What is the Obama Administration’s Consumer Financial Protection Agency?

1. What is the Obama Administration’s Consumer Financial Protection Agency? • The Consumer Financial Protection Agency, or CFPA, is a newly proposed independent federal agency that would, if established, have single, primary authority to protect consumers with respect to financial products and services, other than investment products. • It would have supervisory, examination and enforcement authority for protecting consumers with respect credit, savings, payment and other financial products and services.

2. CFPA’s Mandate • Ensure that consumers of financial products: • Have the information they need to make wise financial decisions • Are protected from abuse, discrimination, and unfair and deceptive practices • Have access to financial services • And, ensure the financial services market operates fairly and efficiently

3. Significance of the CFPA? • Given the scope and ambition of this proposal, this is a game changer for the financial services industry. • The proposal says: consumer protection is a high priority for the federal government, and it will work in coordination with other agencies and the states to ensure that financial products that are fair, transparent, and suitable for the consumer. • Success will depend upon dedicated staff, resources, and enormous coordination throughout the federal government and the states.

4. Why is a CFPA Needed? • The old rules to protect consumers don’t work • Financial products are too complex • the terms and conditions, even the disclosures, are far from clear and transparent; • the incentives of the provider and the consumer’s needs may be misaligned • consumer often doesn’t have the experience or knowledge to know where to go to get the information needed to navigate the array of product options.

5. Products: Mortgages • Consumers face an array of mortgage options that come with wide variations in rates, terms, penalties, and conditions. • In year’s past, mortgages were originated by banks. But as of late, the majority of mortgages are sold by mortgage brokers. • These companies have existed largely outside of the banking regulatory system with respect to consumer protections. • Compounding the issue for the consumer is the fact that mortgage brokers have incentives - the yield spread premium - to sell the consumer a product that isn’t necessarily the most suitable or lowest cost for them. • To successfully navigate navigate this maze, consumers not only need to figure out the product options that suits their need, but also who is selling the product, what motivates that seller, and whether there are rules to ensure the seller is offering a product that is fair and nondeceptive.

6. Products: Bank Accounts • Even basic bank accounts are commonly fraught with unexpected costs, in the form of surcharges at ATMs, under balance fees, and the big one, overdraft charges, which cost are on average about $35 per check. • As overdrafts currently work, an accountholder is automatically over drafted, with the payment completed and the account debited for the overdraft charge. • These kinds of charges which can rack up to hundreds of dollars in the course of a month can tip a family that’s just making it into serious financial hardship.

7. What would the CFPA Do? • Have authority over depositories and other firms with the offering of financial products, thus significantly increasing the scope of a federal regulator with respect to financial products • It would promote effective regulations, with periodic reviews of those regulations • With respect to states, it would set a floor in terms of consumer protection, and • It would empower states to adopt and enforce the federal laws and rules, and when necessary, adopt stricter consumer protection laws • It would coordinate enforcement with the states and the Department of Justice

8. The CFPA’s Authority • Require that all product disclosures and communications be reasonable, balanced, and clear and conspicuous - and this would be based on significant consumer research and analysis • Define standards for “plain vanilla” products, such as mortgages, bank accounts, and credit cards. These products would have straight forward pricing. • Have authority to place tailored restrictions on product terms and provider practices • Enforce fair lending laws and the community Reinvestment Act to ensure underserved communities and consumers have access to prudent financial services.

9. CFPA Staffing? • The staffing plan for this agency is to consolidate the consumer protection staff from the federal banking regulators: the Office of the Controller of the Currency, the Federal Reserve Board, Office of Thrift Supervision, and the FDIC. • Ballpark estimate: could be as many as 1K staff in the new agency. • Funding the agency: Funding may come from fees assessed on the regulated entities and transactions.

10. Where will it fall in the federal government system? • The Obama Administration envisions the CFPA to be established as an independent federal agency, similar to the Securities and Exchange Commission. • Director and a Board, and one of the Board seats will be reserved for one of the prudential regulators. • Advisory Panel, to promote CFPA’s accountability and provide useful information on emerging industry trends

11. Challenging Issues • Securing sufficient funding • Coordinating with other regulators • Coordinating with states on regulations, supervision, and enforcement • Ensuring that consumer protections are put in place, but in a way that does not stifle innovation, curtail financial services to lower income families, and overwhelm institutions with regulatory requirements

12. What’s on the Horizon for the CFPA? • Senate held hearings last week • House will hold hearings this week • Does the House try to move the Consumer Financial Protection Agency separately • And then the bigger issue is whether the Senate will buy a bill that isn’t the comprehensive financial regulation proposal