On June 30, 2010, the House of Representatives approved the Dodd-Frank Wall Street Reform and Consumer Protection Act, or the Financial Reform Act, a comprehensive and expansive set of financial reforms widely thought to be the toughest changes to financial regulation in the United States since the Great Depression.  The Senate approved the Financial Reform Act on July 15, 2010 and President Obama signed it into law on July 21, 2010.  Among the key provisions of the Financial Reform Act is the creation of the Bureau of Consumer Financial Protection, which will have authority over a wide range of participants in the consumer finance industry.  This Update highlights the salient features of the Financial Reform Act as it relates to the consumer finance industry.


Independent Bureau Is Established.  The Financial Reform Act creates the Bureau of Consumer Financial Protection, an independent bureau within the Federal Reserve System.  Under the direction of a presidential appointee, the Bureau implements federal consumer financial laws through rulemaking, orders, policy statements, guidance and enforcement actions.  Although it resides within the Federal Reserve System, the Bureau is autonomous: the Federal Reserve System's Board of Governors has no authority to review, approve, delay or prevent the issuance of any of the Bureau's rules or orders.

Federal Consumer Financial Laws Are Consolidated.  The Financial Reform Act gives the Bureau exclusive authority to administer and enforce federal consumer financial laws, which are currently handled by different federal agencies, including the Office of the Comptroller of the Currency, Office of Thrift Supervision, Federal Deposit Insurance Corporation, Federal Reserve, National Credit Union Administration, Department of Housing and Urban Development and Federal Trade Commission.  Consolidating these statutes is intended to ensure that all consumers have access to fair, transparent and competitive markets for consumer financial products and services.  The Bureau may also, through the rulemaking and enforcement provisions described below, prevent other unfair, deceptive or abusive acts and practices by sellers of consumer financial products or services.

Bureau Has Broad Discretion in Its Rulemaking Authority

New Rulemaking Authorized, but Not Required.  The Financial Reform Act authorizes the Bureau to prescribe rules to identify unlawful unfair, deceptive or abusive acts or practices in connection with transactions for consumer financial products or services.  The Bureau is not required to reexamine any rules, orders or guidance inherited from predecessor agencies related to consumer financial protection.  In its own rulemaking, however, the Bureau must consider potential benefits and costs to consumers and providers, including whether a new rule could result in reduced access by consumers to consumer financial products or services.

Bureau May Create Exemptions by Rule.  The Bureau may issue rules exempting any class of consumer financial products or services or providers thereof from consumer financial protection laws.  However, the Bureau must consider the total assets and volume of transactions at issue when determining exemptions, meaning that they are likely to be limited to small firms or narrow "niche" consumer financial products or services.  Under the Financial Reform Act, merchants, retailers or sellers of nonfinancial goods and services who offer credit to consumers solely to finance the purchase of these types of goods or services are automatically exempt.

Bureau May Expand Its Supervision by Rule.  The Bureau is authorized to issue rules subjecting the following to its supervision: nondepository persons (e.g., persons who offer or provide origination, brokerage or servicing of loans secured by consumer homes), very large banks (i.e., those with assets in excess of $10 billion), savings associations and credit unions.

Substantive Rulemaking Aims to Ensure Fair and Transparent Consumer Financial Products and Services.  In addition to prescribing rules identifying unlawful or abusive practices in connection with consumer financial transactions, the Bureau may also issue rules to ensure that consumers receive complete and effective disclosures about the features of any consumer financial products or services.  To that end, the Bureau may require providers of consumer financial products or services to give consumers upon request detailed information about the products or services they purchased.

Bureau's Enforcement Authority Allows It to Investigate Violations and Determine Remedies

Bureau May Investigate and Adjudicate Violations of Consumer Protection Laws.  The Financial Reform Act prohibits any person from offering or providing to a consumer any financial product or service, other than in compliance with federal consumer financial law, or engaging in any unfair, deceptive or abusive act or practice.  The Bureau is authorized to investigate suspected violations through civil investigative powers and to conduct administrative hearings and adjudications. Final decisions of the Bureau are subject to review by the appropriate federal appellate court.  In emergency situations, the Bureau may issue temporary cease-and-desist orders, which are reviewable at the district court level.

Remedies Are Varied, but Do Not Include Punitive Damages.  Final remedies in these cases include rescission or reformation of contracts, restitution, payment of damages and injunctions barring future violations.  The Bureau is not authorized to award punitive damages.

Trap for the Unwary

  • Lending Discrimination Prosecutions Likely to Increase.  For several months, the Department of Justice and other federal agencies have indicated that prosecuting discrimination in lending is a top priority.  The Department of Justice and the Bureau will undoubtedly work closely together to identify targets for lending discrimination prosecutions by analyzing data that will be made available to the Bureau through its enforcement and regulatory powers.  These new resources and authority, combined with increased public reporting requirements about mortgage data that is included in the Financial Reform Act, will likely lead to an increase in lending discrimination enforcement actions.  Consumer lenders will be wise to pay close attention to this issue by implementing a rigorous compliance program around lending discrimination.

Bureau Has Regulatory Authority Over Large Depository Institutions and Nonbank Financial Companies

Scope of Regulatory Authority Is Discrete.  The Financial Reform Act establishes the Bureau as the federal agency with examination and enforcement authority over large depository institutions and nonbank financial companies with respect to compliance with consumer protection laws, including lending discrimination laws.  Existing regulators retain this authority over insured depository institutions and credit unions with assets of $10 billion or less.  In addition, the
Financial Reform Act excludes from the reach of the Bureau’s supervision and enforcement a number of financial service providers, including the following:

  • retailers, merchants and sellers of nonfinancial goods or services;

  • auto dealers;

  • real estate brokerage activities;

  • accountants and tax preparers;

  • lawyers engaged in the practice of law;

  • persons regulated by state insurance regulators;

  • manufactured home retailers and modular home retailers;

  • employee benefit and compensation plans;

  • persons regulated by state securities commissions, the Securities and Exchange Commission, or the Commodity Futures Trading Commission; and

  • activities related to charitable contributions.

Trap for the Unwary

  • Partnering Among Federal Agencies Could Strengthen the Government's Ability to Prosecute Civil or Criminal Wrongdoing.  The Bureau will partner closely with other federal law enforcement agencies, including the Department of Justice, the Securities and Exchange Commission and the Federal Trade Commission.  If the Bureau discovers significant civil or criminal wrongdoing as part of its compliance examinations, it likely will refer those matters to other federal agencies with more significant prosecutorial authority.

Practical Tips

  • Determine if Your Is Business Subject to the Bureau's Authority.  Determine whether your organization may be regulated by the Bureau or subject to its rulemaking or enforcement authority and, if so, determine the nature and scope of the Bureau’s authority over your business.

  • Stay on Top of New Rulemaking.  As the Bureau begins to take shape, keep abreast of new rulemaking and other activities that will inform your organization about the goals and priorities of the new agency.

  • Review Your Compliance Program.  Develop or amend your organization’s compliance program, including with respect to the Fair Lending Act and related issues.

  • Prepare for Regulatory Examinations. Thoroughly prepare for any regulatory examination conducted by the Bureau.  Treat any examination as you would one conducted by other regulatory agencies, such as the Federal Reserve or Office of the Comptroller of the Currency.

Additional Information

This Update is only intended to provide a summary of the Dodd-Frank Wall Street Reform and Consumer Protection Act.  You can find discussions of other recent cases, laws, regulations, and rule proposals of interest to retailers and financial institutions on our Web site.