Regulation, Monitoring, and Enforcement of Consumer Financial Products

Background

The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) restructured the financial services regulatory system. The act is the most significant financial reform since the Great Depression and incorporates a wide range of important consumer protections.

Dodd-Frank focused both on the systemic problems that brought down the financial system and the economy and on many of the abusive practices aimed at consumers. At the same time, it rolled back federal preemptions and thus allowed states to enforce more of their consumer protection laws.

Federal regulators have promulgated a wide range of rules resulting from Dodd-Frank:

  • Banks are now required to be better capitalized and more focused on the business of banking.
  • Derivatives, which played a central role in the financial crisis, have been standardized and are now centrally cleared and traded transparently.
  • Public companies face increased executive compensation disclosure requirements.
  • The largest financial institutions, which pose a systemic risk to the economy, are required to put in place so-called living wills to provide contingency plans in case they fail.
  • New mortgage standards require lenders to verify borrowers’ income and their ability to repay loans. They also discourage predatory loan provisions, such as introductory teaser rates, that helped precipitate the crisis.
  • New regulations pertaining to loan originator compensation and registration and licensing of loan originators.
  • Mortgage disclosures have been simplified, and new rules now cover every stage of the mortgage lending process, including servicing.
  • The Consumer Financial Protection Bureau (CFPB) has also proposed new rules on payday and car-title lending, as well as arbitration, based on the findings of its extensive research in these areas.

The CFPB’s regulatory authority covers almost all financial products other than securities and insurance. It includes bank products as well as products from many nonbank financial companies such as payday lenders, check cashers, car-title lenders, prepaid card issuers, nonbank subsidiaries of banks, and mortgage brokers, originators, and servicers.

The bureau’s budget is not dependent on annual appropriations but is instead funded through the Federal Reserve System. The CFPB director is appointed by the president, with the consent of the Senate, for a five-year term. However, a recent decision by the US Court of Appeals for the District of Columbia found that the use of a single director who can only be removed for cause was unconstitutional and needed allow the President the authority to remove the director at will. CFPB has appealed the decision.

In addition, the bureau is charged with ensuring that markets for consumer financial products and services are “fair, transparent, and competitive”; that consumers receive timely and understandable disclosures; and that they are protected from discrimination and unfair, deceptive, or abusive acts and practices. The CFPB must consult with other regulators such as those at the Federal Deposit Insurance Corporation, Office of the Comptroller of the Currency, and the Federal Reserve Board, but it can be overruled only by a two-thirds vote of the Financial Stability Oversight Council. In response to a requirement in Dodd-Frank, the CFPB has set up a system to receive consumer complaints, allow companies to respond, and publicize the complaints and any response in order to improve the marketplace.

Dodd-Frank also established within the CFPB the Office of Financial Protection for Older Americans (age 62 and over) to improve the financial literacy of older consumers, including counseling about abusive financial practices. For example, the increasing use of mobile financial services creates new challenges in protecting older consumers from fraud and abuse, including the importance of securing their financial information.

Regulation, Monitoring, and Enforcement of Consumer Financial Products: Policy

Regulatory structure and standards

In this policy: Federal

Federal laws and regulations should strengthen and enhance consumer protection. They should include effective oversight of the financial industry to avoid another meltdown and to protect our economy and the well-being of the public, including those saving for retirement.

Agencies should set up procedures to make sure that all rulemaking is open and transparent.

Agencies issuing rules, including those focusing on systemic problems in the financial markets such as the securitization requirements, should also take into account the effects on the ultimate consumer and on the economy as a whole.

In assessing costs and benefits in rulemaking, agencies should give adequate consideration to a regulation’s potential benefits, including hard-to-measure benefits such as market integrity, market stability, and the benefits to individual households.

In addition to other consumer issues, the Consumer Financial Protection Bureau should:

  • continue to issue and enforce rules to make the mortgage market safe and fair as new abuses arise;
  • maintain a strong regulatory system for nonbank mortgage lenders;
  • establish and enforce rules that restrict abuses by payday lenders, car-title lenders, and other high-cost sources of financing;
  • increase consumer protections on credit cards, overdraft fees, prepaid debit cards, debt collectors, and credit reports;
  • prohibit financial institutions from changing the order of transactions to maximize overdraft fee revenue;
  • ban pre-dispute mandatory binding arbitration clauses in agreements for consumer financial services and products; and
  • continue to collect, analyze, and publish consumer complaints to improve the financial marketplace.

