As part of its financial regulatory reform program, the Obama Administration, through the Treasury, submitted to Congress proposed legislation that would establish a new consumer regulatory agency, the Consumer Financial Protection Agency (the “CFPA”), which would consolidate and expand the existing regulatory regime for consumer financial products.  Rep. Barney Frank, Chairman of the House Financial Services Committee, introduced the proposed legislation to that committee as H.R. 3126, the Consumer Financial Protection Act of 2009 (the “CFPA Act”).  For a further discussion of the initial draft of the CFPA Act, please see the AlertAugust 4, 2009 .

Discussion Draft.  The initial draft of the CFPA Act has been amended several times since its introduction by Chairman Frank and other members of the House Financial Services Committee.  A discussion draft circulated by Chairman Frank eliminated two controversial provisions of the CFPA Act: the provisions relating to “plain vanilla” products that would have been required to be offered alongside other financial products and the “reasonableness” standard for communications with consumers.

Manager’s Amendment.  A manager’s amendment offered by Chairman Frank (the “Manager’s Amendment”) included many revisions to the draft language of the CFPA Act.   The Manager’s Amendment excludes the Treasury and any person collecting federal taxes from the definition of covered person.  It also provides that certain activities would not be considered engaging in a “financial activity,” such as the publication of newspapers and other financial publications of general and regular circulation, advice relating to U.S. backed obligations and exempted securities under the Securities Exchange Act of 1934, and the sale of stored value cards unless the seller influences the terms or conditions of the stored value card.  An issuer of stored value cards would still be covered under the CFPA Act.  The Manager’s Amendment excludes from the definition of “financial services” investment advice by registered investment advisers and tax preparation services.  The CFPA would not have regulatory or supervisory authority over providers of tax preparation services and such services would be allowed to provide credit to customers.  However, tax planning services other than tax preparation services would fall within the definition of financial services.  Attorneys, to the extent they are engaged in the practice of law; accountants, unless providing an extension of credit or sale of securities; and the Federal Home Loan Banks are also excluded from the jurisdiction of the CFPA.

The Manager’s Amendment provides that a third party service provider is a “covered person” under the CFPA Act if the service provider: (i) provides for the marketing, solicitation, disclosure, delivery, account maintenance or loan servicing for a financial product or service sold to consumers; (ii) serves as the primary point of contact for resolving consumer questions or complaints; or (iii) is determined by the CFPA to have a significant impact on the price, terms, or conditions of the financial product or service sold to consumers.  Processing transactions or transmitting funds or data that does not involve correspondence with consumers would not result in the service provider becoming a “covered person.”  However, “account maintenance” would result in coverage, even if the company providing such services has no contact with consumers.

The Manager’s Amendment adds a new section regarding “remittance transfers” and remittance transfer providers.  A remittance transfer is the electronic transfer of funds at the request of a customer located in the U.S. to a person in another country.  A remittance transfer provider is any person, including depository institutions, that originates a remittance transfer in the normal course of business.  Among other things, a remittance transfer provider must comply with new rules requiring disclosures in English and foreign languages, rights to cancel a transaction, error resolution procedures, and the provision of a toll free number and web access.

The Manager’s Amendment clarifies that examinations of “covered persons” by the CFPA are only with respect to consumer financial products and services and that the CFPA has primary enforcement authority with respect to any federal law for which both the CFPA and Federal Trade Commission have jurisdiction.  The Manager’s Amendment provides that any federal agency may recommend that the CFPA take an enforcement action; if the CFPA does not act within 120 days, then the referring federal agency may bring its own action.  The Manager’s Amendment further provides that the CFPA must consult with other federal and state agencies regarding the consistency of proposed regulations.  However, the CFPA is not required to modify any proposed regulation as a result of such consultations.  The Manager’s Amendment preserves the rights of state securities and insurance regulators to adopt rules, initiate enforcement actions or take other actions with respect to a person under their jurisdiction.

Merchant Exclusions.  The CFPA Act was also revised to exclude certain activities of merchants, retailers and sellers of nonfinancial products from the regulatory and supervisory authority of the CFPA.  In particular, the amended language provides that the CFPA shall not exercise authority over credit extended directly by a merchant for the purchase of goods or services that are not a financial product or service or the collection of the debt arising from such credit.  However, a merchant would be covered if he or she provides any other financial service or product.  For example, a merchant that offers customers a “lay away” option is covered, since the merchant would be holding customer funds in a custodial capacity, which is defined as a financial service.  The amendment does not affect the authority of the FTC and other agencies.  The exclusion does not apply if the merchant assigns or sells the debt to another person, the credit provided exceeds the market value of the product or service provided or the CFPA finds that the sale of the product is a subterfuge to evade the provisions of the Act.

Examination Authority.  The House Financial Services Committee has approved an amendment which provides that banks with $10 billion or less in assets and credit unions with $1.5 billion or less in assets would be examined by their primary federal regulator for compliance with CFPA rules rather than by CFPA examiners.  The federal banking agencies would also have primary enforcement authority of CFPA regulations for financial institutions of that size.  However, all financial institutions would be subject to the CFPA’s rules and regulations and the CFPA would continue to have back-up enforcement and examination powers.

Other Amendments.  The House Financial Services Committee has approved two other amendments to the CFPA Act.  One amendment exempts retail agents or brokers for sales of manufactured homes or modular homes from CFPA regulation and oversight.  The other amendment requires the CFPA to provide on its website a disclaimer saying it does not endorse particular products or services.

Preemption.  The CFPA Act currently eliminates federal preemption of state consumer protection statutes.  The House Financial Services Committee is scheduled consider amendments which would address the possibility of retaining federal preemption, possibly with a limited scope.