CFPA: Adding to Conflict and Inconsistencies

Rather than maintaining uniform national consumer protection standards so that  everyone in the country is afforded the same protections, the Senate Discussion Draft opens the door—for the first time in nearly 150 years—to inconsistent, duplicative, and  conflicting mandates between federal and state agencies.  

The House bill follows the same erroneous course, adopting a new—and unclear—standard that could allow a significant increase in conflicting state law rules and certainly will produce an explosion of litigation because of its lack of clarity.  The House bill also precludes preemption of state law even if Congress or a federal regulator specifically determines that regulation in the area addressed by the state law would be harmful either to consumers or to the safety and soundness of the banking system.

Both bills compound the problem by giving the attorney general of each state new, and entirely independent, authority to bring actions under federal law seeking injunctive relief and civil penalties and damages claims that could total tens of millions of dollars or more.  That would allow each state to adopt and enforce its own interpretation of federal law – even if the state’s approach would threaten the safety and soundness of the entire financial system, conflict with the views of the federal regulators or of other states, or harm consumers – free of any oversight by federal regulators other than the ability for the federal regulator to urge the court hearing the state’s case to reject the state’s position. This unprecedented expansion of state regulation of national banks will lead to:

• Lengthier, more confusing and inconsistent disclosures for consumers;
• Fewer choices and competition among products as national companies limit the number of states in which they do business;
•  Higher costs for products that reflect the higher costs associated with complying with multiple federal and state regulations; and
• Competitive disadvantages for nationally chartered U.S. banks. 

Broad preemption of State regulation of federally-chartered institutions has been the rule since the National Bank Act was passed in 1863.  It is essential to the proper functioning of the banking system.

This is consistent with many other areas of the economy, where federal law preempts state regulation in order to avoid conflicting and inconsistent regulation and to maintain a viable national market.  

For example,

• When the Consumer Products Safety Commission issues a rule to address a particular safety concern, the States are barred from adopting anything other than an identical rule to address the risk;
• The statute authorizing federal regulation of motor vehicles, the National Traffic and Motor Vehicle Safety, contains a similar preemption provision.

In addition, in the absence of preemption, disparate state regulations produce fragmented, less-competitive markets.  National companies do not want to incur the significant costs of complying with all of the different regulations imposed by fifty different regulators.  They therefore will only choose to offer products in selected states.  The result:  fewer products at higher prices for consumers. 

In fact, many current and former regulators agree that preemption is important to maintain a viable and sound national market to the benefit of consumers. 

John Dugan, Comptroller of the Currency:

“For the first time in the nearly 150-year history of the national banking system,  federally chartered banks would be subject to this multiplicity of state operating standards…This is a profound change and, in my view, the rejection of national standards option is unwise and unjustified…regressing to a regulatory regime that fails to recognize the way retail financial services are now provided, and the need for an option for a single set of rules for banks with multistate operations and multistate customers, would discard many of the benefits consumers reap from our modern financial product delivery system.”

John E. Bowman, Acting Director, Office of Thrift Supervision

“Without federal preemption to ensure a consistent set of regulations and policies to protect consumers nationwide, the consumer protection agency would be unable to write simple, understandable disclosures to be applied nationwide…All the foregoing could lead ultimately to unintended results, including more complex and lengthier disclosures for consumers, two to three sets of disclosures (federal, state and local) with different and perhaps inconsistent information, higher-cost financial services for consumers and perhaps the elimination of some services altogether.” 

Eugene Ludwig, Comptroller of the Currency in the Clinton Administration, who supports creating a separate consumer agency:

“We need to establish uniform national standards for nationally chartered financial organizations…One of our key competitive advantages as a nation is our large market.  We take a big step toward ruining that market for retail finance when we allow every state to set its own standards with its own enforcement mechanism for entities that have been nationally chartered and are nationally supervised.  Do we really want to be a step behind the European Union and its common market?  Do we really want to cut up our country so that we are less competitive vis-à-vis other large national marketplaces like China, Canada and Australia?”

The CFPA is not limited to, or even focused on, consumer financial products.

Despite claims that the CFPA is intended to protect consumers from predatory practices associated with financial products like mortgages or credit cards, its authority in fact extends to a far broader segment of the economy.  Businesses that have little to do with consumer finance – and had nothing to do with the financial crisis – would find themselves under this new, and most likely duplicative, regulatory agency’s control.  Overreaching new government bureaucracy that will impose new and draconian costs on businesses of diverse sectors and sizes is the last thing we need to get the economy and job growth back on track.  