Bank regulators must make sure that banks engaging in other financial functions maintain the fundamental safety and soundness of traditional banking activities and that insured and uninsured activities are clearly separated. Depositors’ funds must be protected from inappropriate risk. Adequate supervision of any nontraditional activities in which banks engage must be ensured.

Rigorous standards of examination must be developed and enforced as new products are introduced into the marketplace. Regulators should have an affirmative duty to assess continuously the risks such products may pose to consumers’ financial well-being and to initiate oversight and enforcement activities consistent with the risks such products may present to the public, the financial system, and the economy.

Disclosures and transparency

In this policy: FederalState

The risk-assessment methodologies of third-party rating agencies, as well as those of accounting and legal professionals, must be made transparent and free of conflicts of interest.

Financial institutions, especially banks, should be required to clearly and conspicuously inform consumers, before sale, that nondeposit products are not insured by the Federal Deposit Insurance Corporation (FDIC) and therefore may carry a higher risk.

Uniform and appropriate disclosures should be provided for various financial products, regardless of whether the products are being offered by a bank, insurance company, brokerage firm, or other financial services company.

Banks should provide enhanced disclosures using rating systems and default features that help inform consumers and investors about potential product risks.

Consumers should receive annual disclosures about a financial institution’s health, as well as information detailing their rights in the event an institution fails and is taken over by regulators.

The financial services industry’s Freedom of Information Act exemption, which broadly prevents consumer and community groups from obtaining adequate information about the regulation of financial institutions, should be repealed or sharply narrowed. Under no circumstances, however, should consumer account privacy be compromised.

Deception

In this policy: FederalState

Financial institutions should be prohibited from misrepresenting the insured status of any product or the risk associated with it.

Policymakers should enhance protections against unfair, deceptive, or abusive practices.

Privacy

In this policy: FederalState

Policymakers should prohibit the dissemination of consumers’ confidential financial information without their permission, except when sharing such information with authorized law enforcement agencies, adult protective services agencies, or financial regulators to further their investigation of elder financial exploitation, fraud, or abuse.

Enforcement

In this policy: FederalState

Where circumstances warrant, authorities should pursue vigorous criminal prosecution when a financial institution fails. They should also pursue civil actions against organizations and individuals when they conceal or misrepresent information about an institution’s health or otherwise undermine the solvency of a financial institution.

Consumers should have remedies to obtain financial recovery for violations of the law.

Deposit insurance ceilings

In this policy: Federal

An appropriate deposit insurance ceiling must consider an individual’s needs, major events, and many older consumers’ reliance on current deposit insurance levels to protect their savings.

Additional protections and reforms

In this policy: FederalState

Banks should be subject to anticoercion requirements to prevent them from using their role as lenders to pressure consumers into purchasing nonbanking products.

Financial institutions, including banks and insurance companies, should be required to adhere to a fiduciary standard, and to make recommendations based on the best interests of the individual. At a minimum, those who sell insurance products should be held to a suitability standard to ensure that recommended products are suitable for the individual’s financial situation.

Regulators must have enhanced access to information about market developments and activities in order to detect and correct problems that pose systemic threats, as well as to help prevent or mitigate the effects of an individual institution’s failure. The risk assessment methodologies of third-party rating agencies, as well as accounting and legal professionals, must be made transparent.

The advising and rating functions of credit-rating agencies should be separated. There should be greater clarity in comparing ratings across asset classes. Information on the track record of rating agencies, as well as disclosure of the limitations of ratings, should be made available to investors, regulators, and the public.

Mobile financial services

In this policy: FederalState

Mobile financial services should provide the same level of consumer protections as other financial services.

Legislators, regulators, and the financial services industry should prioritize the development of technological advances to improve the security of mobile financial services, in order to protect consumers’ financial information.