The Consumer Financial Protection Bureau - Digital

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The Consumer Financial Protection Bureau - Digital

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Boston College Law School
Digital Commons @ Boston College Law School
Boston College Law School Faculty Papers July 2012
The Consumer Financial Protection Bureau: Financial Regulation for the 21st Century
Patricia A. McCoy Boston College Law School, [email protected] Leonard Kennedy Ethan Bernstein
Follow this and additional works at: Part of the Administrative Law Commons, Banking and Finance Law Commons, and the Consumer
Protection Law Commons
Recommended Citation Patricia A. McCoy, Leonard Kennedy, and Ethan Bernstein. "The Consumer Financial Protection Bureau: Financial Regulation for the 21st Century." Cornell Law Review 97, no.5 (2012): 1141-1176.
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Leonard . Kennedyt PatriciaA. McCoytt & Ethan Bernsteintt-
After existing regulatory systems failed to prevent the recent financial crisis, Congress passed the Dodd-Frank Wall Street Reform and Consumer ProtectionAct, a sweeping reform designed to alleviate the crisis and prevent its recurrence. Out of this Act, the ConsumerFinancialProtectionBureau was born. This new agency is charged with making markets for consumer financialproducts and services work for Americans, a task that was previously spread out among seven different federal agencies with varying priorities. This Article describes, with a series of concrete case studies, four key principlesthat have guided the Bureau as it strives to fulfill Congress's mandate. First, the Bureau has taken a market-based approach that reflects its belief in the power of markets and competition to produce increasingly better outcomes for consumers and responsibleproviders alike. Second, recognizing that understandinga market well is essential to effective regulation,the Bureau has relied on evidence-based analysis to inform all of its activities. Third, the Bureau has complemented its empirical analysis with inputfrom all segments of the public-includingconsumers, advocates, and regulated entities. To facilitatethe kind of robustpublic participationthat will make for more effective regulation, the Bureau has employed innovative technologies and strong transparencypolicies. Finally, the Bureau has studied and learnedfrom historic regulatory experiences and has adopted best practices from the public and private sectors. These four principles, and others which cascadefrom them, define the Bureau's twenty-first century approachto promoting a well-functioning market for consumerfinancialservices and effective consumer protection.
* While every effort has been made at accuracy, this Article should not be relied upon as a legal reference.
t General Counsel, Consumer Financial Protection Bureau. B.A., 1974, and J.D., 1977, Cornell University. Member of the Washington, D.C. and Maryland Bars.
tt Connecticut Mutual Professor of Law, University of Connecticut School of Law and former Assistant Director, Mortgage Markets, Consumer Financial Protection Bureau.
ttt Chief Strategy Officer, Consumer Financial Protection Bureau; Doctoral Candidate, Harvard Business School; and Kauffman Foundation Fellow, Harvard Law School; A.B. Amherst College, 1998; J.D. and M.B.A., 2002, Harvard University.
Thanks to all of the staff at the Consumer Financial Protection Bureau for building this agency. Special thanks to Manuel Alvarez, Kristin Bateman, Richard Bennett, David Bleicken, Rebecca Deutsch, Seth Frotman, Roberto Gonzalez, David Gossett, Deepak Gupta, Courmey Jean, Kent Nakamura, Connor Raso, Gerald Sachs, Stephen Van Meter, and Priscilla Walton-Fein for their assistance on this Article.



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CONSUMER AGENCY .......................................



A. The Financial Crisis ................................ 1144

B. Creation of the Bureau ............................. 1145

C. The Challenge Ahead .............................. 1150



OTHER AGENCIES' EXPERIENCE ...........................


A. A Market-Based Approach .......................... 1153

B. A Focus on Evidence-Based Analysis ................ 1155

C. Facilitating Robust Public Participation Through

Innovative Technologies and Transparency ......... 1158

D. Learning from History and Borrowing Best Practices

from Other Agencies ............................... 1159

III. THE CFPB's APPROACH IN PRACTICE .....................


A. The "Know Before You Owe" Mortgage Disclosure

Project: Relying on Data Analysis and Public Input

to Craft a Market-Based Solution to Consumer

Confusion in the Mortgage Market ................. 1160

1. EstablishingProject Objectives...................... 1163

2. Iterative, Collaborative Cycles ...................... 1165

B. Office of Servicemember Affairs: Collecting

Information to Ensure Effective Education and

O utreach ...........................................


