Financial Services Regulation

Federal, state, and local consumer protection agencies all have a role in safeguarding consumers against fraud, deception, and unfair practices. But they need sufficient resources and authority to carry out their responsibilities. Consumers must be able to take part in making the laws that protect their rights and interests. They should also have the right to challenge violations of these laws. Consumer participation in administrative, legislative, and judicial processes is often valuable for these purposes.

Dodd-Frank Act: In 2010, following the housing market collapse, Congress enacted the Dodd-Frank Act to restructure the financial services regulatory system and enact important consumer protections. One goal was to ensure that financial institutions manage risk properly and minimize the risk of collapse. This is referred to as safety-and-soundness regulation. It helps ensure that depositors, taxpayers, and communities are not on the hook for future bank failures.

Another goal was to promote consumer protection. One major change resulting from the law was consolidating consumer protection under a new federal regulator, the Consumer Financial Protection Bureau (CFPB). Congress also allowed states to enforce more of their consumer protection laws. It did so by rolling back federal preemption of those state laws.

The Consumer Financial Protection Bureau: The CFPB regulates almost all financial products other than securities and insurance. It is charged with making rules governing consumer finance markets to protect consumers from unfair, deceptive, or abusive practices. It regulates bank and nonbank financial products. Examples of nonbank financial companies are payday lenders, check cashers, car-title lenders, prepaid card issuers, nonbank subsidiaries of banks, debt collectors, and mortgage brokers, originators, and servicers. The CFPB is responsible for the enforcement of its rules. It also supervises financial institutions for compliance with them. In addition, the CFPB assists certain populations, including older Americans and military service members, who are often specific targets of abuses. The CFPB also educates consumers about their rights and publishes a database of consumer complaints it has handled.

The CFPB’s consumer complaints database is publicly searchable to improve the marketplace. Although the database remains public, in 2018, it indicated it might remove the database from public view. The public complaint database and individual consumer complaint narratives remain available, but some have argued that the complaint narratives have become difficult to locate on the website.

The CFPB’s budget is not dependent on annual appropriations. This is the same as other banking regulators, such as the Office of the Comptroller of the Currency. Instead, its budget is transferred from the Federal Reserve System. This helps ensure the CFPB’s independence. Other agencies may receive appropriations through Congress or may be fee-funded. Charging fees to pay for the cost of regulation can have negative consequences. In some cases, fees may be passed onto consumers in the form of higher prices (as with the Transportation Security Administration fees on airline tickets). Other times, fees charged may create new conflicts of interest that alter regulator behavior. For example, in the years prior to the financial crisis, banking regulators competed for business among covered banks in exchange for favorable treatment. Even today, some regulators may consider fee-paying entities as their “customers.”

Another reason the CFPB has fulfilled its mission is that it has a single director as its head, rather than a commission. The CFPB director is appointed by the president, with the consent of the Senate, for a five-year term. The CFPB is one of several federal agencies structured with a single director to ensure its effectiveness and independence from the political process. Although a commission may represent a broader set of perspectives, it is also likely to lead to gridlock. One challenge with the director structure, however, is that the director is not required to have experience in or a commitment to protecting consumers.

In 2018, Congress passed the Economic Growth, Regulatory Relief, and Consumer Protection Act, which weakened a number of safeguards from the Dodd-Frank Act, including some regulatory requirements for large financial institutions and a number of requirements for thousands of smaller institutions, particularly in the mortgage market.

State and local regulation: State and local governments also play an active role in protecting consumers. State laws are similar to and complement federal laws in such areas as antitrust, unfair trade practices, and financial services policies. Many state agencies, consumer affairs offices, and attorneys general have been particularly active in protecting consumer rights and have important oversight roles in areas such as nonbank and insurance products. States have long been recognized for playing an invaluable role in developing innovative advances in consumer health, safety, and financial regulations. In many cases, state initiatives provide a model for needed improvements in federal regulation. When federal law preempts stronger state laws, consumers lose out on potentially more robust consumer protections. Local governments likewise can help to protect consumers. They can use powers such as zoning and licensing to do so.

Regulating nonbanks: Nonbanks have offered an increasing share of financial products and services over time. Nonbanks potentially offer additional competition and choices for consumers. However, they have created new challenges for regulators. This is because products offered by banks are generally subject to greater levels of regulation. Moreover, consumers may not be aware that the consumer protections they would expect from a financial product or service do not apply. This leaves them vulnerable to harmful practices that are not permissible for a bank. In some cases, financial companies have used nonbank status to evade consumer protection and civil rights laws.

Protections for vulnerable consumers: Policymakers should focus more attention on protecting vulnerable consumers. People with diminished capacity may be especially vulnerable to abusive financial products or foreclosure. For example, reverse mortgage borrowers with diminished capacity who cannot keep up with required paperwork and payment history can lose their homes to foreclosure. People with diminished capacity are among the most vulnerable targets for financial exploitation and abuse.

In some cases, financial service providers are the first people to recognize signs of cognitive decline. This is because the ability to work with numbers and manage money are among the first skills that noticeably decline for those with diminished capacity. As a result, policymakers at the federal level and some states have put in place mandatory reporting laws. Many states require financial institutions to report suspected cases of elder financial exploitation to law enforcement and Adult Protective Services. Financial institutions that do so in good faith are then shielded from liability for having made the report.

The Financial Crime Enforcement Network (FinCEN), a bureau of the U.S. Department of the Treasury, requires that financial institutions file a confidential suspicious activity report (SAR) when they suspect elder financial exploitation and other criteria are met. Law enforcement agencies are able to use information in the reports to identify, investigate, and prosecute elder financial abuse. FinCEN has created a public SARs database. It contains information on how often financial institutions are filing SARs for suspected elder financial exploitation. Providing more information—including statistics on the type of suspected fraud, the amount of the suspicious transactions, and other information gathered from analyzing the narrative explanation—would make it easier for policymakers and researchers to track elder financial exploitation. It also could help communities and nonprofits to identify proactive steps to stop exploitation.