Background
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 and the resulting financial crisis, Congress enacted the Dodd-Frank Wall Street Reform and Consumer Protection 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. A major change resulting from the law was consolidating most consumer protection laws under a new federal regulator, the Consumer Financial Protection Bureau (CFPB), without preempting states from enforcing their consumer protection laws.
CFPB: The bureau is charged with protecting consumers from unfair, deceptive, and abusive business practices. To that end, it regulates consumer financial products and services other than securities and insurance, enforces federal consumer protection laws, and supervises banks and nonbanks. 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. In addition, the CFPB assists certain populations, including older Americans, students, 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. As of March 2020, consumers submitted more than two million complaints to the bureau through its consumer complaint portal. The CFPB seeks responses from the companies involved. The bureau has collected over $12.4 billion in fines through enforcement actions, and more than 31 million consumers have received relief.
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.”
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. 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. They 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.
Nonbank regulation: 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. Financial companies have sometimes used nonbank status to evade consumer protection and civil rights laws.
Protections for vulnerable consumers: People with diminished capacity are among the most vulnerable targets for financial exploitation and abuse. They may be especially vulnerable to abusive financial products or foreclosure. For example, forward and reverse mortgage borrowers with diminished capacity who cannot keep up with required paperwork or payments can lose their homes to foreclosure.
In some cases, financial service providers are the first people to recognize signs of cognitive decline. 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, among others, 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 Department of the Treasury, requires that financial institutions file confidential suspicious activity reports (SARs) when certain criteria are met. They have the option to indicate when the suspicious activity involves elder financial exploitation. Law enforcement agencies can use this information to identify, investigate, and prosecute elder financial abuse. FinCEN and the Consumer Financial Protection Bureau have also published papers on suspected financial exploitation based on these reports.
FinCEN has created a public SARs statics database. It contains information on how often financial institutions are filing SARs without revealing any confidential information. However, it does not allow researchers to search for statistics related to suspected elder financial exploitation. Providing information related to financial exploitation while protecting the confidentiality of the victim would make it easier for policymakers and researchers to track elder financial exploitation. Doing so could also help communities and nonprofits identify proactive steps to stop exploitation. Helpful information could include statistics on the type of suspected fraud, the amount of the suspicious transactions, and other information gathered from analyzing the narrative explanation.
FINANCIAL SERVICES REGULATION: Policy
FINANCIAL SERVICES REGULATION: Policy
Consumer protections
Laws and regulations should strengthen and enhance consumer protection. Policymakers should enhance protections against unfair, deceptive, or abusive practices. Consumers should have access to remedies for violations of law.
The marketplace for consumer financial products should be transparent.
To ensure consumer privacy rights, policymakers should prohibit the dissemination of consumers’ confidential financial information without their permission (see also Data Privacy and Data Security policy). Exceptions should be made for:
- authorized law enforcement agencies,
- Adult Protective Services agencies, or
- financial regulators investigating elder financial exploitation, fraud, or abuse.
Financial institutions, including banks and insurance companies, should be required to act as a fiduciary when providing financial advice to individuals. That is, they should make recommendations based on the best interests of the individual consumer rather than their own interest or compensation. 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. Policymakers should seek to increase these standards beyond suitability.
Financial professionals should avoid conflicts of interest. When they cannot avoid conflicts of interest, they should disclose and mitigate them.
Transparency and disclosures: The methods that third-party rating agencies use to assess risk should be transparent and free of conflicts of interest. The same should be true of accounting and legal professionals in the financial sector. Financial institutions, especially banks, should be required to tell consumers when products carry higher risks.
Disclosures provided for various financial products should be uniform and appropriate. This applies regardless of whether the product is offered by a bank, insurance company, brokerage firm, or other financial services company.
Banks should inform consumers and investors about potential product risks.
The Freedom of Information Act’s exemption of federal records pertaining to the financial services industry should be repealed or sharply narrowed, with protections added to ensure the privacy of sensitive consumer data.
Anticoercion requirements for banks: Banks should be prevented from using their role as lenders to pressure consumers into purchasing nonbanking products.
Mobile financial services: Mobile financial services, including banking transactions conducted via computerized systems, should have the same consumer protections as other financial services. This includes ensuring that customers using mobile financial services have access to the same information and disclosures they could view on paper offers and statements. In addition, customers should not be responsible for unauthorized activity.
Legislators, regulators, and the financial services industry should improve the security of mobile financial services to better protect consumers’ financial information.
Roles in financial services regulation
Federal legislation should provide a minimum level of consumer protections. It should preserve states’ ability to provide additional protections to consumers.
When considering proposals that include preemption provisions in federal laws and regulations, policymakers should consider:
- the extent to which the federal or state authorities have identified and focused on the specified problem and addressed the issue satisfactorily;
- the potential benefits resulting from additional federal, state, or local laws;
- the possibility of intolerably high compliance burdens resulting from both federal and state regulations;
- unique state or local needs that would be adversely affected;
- the capacity of states to respond effectively to emerging issues, unusual circumstances, or unanticipated consequences;
- the need to preserve the role of states as laboratories for policy innovation within our federal system; and
- the importance of giving state attorneys general and other state officials concurrent authority to enforce federal statutes intended to protect consumer and investor rights.