C. Ex PartePolicy: Promoting Transparency and

Evidence-Based Decision Making ................... 1170

D. Adjudication Rules: Learning from Other Federal

Regulators ..........................................


CONCLUSION .....................................................


The recent financial crisis, the worst since the Great Depression, was partly the result of federal regulatory failure. The consequences were catastrophic. Congress responded by passing the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank), which included the creation of a new regulatory agency charged with ensuring that "all consumers have access to markets for consumer financial products and services" that are "fair, transparent, and competitive."1 Congress consolidated in this new agency consumer financial

1 Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act or Dodd-Frank), 12 U.S.C. § 5511(a) (Supp. IV 2010).

protection functions that previously were spread across seven federal agencies and provided the new agency with important new authority and responsibilities for consumer financial protection.
Building this new agency-the Consumer Financial Protection Bureau (CFPB or the Bureau)-has been no small job. As described by Raj Date, the Bureau's Deputy Director, "What we're doing is in roughly equal measures a startup and a post-merger integration. And, we are doing both of those things at the same time [that] we are trying to undertake a pretty strategic overhaul over how this basic enterprise, protecting consumer financial services, is done."2
The Bureau has sought to approach the historic challenge it faces deliberatively-with full appreciation for the gravity and difficulty of the work before it. The Bureau strives to be an agency that will help consumer financial markets work by making rules more effective, by consistently and fairly enforcing those rules, and by enabling consumers to take more control of their economic lives. This Article explains how the CFPB has approached building an agency that will achieve these goals.
Through a series of concrete case studies describing the Bureau's startup activity across a range of functions-from rulemaking and enforcement to consumer education and outreach-this Article shows how the CFPB has begun to give life to its statutory obligations through four core principles: (1) a market-based approach, (2) a focus on evidence-based analysis, (3) a commitment to encouraging and enabling robust public participation through transparency and innovative uses of technology, and (4) a recognition that history and other agencies' experience can provide invaluable guidance. By following these core principles, the Bureau seeks to achieve its mandate.
Part I of this Article provides a brief background of the CFPB. It describes the crisis that inspired the creation of this new consumer agency as well as the Bureau's legislative mandate, progress so far, and structure. Part II then elaborates on the four core principles noted above that guide the CFPB's approach to meeting its statutory responsibilities. Finally, Part III provides four concrete examples of how the agency has employed these core principles in practice. Although these four case studies by no means show the full breadth and depth of the Bureau's work, they do provide insight into how the Bureau has integrated the principles into its activities.
2 Tim Fernholz, What Startups Can Learn from a Bootstrapping Government Agency, GOOD (Sept. 7, 2011, 5:30 AM),



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A. The Financial Crisis
The Bureau was born out of the worst financial crisis since the Great Depression. The crisis, which pushed the financial system into great distress in September 2008 following the unraveling of Bear Stearns, the conservatorship of Fannie Mae and Freddie Mac, the bankruptcy of Lehman Brothers, and the near collapse of AIG and other firms, had devastating consequences. As a result of the crisis, home values plunged, personal savings fell, millions of people lost their jobs, and millions of consumers defaulted on their mortgages and other loans.3
The damage was not confined to those who became delinquent due to unaffordable loans. The housing market crash sparked by the crisis also harmed homeowners able to pay their mortgages whose home values fell and neighborhoods declined. 4 Consumers struggled to obtain credit as banks tightened their lending standards. Retirees saw their retirement funds drop precipitously. Workers saw their positions eliminated as employers struggled to make ends meet.5 Small businesses suffered greatly as credit contracted and consumer demand fell. Providers of financial services and products saw their earnings fall and share prices plunge. The distress was widespread and severe. Many of the problems sparked by the crisis persist years later, as housing prices remain depressed in many areas and the economy continues to recover. 6
The fact that many Americans took on loans that they did not understand and ultimately could not afford undoubtedly worsened the crisis. While some borrowers consciously assumed too much debt,