What would CFPA regulation mean for businesses?

Businesses may be required to pay fees to support the new Agency (which would have the power to set its own budget and fees).

Businesses would be required to provide reports to the new Agency and would be subject to inspection by the new Agency.

Businesses would be subject to enforcement actions by the new Agency.

These new burdens would be duplicative, because most of these businesses would remain subject to all existing regulation by the Federal Trade Commission.

Who would be regulated by the CFPA, and what would make them a “covered person”?

DOCTORS AND DENTISTS

If you allow patients to pay for expensive procedures or treatments in four or more installments, you’re covered by the CFPA.  (Dodd Bill §§ 1002(13)(B) & 1024)

 

RETAIL STORES

If you sell phone cards or any other type of gift card (even if the cards are issued by others), you’re covered by the CFPA. (Dodd Bill §1002(13)(L) & (26))

If you regularly extend credit to customers and impose a finance charge or flat fee for late payment, you’re covered by the CFPA.   Or if you sell customer debt to other company, you’re covered by the CFPA.  (Dodd Bill §§ 1002(13)(B) & 1024)

Even if all you do is accept credit cards issued by others, you still may be covered by the CFPA for “indirectly” providing credit. (Dodd Bill §1002(6) & (13)(B))

 

COLLEGES, UNIVERSITIES AND OTHER SCHOOLS

If you issue any type of stored value card (for example, cards used by students from which the value of food or school supplies are deducted), you’re covered by the CFPA. (Dodd Bill §1002(13)(L) & (26))

If you offer financial literacy courses or provide students with financial literacy materials, you’re covered by the CFPA. (Dodd Bill §1002(13(I)))

 

LARGE RETAILERS

If you issue or sell any type of gift card, you’re covered by the CFPA. (Dodd Bill §1002(13)(L) &(26))

If you regularly extend credit to customers and impose a finance charge or flat fee for late payment, you’re covered by the CFPA.  Or if you sell customer debt to other company, you’re covered by the CFPA. (Dodd Bill §§ 1002(13)(B) & 1024)

Even if all you do is accept credit cards issued by others, you still may be covered by the CFPA for “indirectly” providing credit. (Dodd Bill §1002(6) & (13)(B))

 

TELEPHONE, POWER, GAS, WATER, OIL COMPANIES

If you regularly extend credit to customers and impose a finance charge or flat fee for late payment, you’re covered by the CFPA.  Or if you sell customer debt to other company, you’re covered by the CFPA. (Dodd Bill §§ 1002(13)(B) & 1024)

 

TECHNOLOGY COMPANIES

If you provide advice to financial services companies regarding processing and storage of data relating to consumer products or services, you’re covered by the CFPA. (Dodd Bill §1002(13)(J))

If you provide processing or storage services for financial, banking or economic data, and any of that data relates to consumer transactions, you’re covered by the CFPA. (Dodd Bill §1002(13)(J))

If you serve ads relating to consumer financial products or services, then you’re covered by the CFPA. (Dodd Bill §1002(23))

 

TRADE ASSOCIATIONS AND NONPROFIT ORGANIZATIONS

If you offer financial literacy information or provide consumers with financial literacy materials, you’re covered by the CFPA. (Dodd Bill §1002(13)(I))

 

SOFTWARE COMPANIES

If you create or sell software for consumers to use in managing financial matters, you’re covered by the CFPA. (Dodd Bill §1002(13)(I))

 

AUTO DEALERS   

If you play any part in helping customers obtain financing, you’re covered by the CFPA. (Dodd Bill §1002(6) & (13)(B))

 

REAL ESTATE BROKERS

If you assist buyers or sellers in obtaining financing or settlement services or advise them regarding the financial aspects of a purchase, you’re covered by the CFPA. (Dodd Bill §§ 1002(13)(B) & 1024(a)(3))

 

LAWYERS

If you provide debt collection services or assist consumers with debt-related issues or credit-related issues, you’re covered by the CFPA. (Dodd Bill §1002(13)(E), (F) & (I))

If you provide tax planning advice to individuals, you’re covered by the CFPA. (Dodd Bill §1002(13)(I))

 

ADVERTISING AND MARKETING AGENCIES

If you assist clients in advertising and marketing consumer financial products or services, you’re covered by the CFPA. (Dodd Bill §1002(23))

 

PRINT OR ELECTRONIC MEDIA

If you provide information that educates consumers about financial matters (for example, advice columns), you’re covered by the CFPA. (Dodd Bill §1002(13)(I) & (J))

