The New Consumer Financial Protection Act: What Lenders Need to Know

Congress today passed the most sweeping financial reform package since the Great Depression. President Obama is expected to sign this bill soon. This legislation will put a check on unbridled Wall Street risk and launch a new era of consumer protection. No corner of the financial services industry is untouched. The Consumer Financial Protection Act (Act) — part of the comprehensive bill — creates a new federal bureau specifically charged with writing and enforcing regulations aimed at tightening lending practices, strengthening consumers’ rights, and creating greater transparency generally in lending and related consumer financial practices. This legislation will significantly and permanently change the legal landscape by giving states far greater authority to pass and enforce state laws impacting national banks.

Key provisions of the Act include the following:

• The creation of an independent Bureau of Consumer Financial Protection within the Federal Reserve, whose director will be appointed by the president and confirmed by the Senate.
• The Bureau must ensure that existing consumer protection laws are comprehensive, fair, and vigorously enforced.
• The Bureau will issue rules for all financial institutions that offer products and services to consumers. It also can issue rules under existing consumer banking statutes, including the Truth in Lending Act, the Equal Credit Opportunity Act, and the Real Estate Settlement Procedures Act. It is authorized to regulate unfair, deceptive, and abusive practices and consumer products that it identifies. It may issue regulations relating to disclosures about consumer financial products and services.
• The Bureau will have examination and enforcement authority over very large banks and nonbank financial institutions for compliance with consumer protection laws.
• The Bureau is not subject to veto power from other regulators and has a set funding source.
• The Act mandates that state consumer protection laws are only preempted if they prevent or significantly interfere with a national bank’s exercise of its powers. It also gives state attorneys general the power to enforce both federal and state consumer protection laws against banks and savings associations.
• The Act establishes the Office of Fair Lending and Equal Opportunity within the Bureau. This Office is charged with overseeing the enforcement of federal laws intended to ensure fair, equitable, and nondiscriminatory access to credit for individuals and communities. The Office is mandated to promote coordination of fair lending enforcement efforts with other federal agencies and state regulators to provide consistent, efficient, and effective enforcement of federal fair lending laws.
• Finally, the Act creates within the Bureau an Office for Financial Education and an Office for the Financial Protection of Older Americans.

Two additional acts that are part of the financial reform package also relate to consumer lending and should be noted by lenders.

The Improving Access to Mainstream Financial Institutions Act is intended to expand access to safe and affordable bank accounts, credit, and financial information for low-income, minority, and other underserved families by authorizing three new programs:

• A program to help low- and moderate-income individuals open low-cost accounts
• A program to increase access to objective advice through nonprofits and others aiding in offering financial advice to consumers
• A program to create a pool of capital to enable community development financial institutions to establish and maintain small-dollar loan programs, creating an alternative to payday or car title loans

The Mortgage Reform and Anti-Predator Lending Act sets minimum standards for mortgages by requiring lenders to establish that consumers have a reasonable ability to repay at the time a mortgage is consummated. This act prohibits certain financial incentives to mortgage originators, prohibits prepayment penalties in certain circumstances, and includes protections for renters of foreclosed properties. It also contains many other protections for consumers and provisions designed to control and limit high-cost mortgages.

What All of This Means for Banks and Other Lenders
These new laws and the regulations that will be promulgated under them will result in a new era of regulation and scrutiny for lenders. These laws not only restrict what lenders can do in making loans, they also create powerful agencies with many tools to detect and punish any violations of consumer protection laws.

All lenders would be well-served by ensuring that they have a comprehensive understanding of these new laws and regulations and that they consult legal counsel before embarking on any lending practice that affects consumers.

Contacts

Michael C. Lueder
Chair, Consumer Financial Services Litigation Practice
Milwaukee, Wisconsin
414.297.5643
mlueder@foley.com

Martin J. Bishop
Vice Chair, Consumer Financial Services Litigation Practice
Chicago, Illinois
312.832.5154
mbishop@foley.com

Christi R. Adams
Senior Counsel
Orlando, Florida
407.244.3235
cadams@foley.com

Thomas I. Elkind
Partner
Boston, Massachusetts
617.342.4010
telkind@foley.com