4 For an overview of the housing downturn, see JOINT CTR. FOR Hous. STUDIES OF
HARVARD UNIV., THE STATE OF THE NATION'S HOUSING 2011 (2011), available at http:// www''s-housing-201 1.
5 For a summary ofjob loss, see News Release, Bureau of Labor Statistics, U.S. Dep't of Labor, Worker Displacement: 2007-2009 (Aug. 26, 2010), available at http://
6 See Economic Outlook and Recent Monetary Policy Actions: HearingBefore theJoint Econ.
Comm., 112th Cong. 1-2 (Oct. 4, 2011) (statement of Ben S. Bernanke, Chairman, Bd. of Governors of the Fed. Reserve System) [hereinafter Economic Outlook], available at http://

many others were misled by confusing loans.7 The regulatory system prior to Dodd-Frank failed to protect consumers from such abuses.
This failure was not surprising. During the period leading up to the crisis, federal oversight of consumer finance was a patchwork spread out among seven different agencies.8 None of these agencies had the jurisdiction and tools necessary to ensure that consumer financial markets functioned well, and important sectors of these markets operated without any meaningful federal oversight. 9 Moreover, consumer financial protection was not a central task for any of the federal banking agencies, whose principal mission was ensuring the safety and soundness of financial institutions.1 0 The fragmentation in regulatory structure made policy coordination difficult."'
This regulatory apparatus was simply not up to the task of responding to new products offered in the midst of the dramatic growth in lending. Some lenders took advantage by issuing increasingly complex credit products that entailed significant hidden costs and risks for consumers. 12 Many consumers struggled to make sense of these ever more complicated products.13 Ultimately, the ineffective regulatory system failed to protect the market for consumer financial services and the stability of the U.S. economy. Neither the extent nor the ramifications of this problem were exposed fully until the financial crisis.
B. Creation of the Bureau
In June 2009, President Obama proposed to address these failures by consolidating consumer financial protection responsibility in one agency. 14 Just over one year later, with the passage of the Dodd-
7 See generally KATHLEEN C. ENGEL & PATRICIA A. McCoy, THE SUBPRIME VIRUS: RECKLESS CREDIT, REGULATORY FAILURE, AND NEXT STEPS (2011) (providing a detailed account of the issues underlying the subprime mortgage crisis).
8 See Designated Transfer Date, 75 Fed. Reg. 57,252, 57,252 (Sept. 20, 2010). 9 See Oren Bar-Gill & Elizabeth Warren, Making Credit Safer, 157 U. PA. L. REv. 1, 95-97 (2008). 10 See id. at 86-87. 11 Private sector firms similarly face high costs when coordinating among fragmented entities. For this reason, private sector firms integrate functions internally rather than purchasing them on the open market. Private firms may integrate functions when the "transaction cost" created by contracting for such functions on the market becomes too great. For the seminal description of transaction cost economics, see R.H. Coase, The Nature of the Firm, 4 ECONOMICA 386 (1937). The situation is admittedly somewhat different in the case of government agencies, but the transaction costs of interagency coordination can similarly justify integrating authority within one agency. 12 For an overview of the survey evidence, see Bar-Gill & Warren, supra note 9, at 26-58. 13 Id. at 11-20. 14 See U.S. DEP'T OF THE TREASURY, FINANCIAL REGULATORY REFORM: A NEW FOUNDA-
TION; REBUILDING FINANCIAL SUPERVISION AND REGULATION 55-62 (2009), available at http:/ / (proposing the creation



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Frank Act, Congress created the CFPB as an independent agency within the Federal Reserve System to regulate consumer financial products and services. The Bureau assumed responsibilities and authorities from seven other federal agencies on July 21, 2011,15 and President Obama appointed Richard Cordray as its first Director in January 2012.16
The Dodd-Frank Act tasks the CFPB with helping consumers ob-
tain the information needed to make informed and responsible financial decisions, protecting consumers from harmful practices and discrimination, eliminating outdated and unnecessary regulations, consistently and evenhandedly enforcing federal consumer financial law to promote fair competition, and increasing market transparency.17 Congress gave the CFPB six basic tools to achieve these goals: examination and supervision, enforcement, rulemaking, consumer education, collecting and responding to consumer complaints, and researching and monitoring consumer financial markets.18
In giving the Bureau this broad mandate, Congress gave the Bureau many important authorities and transferred functions relating to consumer financial protection from other agencies to the Bureau. 19 For instance, Congress gave the Bureau authority to take action against unfair, deceptive, and abusive acts and practices in the consumer financial marketplace, including through rulemaking. 20 Con-

