This month, Congress will begin to address the proposed Consumer Financial Protection Agency Act of 2009, known as the CFPAA, which is one piece of the dramatic financial regulatory reform that Barney Frank, Chairman of the House Financial Services Committee, introduced in July 2009.  Initially, the CFPAA, as proposed, imposed federal financial regulation on a much broader spectrum of businesses than were previously subject to federal financial regulation, such as merchants, retailers, e-retailers, and other nonfinancial institutions.  This week Chairman Frank released a memorandum indicating that merchants, retailers and other non financial businesses will be excluded from regulation under the CFPAA.  Despite this apparent narrowing of coverage, the newly created Consumer Financial Protection Agency will nonetheless be responsible for rulemaking and subsequent enforcement of rules pertaining to a broad range of financial products and services. 

This Update highlights key points of the proposed CFPAA—particularly for those businesses that have not historically been subject to federal financial service regulation—and offers practical advice for their directors and executives.

Many Businesses May Face New Financial Regulation

Definition of "Covered Person" Is Potentially Far-Reaching.  The CFPAA would apply to any person who, directly or indirectly, engages in a financial activity related to consumer financial products or services, as well as to those who provide a material service to, or process a transaction on behalf of, one of these persons.  In other words, "covered persons" under the CFPAA are those operating directly in a financial activity and those indirectly providing financial services intended primarily for personal, family, or household purposes. 

Broadly interpreted, the CFPAA may cover any significant service provider of businesses that provide actual financial products or services, although according to Chairman Frank's recent memorandum, strictly ministerial or support services will be exempt. In addition, Chairman Frank's recent memorandum highlights other entities that will not be subject to regulation under the CFPAA, including accountants, real estate brokers and agents, lawyers, auto dealers, communications providers, consumer reporting agencies, and pension plan providers.  The broad scope of the CFPAA may cause businesses that are only remotely connected to financial services to rethink their models and prepare to become regulated entities. 

Definition of "Financial Activity" May Also Be Broad.  The financial activities that trigger coverage under the CFPAA would include:

• maintaining consumer report information, despite the exemption for consumer reporting agencies;
• providing real estate settlement services, despite the exemption for real estate brokers and agents;
• leasing personal or real property;
• processing financial data; and
• acting as a custodian.

The newly created agency would also have the authority to define as a "financial activity" any other activity, other than engaging in the insurance business, unless the insurance provided is credit, mortgage, or title insurance.  The broad definition of financial activity means that the CFPAA could nonetheless cover and impose regulations on businesses and individuals not traditionally considered within the realm of financial services.

CFPAA May Result in Overlapping Regulation

The CFPAA does not cover businesses and individuals already subject to regulation by the Securities and Exchange Commission or the Commodity Futures Trading Commission to the extent that they engage in an activity regulated by those agencies.  If a business is already subject to traditional banking regulation, such as by the Office of the Comptroller of the Currency or the Office of Thrift Supervision, that business may find itself doubly regulated with the duties being split between the banking regulators for safety and soundness and the CFPAA for consumer protection.  However, Chairman Frank's recent memorandum clarifies that depository institutions will have simultaneous examinations for federal safety and soundness and consumer compliance in order to minimize any regulatory burden.

Other Regulatory Agencies Would Transfer Relevant Authority

Under the CFPAA, all consumer financial protection functions and authority of the Federal Reserve System's Board of Governors, the Comptroller of the Currency, the Office of Thrift Supervision, the Federal Deposit Insurance Corporation, the National Credit Union Administration, and the Federal Trade Commission will transfer to the new agency.  The transfer of functions includes the transfer of personnel from these organizations to the agency.

Regulated Businesses Could Face Numerous New Fees and Penalties

A company regulated by the CFPAA will become subject to a number of new terms and obligations.  For example, the CFPAA as originally proposed allows the new agency to charge companies subject to CFPAA regulation annual fees, assessments, and penalties for violations of the CFPAA of up to $1 million per day.  These fees and penalties would support the agency's expenses and a consumer victim relief fund.  However, Chairman Frank's memorandum clarifies that the Federal Reserve will fund the agency at a level that reflects the fees financial institutions that are currently regulated pay for regulatory consumer compliance, and that banks will not pay for the costs associated with the examination and supervision of non-banks.  The CFPAA also authorizes the new agency to impose various duties on businesses, including those related to certain compensation practices of regulated businesses.  To ensure compliance, the agency may require an examination of, or compliance reports from, regulated companies.

An Oversight Board Would Advise the Director

According to Chairman Frank's recent memorandum, a single director will govern the Consumer Financial Protection Agency and a Consumer Financial Protection Oversight Board would advise the director.  This oversight board would include representatives from the federal banking agencies, the National Credit Union Administration, the Federal Trade Commission, the U.S. Department of Housing and Urban Development, and the Chairman of the State Liaison Committee of the Federal Financial Institutions Examination Council.

Legislation Is Likely to Be Adopted in Some Form

Leading business groups, including the U.S. Chamber of Commerce, oppose the CFPAA.  However, most commentators believe Congress will enact some form of legislation similar to the CFPAA during the current congressional term.  Any business involved in financial activities surrounding financial services or products should be aware of this potential change in regulation and the consequences for them.

Additional Information

The purpose of this Update is to provide a general summary of key highlights of the proposed legislation.  You may access the full text of the proposed legislation online.  You can find discussions of other recent cases, laws, regulations and rule proposals of interest on our website.  We will be monitoring this important legislation and providing periodic updates to our clients.