If you provide economic, banking for financial information or databases to consumers, you’re covered by the CFPA. (Dodd Bill §1002(13)(I) & (J))

If your website displays click-through ads for consumer financial products or services, you’re covered by the CFPA. (Dodd Bill §1002(23))

 

ANY OTHER TYPE OF BUSINESS

If you “advertise, market, sell, enforce, or attempt to enforce” any agreement or any term in any agreement or any fee or charge that “is not in conformity with” the new law or rules or orders issued by the new Agency; or if you “engage in any unfair, deceptive, or abusive act or practice”; or if you “recklessly” provide someone else with “substantial assistance” of the statutory authority against unfair, deceptive or abusive practices or of the Agency’s rules, then you’ve violated the CFPA. (Dodd Bill §1038 )

The new Agency has extremely broad power to extend its authority to other categories of businesses simply by issuing a regulation.  Once it issues such a rule, you’re covered by the CFPA.  (Dodd Bill §1002(13)(O))

CFPA: Duplication, Not Consolidation

The CFPA will subject the vast majority of businesses under its jurisdiction to two separate—and entirely overlapping—layers of federal consumer protection regulation. 

In particular, the tens of thousands of non-bank businesses that would be regulated by the CFPA will also remain subject to the authority of the Federal Trade Commission (FTC).  Taken together with proposals to drastically expand the powers of the FTC, the result will be a duplicative, confusing, and burdensome new regulatory regime that will disproportionately fall on nonfinancial businesses.

Duplication of Existing Federal Regulation

• Although the CFPA is intended to consolidate federal consumer protection oversight, it will in fact impose a new, duplicative layer of regulation – particularly on those businesses already regulated by the FTC.
• The FTC would retain its current broad rulemaking authority under the FTC Act to prevent any business, other than a federally-regulated financial institution, “from using . . . unfair or deceptive acts or practices in or affecting commerce.”  That very broad authority can be used by the FTC to bring enforcement actions or to issue regulations.
• All of these businesses therefore will be vulnerable to regulations and enforcement actions by both the FTC and the CFPA and by state attorney’s general enforcing the CFPA provisions. 

Proposals to Drastically Expand FTC Powers In Addition to Unprecedented CFPA Authority

• The House bill (H.R. 4173) includes, and the Senate Commerce Committee is considering, proposals to drastically expand the powers of the FTC.  

Eliminating Statutory Protections That Assure a Fair Rulemaking Process

Because the FTC’s jurisdictional reach is so broad, Congress in the Magnuson-Moss Act adopted important procedural protections to ensure that FTC regulations target broad problems that could not be addressed through enforcement actions and that the Commission’s rulemaking processes are comprehensible and transparent.  The proposal to eliminate these protections would remove an important fairness guarantee—without any showing that the change is necessary.

Unfair Authority to Impose Civil Penalties Without Notice

Proposals to give the FTC authority to seek penalties not only for violations of FTC orders and rules, but also for violations of the statute’s vague “unfair or deceptive acts or practices” standard would have negative unintended consequences.  The FTC currently already has ample enforcement tools at its disposal.  Currently, the FTC issues an administrative order directing a company to change a specified practice or behavior, and may obtain civil penalties if the company does not comply.  This gives companies an incentive to reach an agreement with the FTC and improve their business practices instead of litigating against the Commission.   In contrast, the prospect of civil penalties would likely lead companies to take a more adversarial approach and vigorously defend themselves against FTC scrutiny.   Affected industries would be subject to these new civil penalties in addition to the CFPA’s authority to impose civil penalties. 

New Authority to Impose Civil Penalties on Third Parties

The FTC today has authority to prevent individuals or businesses from engaging in unfair or deceptive practices.  Creating new liability for anyone who “recklessly” provides “substantial assistance” to someone else who is violating the FTC Act is unnecessary and unfair.  It is unnecessary because the FTC has the power to target the actual wrongdoer.  It is unfair because the “substantial assistance” itself need not be unlawful and actual knowledge of the other person’s wrongdoing is not required.  The effect of this provision would be to impose liability for engaging in perfectly lawful conduct without knowing that the conduct is assisting someone else’s deceptive practice.  This would be in addition to the broad authority to impose such liability that would be granted to the CFPA and to state attorneys general enforcing the CFPA.

The Chamber stands ready to work with the Congress to advance more effective reforms that will protect investors and strengthen our capital markets without adding new layers of bureaucracy on top of the current system.