of a new Consumer Financial Protection Agency); President Barack Obama, Remarks by the President on the Economy at Georgetown University (Apr. 14, 2009), available athttp:/ / (announcing financial reform as a "new foundation for growth and prosperity"). This idea was derived from Oren Bar-Gill and Elizabeth Warren's recommendation for a new federal agency to protect consumers in the financial marketplace. See Bar-Gill & Warren, supra note 9, at 1-2 (making "a case, supported by both theory and data, for comprehensive safety regulation of consumer credit").
15 Designated Transfer Date, 75 Fed. Reg. 57,252, 57,252-53 (Sept. 20, 2010) (setting
July 21, 2011 as the date on which "certain authorities will transfer from other agencies to the CFPB, and the CFPB will be able to exercise certain additional, new authorities under the [Consumer Financial Protection] Act and other laws").
16 Press Release, The White House, Office of the Press Sec'y, President Obama An-
nounces Recess Appointments to Key Administration Posts (Jan. 4, 2012), available at http: //www.whi the-press-office/ 201 2/01 /04/ presiden t-obama-announcesrecess-appointments-key-administration-posts.
17 12 U.S.C. § 5511(a)-(b) (Supp. IV 2010).
18 Id. § 5511(c). 19 Pursuant to section 1062 of the Dodd-Frank Act, the Treasury Secretary designated
that these functions would transfer to the Bureau on July 21, 2011. See Pub. L. No. 111-203, § 1062(c)(1), 124 Stat. 1376, 2040 (codified at 12 U.S.C. § 5582(c) (1)); Designated Transfer Date, 75 Fed. Reg. 57,252-53. The Bureau colloquially refers to this as its "launch date," even though it was vested with and exercised certain other authorities before that date. See, e.g., Learn About the Bureau, CONSUMER FIN. PROT. BUREAU, http://www.consumer (last visited Apr. 7, 2012) (listing the Bureau's accomplishments as ofJuly 21, 2011).
20 12 U.S.C. § 5531.

gress also assigned the Bureau the responsibility of supervising certain nonbank firms offering consumer financial products and services, 2 1 an important market segment that had previously not been subject to federal supervision. In particular, Congress gave the Bureau the authority to conduct examinations of and require reports from nonbank entities including mortgage originators, brokers, and servicers; private student lenders; payday lenders; "larger participant[s]" in markets for other consumer financial products and services; and other covered entities determined to pose risk to consumers. 22 This supervisory authority will enable the Bureau to work with nonbank entities to correct violations and provide redress where appropriate. When necessary, the Bureau may also take legal action to enforce "[f] ederal consumer financial law,"23 including against nonbank entities. The Dodd-Frank Act also makes the Bureau's Director a member of the Federal Deposit Insurance Corporation's Board of Directors, 24 the Federal Financial Institutions Examination Council,25 and the Financial Stability Oversight Council. 2 6 By giving the Bureau a seat at these tables, Congress recognized that a consumer-oriented perspective can help preserve the safety and soundness of financial institutions and of the financial system as a whole and that safety and soundness measures can have implications for consumers.
At the same time, Congress also transferred the responsibility for protecting consumers in the financial marketplace from other regulators to the Bureau. Notably, Congress gave the Bureau the authority to supervise certain depository institutions that other regulators historically had supervised for compliance with federal consumer financial law.27 In particular, the Bureau is tasked with supervising banks, thrifts, and credit unions with total assets of over $10 billion, as well as their affiliates, for compliance with federal consumer financial laws. 28 Currently, these large institutions total approximately one hundred. The Bureau will coordinate this supervision with other federal and state bank regulators, who have supervisory authority over these entities, for safety and soundness, among other things.
Congress also transferred to the Bureau the authority to promulgate rules regarding federal consumer financial laws and to enforce
21 Id. § 5514. 22 Id. § 5514(a) (1). 23 Id. §§ 5561-5565. "Federal consumer financial law" is defined in § 5481(14). 24 Id.§ 1812(a)(1)(B). 25 Id. § 3303(a) (4). 26 Id. § 5321 (b) (1)(D). 27 This includes most, but not all, consumer financial protection laws. See Id. § 5481(14). 28 Id.§ 5515(a)(1).



