What is the Obama Administration’s
Consumer Financial Protection Agency?
The Consumer Financial Protection Agency, or CFPA, is a
newly proposed independent federal agency that would, if
established, have single, primary authority to protect
consumers with respect to financial products and services,
other than investment products.
It would have supervisory, examination and enforcement
authority for protecting consumers with respect credit,
savings, payment and other financial products and
Ensure that consumers of financial products:
Have the information they need to make wise
Are protected from abuse, discrimination, and
unfair and deceptive practices
Have access to financial services
And, ensure the financial services market operates
fairly and efficiently
Significance of the CFPA?
Given the scope and ambition of this proposal, this is a
game changer for the financial services industry.
The proposal says: consumer protection is a high priority
for the federal government, and it will work in coordination
with other agencies and the states to ensure that financial
products that are fair, transparent, and suitable for the
Success will depend upon dedicated staff, resources, and
enormous coordination throughout the federal government
and the states.
Why is a CFPA Needed?
The old rules to protect consumers
Financial products are too complex
the terms and conditions, even the disclosures, are far from
clear and transparent;
the incentives of the provider and the consumer’s needs may
consumer often doesn’t have the experience or knowledge to
know where to go to get the information needed to navigate
the array of product options.
Consumers face an array of mortgage options that come with wide
variations in rates, terms, penalties, and conditions.
In year’s past, mortgages were originated by banks. But as of late, the
majority of mortgages are sold by mortgage brokers.
These companies have existed largely outside of the banking regulatory
system with respect to consumer protections.
Compounding the issue for the consumer is the fact that mortgage
brokers have incentives - the yield spread premium - to sell the
consumer a product that isn’t necessarily the most suitable or lowest cost
To successfully navigate navigate this maze, consumers not only need to
figure out the product options that suits their need, but also who is
selling the product, what motivates that seller, and whether there are
rules to ensure the seller is offering a product that is fair and
Products: Bank Accounts
Even basic bank accounts are commonly fraught with
unexpected costs, in the form of surcharges at ATMs,
under balance fees, and the big one, overdraft charges,
which cost are on average about $35 per check.
As overdrafts currently work, an accountholder is
automatically over drafted, with the payment completed
and the account debited for the overdraft charge.
These kinds of charges which can rack up to hundreds of
dollars in the course of a month can tip a family that’s just
making it into serious financial hardship.
What would the CFPA Do?
Have authority over depositories and other firms with the
offering of financial products, thus significantly increasing the
scope of a federal regulator with respect to financial products
It would promote effective regulations, with periodic reviews of
With respect to states, it would set a floor in terms of consumer
It would empower states to adopt and enforce the federal laws
and rules, and when necessary, adopt stricter consumer
It would coordinate enforcement with the states and the
Department of Justice
The CFPA’s Authority
Require that all product disclosures and communications
be reasonable, balanced, and clear and conspicuous - and
this would be based on significant consumer research and
Define standards for “plain vanilla” products, such as
mortgages, bank accounts, and credit cards. These
products would have straight forward pricing.
Have authority to place tailored restrictions on product
terms and provider practices
Enforce fair lending laws and the community Reinvestment
Act to ensure underserved communities and consumers
have access to prudent financial services.
The staffing plan for this agency is to consolidate the
consumer protection staff from the federal banking
regulators: the Office of the Controller of the Currency,
the Federal Reserve Board, Office of Thrift Supervision,
and the FDIC.
Ballpark estimate: could be as many as 1K staff in the new
Funding the agency: Funding may come from fees
assessed on the regulated entities and transactions.
Where will it fall in the
federal government system?
The Obama Administration envisions the CFPA to be
established as an independent federal agency, similar to
the Securities and Exchange Commission.
Director and a Board, and one of the Board seats will be
reserved for one of the prudential regulators.
Advisory Panel, to promote CFPA’s accountability and
provide useful information on emerging industry trends
Securing sufficient funding
Coordinating with other regulators
Coordinating with states on regulations,
supervision, and enforcement
Ensuring that consumer protections are put in
place, but in a way that does not stifle
innovation, curtail financial services to lower
income families, and overwhelm institutions with
What’s on the Horizon for the CFPA?
Senate held hearings last week
House will hold hearings this week
Does the House try to move the
Consumer Financial Protection Agency
And then the bigger issue is whether the
Senate will buy a bill that isn’t the
comprehensive financial regulation