P.
Kromer Clinton R. Rockwell Jon David
LangloisWashington, DC Los Angeles, CA
Washington, DC
Experienced Specialized Accomplished Cost-Effectiv
e Collaborative
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Overview

• Consumer Financial Protection Agency (CFPA)
• History Outlook
• Key elements
• Other Reform Proposals
• Financial Stability Council
• Too Big To Fail
• Risk Retention
• Mortgage Reform
• Volcker Rule
• Financial Crisis Responsibility Fee
• SAFE Act

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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 Dodds bill.

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Consumer Protection The Arguments

• Arguments for Creating CFPA
• 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
• Arguments Against the CFPA
• 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?

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The CFPA House Proposal

• Title IV of H.R. 4173 establishes the Consumer
  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.

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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.

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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 extensions of credit
• Collecting, analyzing, maintaining, and providing
  consumer report information or other account
  information by covered persons
• Debt collecting related to any consumer financial
  product or service
• 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.

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The CFPA House Proposal

• Structure of the CFPA
• 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.

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The CFPA House Proposal

• Funding
• 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.

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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.

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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

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The CFPA House Proposal

• Preemption Provisions
• Generally addresses federally-chartered banks and
  thrifts and their operating subsidiaries.
• Key Conclusions of H.R. 4173
• Codifies the Barnett Bank standard for preemption
  of state laws for national banks and thrifts
• National banks subject to state laws, unless (i)
  application would have a discriminatory effect on
  national banks in comparison with its effect on a
  state chartered bank or (ii) the State consumer
  financial law prevents, significantly interferes
  with, or materially impairs the ability of a
  national bank to engage in the business of
  banking.
• 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
  provided under federal law.

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Other Reform Proposals

• Some other key reform proposals include
• Financial Stability Council
• Too Big To Fail
• Risk Retention
• Mortgage Reform
• Volcker Rule
• Financial Crisis Responsibility Fee
• SAFE Act Implementation

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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

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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

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Other Reform Proposals Credit Risk Retention

• House systemic risk title requires retention of
• 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
  insufficient
• Appropriate Agencies may provide
  exemptions/adjust requirements
• Note of Interest -- H.R. 1728, which passed House
  in May, would have exempted FHA and GSE loans
  from risk retention requirements

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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

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Other Reform Proposals Volcker Rule

• On January 21, President Obama announced the
  "Volcker Rule
• Restricts the size and scope of banks and
  financial institutions. Generally,
• prevents banks or financial institutions that
  contain a bank from owning, investing in, or
  sponsoring a hedge fund, private equity fund, or
  proprietary trading operations for their own
  profit and unrelated to servicing customers
• 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.

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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

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Other Reform Proposals SAFE Act

• Mortgage Loan Origination Licensing and
  Registration
• 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

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Other Reform Proposals SAFE Act

• Major Issues
• Unlevel playing field between State and Federal
  systems
• Licensing of loan modification specialists
• Overlap of State and Federal systems for bank
  subsidiaries
• Implementation issues

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For further information contact

• John P. Kromer, Esq. Clinton R. Rockwell
• BuckleySandler LLP BuckleySandler LLP
• 1250 24th Street, NW 1801 Century Park East
• Suite 700 Suite 2240
• Washington, DC 20037 Los Angeles, CA 90067
• jkromer_at_buckleysandler.com crockwell_at_buckleysandl
  er.com
• Jon David Langlois
• BuckleySandler LLP
• 1250 24th Street, NW
• Suite 700
• Washington, DC 20037
• jlanglois_at_buckleysandler.com