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those laws and regulations against certain entities. 29 In particular, the Bureau is now charged with implementing and enforcing the following laws, among others:
" The Truth in Lending Act (TILA),30 which requires that lenders provide clear disclosures to consumers about the costs of a mortgage, credit card, payday loan, or other consumer credit. For example, TILA requires that credit card issuers disclose annual percentage rates (APRs) to allow consumers to compare product choices. In addition, the CARD Act of 200931 amended TILA to prohibit certain credit card practices, improve disclosures, and create other important consumer protections. Congress also gave the Bureau jurisdiction over other laws that amended TI[A: the Consumer Leasing Act,3 2 which covers leases; the Home Ownership and Equity Protection Act,33 which covers high-cost mortgages; and the Fair Credit Billing Act,3 4 which provides certain protections regarding billing errors, grace periods, and other matters.
* The Fair Credit Reporting Act (FCRA),35 which governs the behavior of consumer reporting agencies and establishes requirements for entities that use credit reports or furnish information to credit bureaus. FCRA also entitles consumers to obtain a free copy of their credit report once a year from each of the three nationwide credit bureaus.
" The Real Estate Settlement Procedures Act (RESPA),36 which regulates settlement services provided in connection with residential real estate transactions and requires certain disclosures in mortgage transactions.
" The Equal Credit Opportunity Act (ECOA), 37 which prohibits discrimination in lending on the basis of race, color, religion, national origin, sex, marital status, or age, or because a person receives public assistance or has exercised a right under certain consumer protection laws.

29 Id. §§ 5515, 5564, 5581. 30 Pub. L. No. 90-321, 82 Stat. 146 (1968) (codified as amended at 15 U.S.C. §§ 1601-1667e) (2006)). 31 Pub. L. No. 111-24, 123 Stat. 1734 (2009) (codified in scattered sections of 15 and 16 U.S.C.). For more information on the CARD Act, see infra note 80. 32 15 U.S.C. §§ 1667-1667e (2006).
33 Id. § 1639 (2006). 34 Id. §§ 1666-1666j (2006). 35 Id. §§ 1681-81x (2006) (except with respect to 15 U.S.C. §§ 1681m(e), 1681(w), which discuss identity theft and the disposal of records, respectively). 36 12 U.S.C. §§ 1831b, 2601-2610, 2614 -2617 (2006). 37 15 U.S.C. §§ 1691-1691f (2006).

* The Home Mortgage Disclosure Act (HMDA) ,3 which requires most lenders to disclose certain data about their mortgage lending, in part so that the public can determine whether lenders are serving the needs of their local communities. This data can also be used to identify potentially discriminatory lending practices.
" The Electronic Fund Transfer Act (EFTA), 39 which provides a framework to protect consumers engaging in electronic money transfers.
* The Fair Debt Collection Practices Act (FDCPA),40 which protects consumers against harassment and other unfair or deceptive practices by debt collectors.
* The Truth in Savings Act (TISA) ,41 which requires uniform disclosures of various rates and fees for deposit accounts.
* The privacy provisions of the Gramm-Leach-Bliley Act,42 which require financial institutions to provide consumers with privacy notices, including notice of the right to direct the institution not to disclose the consumer's nonpublic personal information to unaffiliated third parties in certain circumstances.
* The SAFE Mortgage Licensing Act,43 which provides for registration and some licensing of mortgage loan originatorsmeaning brokers and mortgage loan officers-and establishes minimum standards for state registration and licensing of specified originators.
* A provision of the Omnibus Appropriations Act of 200944 that authorizes prohibition of unfair or deceptive acts or practices related to mortgage lending.
In addition, the Bureau is empowered to enforce a number of rules issued by the Federal Trade Commission, including rules regarding telemarketing sales and cooling-off periods for sales made at homes. 45
38 12 U.S.C. §§ 2801-2810 (2006). 39 15 U.S.C. §§ 1693-1693r (2006). The Bureau did not assume authority over section 920 of the Act, 15 U.S.C. § 1693r. See 12 U.S.C. § 5481(12)(C). 40 15 U.S.C. §§ 16 9 2-1 6 9 2p (2006). 41 12 U.S.C. §§ 4301-4313 (2006). 42 15 U.S.C. §§ 6802-6809 (2006). The Bureau did not assume authority over § 6805 as it applies to § 6801(b). See 12 U.S.C. § 5481(12)(U). 43 12 U.S.C. §§ 5101-5116 (2006). 44 Omnibus Appropriations Act, Pub. L. No. 111-8, § 626, 123 Stat. 524 (2009) (codified as amended in scattered sections of 2, 5, 7, 12, 16, 20, 30, 33, 42, 43, 48 and 50 U.S.C.). 45 See 12 U.S.C. § 5581 (b) (5). The Bureau is authorized to enforce FTC rules including, among other things: Telemarketing Sales Rule, 16 C.F.R. pt. 310 (2011); Use of Prenotification Negative Option Plans, 16 C.F.R. pt. 425 (2011); Rule Concerning Cooling-Off Period for Sales Made at Homes or at Certain Other Locations, 16 C.F.R. pt. 429 (2011);