State and local governments should expand and strengthen consumer protections, as well as consumer outreach and education programs. Consumer outreach and education programs should also be properly funded.
Regulation
Regulators should ensure robust consumer protections in the financial marketplace. They should provide effective oversight of the financial industry. Rulemaking should be open, clear, and transparent.
Regulators should ensure that banks involved in other financial functions maintain the fundamental safety and soundness of traditional banking activities. They should also ensure that customer deposits remain secure.
Consumers should receive the same robust consumer protections regardless of the type of institution providing the product, bank or nonbank.
Regulatory agencies should receive adequate funding to carry out their missions. Regulators should carefully consider whether to charge covered industries fees to support the cost of regulation. They should avoid unintended consequences that can result from doing so, such as higher costs to consumers or potential regulatory capture.
Regulators appointed to banking agencies should have demonstrated expertise in financial services regulation. They should be free from conflicts of interest that could impair their judgment.
When using cost-benefit analysis, agencies should consider a regulation’s potential benefits when assessing costs. The assessment should include hard-to-measure benefits such as market integrity, market stability, and the benefits to individual households.
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 new products may pose to consumers’ financial well-being. They should initiate oversight and enforcement activities consistent with the risks such products may present to the public, the financial system, and the economy.
Insured and uninsured operations need to be clearly separated. Depositors’ funds must be protected from inappropriate risk. Regulators must adequately supervise any nontraditional activities. Regulators should receive enhanced access to information about market developments and activities to detect and correct problems that pose systemic threats. They should also help prevent or mitigate the effects of an individual institution’s failure.
If appropriate, criminal prosecution should be pursued when a financial institution fails. Civil actions should be pursued against organizations and individuals that hide or distort information about an institution’s health. Civil actions are also appropriate when the solvency of a financial institution is undermined.
The deposit insurance ceiling should consider an individual’s needs, major events, and many older consumers’ reliance on current deposit insurance levels to protect their savings. Nondeposit products should clearly state that they are not insured by the Federal Deposit Insurance Corporation or another banking agency.
The Consumer Financial Protection Bureau (CFPB)
Congress should ensure that the CFPB is a strong and independent consumer protection regulator. This includes maintaining CFPB’s existing independent funding. The CFPB should also:
- maintain its sole director structure;
- strongly enforce consumer financial protection laws;
- strengthen oversight and regulation of abusive financial products and services;
- maintain a public database of consumer complaints, including those made by older adults;
- pay special attention to populations most at risk of financial exploitation, including older adults;
- regularly evaluate consumer fraud and financial exploitation; and
- frequently engage with the public to learn about financial challenges.
The CFPB director should have demonstrated expertise in consumer protection and should be free from conflicts of interest (see also Ethics and Accountability).
The CFPB should also:
- continue to issue and enforce rules to make financial markets safe and fair as new abuses arise;
- maintain a robust 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 for credit cards, overdraft fees, nonsufficient funds fees, prepaid debit cards, debt collectors, and credit reports;
- prohibit financial institutions from changing the order of transactions to maximize overdraft fee revenue; and
- ensure consumers wronged by a financial product or service have access to redress, including through the availability of class actions and removal of restrictions on pre-dispute mandatory binding arbitration.
The CFPB should continue to collect, analyze, and publish consumer complaints to improve the financial marketplace. The bureau should expand categories of demographic information collected in complaints. The CFPB should explore requiring complainants to disclose whether they are older adults while protecting their privacy. CFPB defines older adults as age 62 and older based on the Dodd-Frank Act requirements. Consumers should be encouraged to report demographic information in areas such as age, race, ethnicity, sex, gender identity, sexual orientation, and location to enable more complete analysis of complaint data while protecting individual privacy.
Protections for vulnerable consumers
Policymakers and financial institutions should protect consumers with diminished capacity and others at risk of financial exploitation.
Policymakers should work with financial institutions to create and enforce effective processes and procedures to facilitate the reporting of suspected financial exploitation. This includes making financial institutions mandatory reporters of suspected financial abuse to Adult Protective Services and law enforcement.
Federal policymakers should:
- require financial institutions to indicate in confidential suspicious activity reports (SARs) when there is suspected elder financial exploitation;
- add statistics related to elder financial exploitation to the Financial Crimes Enforcement Network’s Suspicious Activity Reports (SARs) statistics database; and
- explore other mechanisms to make more widely available the insights contained in SARs related to elder exploitation, but only to the extent it does not compromise consumer confidentiality or impede criminal investigations and prosecutions.
Financial institutions should train their employees to prevent financial exploitation and recognize and respond, as appropriate, to suspected cases of it. They should report suspected cases of financial exploitation to Adult Protective Services and law enforcement.