The Proposed CFPA Will Disproportionately Harm Small Businesses

“Everyone wants to protect the consumer, there’s no argument there, but if it becomes more difficult for small business owners to get credit lines, get money, and none of them can right now, they can’t hire, they can’t grow, they can’t expand.” – Mark Ryan, Littleton, CO

“If… the enforcement is handled so that bad actors are taken out of the game, as opposed to increasing regulation for all companies, it will be better for the economy all around.” – Fran Fisher, Fairfax, VA

“Small business owners already face the tightest credit environment many have ever seen. A further tightening of credit, or more expensive pricing of credit when it is available, as a result of CFPA, unfairly punishes small business owners when their participation in the economy is crucial to recovery. We can’t allow this to happen.” – Jeff Walters, Billings, MT

The CFPA Would Restrict Access to Credit for Small Businesses and Consumers at Exactly the Wrong Time.

Small businesses are critical engines of economic growth and job creation. As noted in a study on the impact of the CFPA on small business written by Thomas Durkin, a former official who spent more than 20 years at the Federal Reserve, start-up businesses with fewer than 20 employees account for 86.7% of net job creation1. At the same time, these small firms face significant hurdles in accessing the capital they need to get off the ground or to maintain their operations. In most cases, small businesses either cannot borrow any money, cannot borrow as much as they need at reasonable rates, or they can only borrow at high rates.

In these tough economic times, the government should find ways to enhance small business access to credit, rather than further reduce the availability and affordability of credit through overreaching and duplicative government regulation. Unfortunately – this is exactly what the CFPA will do. As stated in the Durkin study:

“….it would have a significantly adverse effect on small businesses by restricting their access to credit. Some would lose access to credit altogether. The businesses that would be most adversely affected would be the new businesses that for which consumer loan products are a principal source of funding. As a result, the CFPA Act would inflict the greatest harm on those small businesses that account for a significant portion of the economy’s net job growth.”

The CFPA creates significant disincentives and makes it much more expensive for financial institutions, particularly smaller institutions, to lend. This will result in reduced access to credit, and bring a higher price to the credit products that are available. In addition, the CFPA would have the authority to prohibit certain products, require only “safe” products, and ultimately limit small business owners’, and their customers’, options and choice among financial products.

The bill takes a one-size-fits-all approach that fails to recognize the differences between small business owners and consumers.

Particularly in tight credit markets, small business owners may supplement inadequate commercial credit through consumer credit products, such as personal credit cards, home equity lines of credit, and even title loans. Through its broad regulatory authority, the CFPA could ban or restrict access to certain financial products deemed “too risky” forconsumers, denying informed and sophisticated small business owners access to the products they rely on for short term capital needs.

As Durkin cites in his study:

“The CFPA adopts a “one-size-fits-all approach to consumer protection that ignores the fact that small businesses use consumer financial products in different ways than the average consumer. Rules that are designed to protect ordinary consumers are likely to impose collateral damages on informed and sophisticated small business owners who depend on consumer loan products.”

The CFPA would regulate nonfinancial businesses that had nothing to do with the financial crisis or the consumers that were harmed.

Ill-defined terms in the legislation, vague regulatory standards and an unprecedented regulatory overreach leave many small businesses subject to CFPA regulation. These are businesses that don’t offer financial products to consumers, but could be subject to CFPA regulation because they provide goods and services to financial firms, or because of the way they manage their billing process. This includes everything from technology providers, utilities, lawyers, software providers, and even educational institutions. These include small businesses that are already suffering under the consequences of the financial crisis; they shouldn’t have to pay for it twice through an overreaching government response that will subject them to new and onerous regulations.

The CFPA would subject businesses to a complex and confusing maze of state and federal regulations and liability.

The bill would expose small business owners to a vast and confusing new regulatory maze. Rather than a uniform national standard, the CFPA sets the floor, not the ceiling for consumer protection mandates. This means the CFPA and each state regulator could adopt their own sets of rules – and businesses would have to comply with all of them. Also, each state regulator could adopt its own interpretation of the CFPA. Companies and their customers would be lost in a maze of overlapping and conflicting mandates.

Taken together, these elements of the CFPA will have a devastating impact on small businesses already struggling through tough economic times to get this country on its feet again.

As Durkin aptly concludes:

“A new regulatory regime that adversely affects this important economic sector with higher costs and new financial difficulties through unavailable products while that sector is struggling to overcome the aftermath of a significant recession is simply the wrong remedy at the wrong time.”

The Chamber stands ready to work with the Congress to advance more effective reforms that will protect investors and strengthen our capital markets without adding new layers of bureaucracy on top of the current system.