The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Act”) significantly changed the regulatory landscape by creating the Bureau of Consumer Financial Protection (the “Bureau”). The Bureau is charged with the implementation and enforcement of federal consumer-protection laws applicable to banks and nonbank financial firms. Though the Bureau will not have primary examination and enforcement authority over community banks with assets of $10 billion or less, the Bureau’s broad regulatory mandate will impact all community banks, regardless of size.
What is the Bureau?
The Bureau will be an independent regulator established within the Federal Reserve System. The Bureau will be headed by a Director who is appointed to a 5-year term by the President and confirmed by the Senate. The Act grants the Bureau broad supervisory, regulatory and enforcement authority over consumer-protection laws, including the authority to prescribe rules and issue orders and interpretive guidance that will apply to all entities that offer consumer financial services or products, including community banks.
What is the Bureau’s mandate?
The Act shifts most consumer-protection duties from the federal banking agencies to the Bureau, including authority over the following:
- Electronic Funds Transfer Act
- Equal Credit Opportunity Act
- Fair Credit Reporting Act
- Fair Debt Collection Practices Act
- Home Mortgage Disclosure Act
- Real Estate Settlement Practices Act
- Secure and Fair Enforcement for Mortgage Licensing Act
- Truth in Lending Act
- Truth in Savings Act
With certain limitations, the Bureau may also develop new rules prohibiting any “unfair, deceptive, or abusive acts or practices” relating to consumer financial products or services. The Bureau must weigh the costs and benefits of the rules it promulgates on the banks and nonbank financial institutions subject to the rules, as well as consumers for whose protection the rules are promulgated, and must specifically consider the impact of proposed rules on depository institutions and consumers in rural areas.
What is the Bureau’s relationship to other agencies?
The Financial Stability Oversight Council (the “FSOC”)—a ten voting member board comprised of the heads of the major financial services regulatory agencies, including the Secretary of the Treasury, the Chairperson of the Federal Reserve, the Comptroller of the Currency, and the Chairperson of the FDIC—has veto power over any rule proposed by the Bureau. Additionally, within ten days of publication of any rule, a prudential regulatory agency may request that the FSOC stay the rule on grounds that it puts the safety and soundness of the U.S. banking system or stability of the financial system at risk. If the FSOC grants the stay, it will last for a period of up to ninety days to allow the FSOC sufficient time to determine whether the rule should be set aside.
What oversight and enforcement powers will the Bureau have over community banks?
While all financial institutions are subject to the Bureau rules, the Act divides oversight and enforcement powers of the rules between the Bureau and the federal banking agencies based on the size of the regulated financial institutions. Community banks with assets of $10 billion or less are exempt from examination and enforcement by the Bureau. The primary federal regulators of these community banks will continue to have exclusive authority to examine the banks and to enforce federal consumer financial laws.
While the Bureau does not have examination authority over community banks, it can require a variety of reports from community banks that it deems necessary to enforce federal consumer financial laws and to detect and assess risks to consumers and financial markets. The Bureau also has access to all examination reports prepared by a primary regulator. A Bureau examiner may also participate in an examination by a community bank’s primary regulator on a “sampling” basis to determine whether institutions are complying with federal law.
What about service providers?
The Bureau may also indirectly influence the examination process and reporting requirements of community banks by virtue of its oversight and authority over service providers engaged by community banks, further complicating the interrelationship between community banks, their primary regulators, their service providers and the Bureau. Service providers to banks that have more than $10 billion in assets are subject to the authority of the Bureau to the same extent as the banks themselves. The Bureau also has the same level of authority over service providers to community banks with $10 billion or less in assets if the service providers provide services to a substantial number of community banks. The Bureau’s authority over these service providers could impose reporting and examination requirements on community banks themselves.
How will consumer complaints be handled?
The Bureau will have a single toll-free hotline routed to a complaint collection and tracking unit that will serve as a centralized collection point of all consumer complaints regarding consumer financial products or services. This unit will route complaints to, and coordinate response efforts with, the Federal Trade Commission, each of the financial institution regulatory agencies, and state agencies to the extent such agencies are equipped to address the complaints. The Director of the Bureau is required to present an annual report to Congress reviewing consumer financial product and service complaints, the types of complaints, and resolutions of complaints.
What does this mean for community banks?
The short- and long-term impact of the Bureau on community banks is largely unknown until it promulgates new rules and regulations. What is known now is that community banks will be subject to rules promulgated by an agency other than their primary regulator and will be subject to their primary regulator’s understanding and interpretation of the new and existing rules during the examination process. Additionally, while the Bureau will not be directly examining community banks, it is likely that the primary regulatory agencies will, at a minimum, conform their consumer-protection examination process to that of the Bureau, if not adopt it altogether, and be significantly influenced by the Bureau.
The mere creation of the Bureau should serve as a signal to community banks that the federal law enforcement agenda is focusing on consumer protection. The result of this focus will likely be (1) an increase in the number of consumer-protection regulations, (2) increased compliance costs for community banks as they navigate the new regulations, (3) significant pressure from the Bureau for federal regulatory agencies to address complaints about consumer financial products and, as a result, (4) increased vigilance of federal banking regulators in enforcing new and existing consumer-protection laws and regulations.