In 2010, during the housing market collapse, Congress restructured the financial services regulatory system and enacted important consumer protections by enacting the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank). One goal was to promote the “safety and soundness” of the banking system to ensure that financial institutions manage risk properly and minimize the risk of collapse. Minimizing risk 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 through a rollback of federal preemption.
Congress established the CFPB to ensure that:
- markets for consumer financial products and services are fair, transparent, and competitive;
- consumers receive timely and understandable disclosures; and
- consumers are protected from discrimination and unfair, deceptive, or abusive acts and practices.
The CFPB regulates almost all financial products other than securities and insurance. It includes bank products as well as products from many non-bank financial companies. Examples of non-bank financial companies are payday lenders, check cashers, car-title lenders, prepaid card issuers, non-bank subsidiaries of banks, and mortgage brokers, originators, and servicers. Its budget is not dependent on annual appropriations but is instead funded through the Federal Reserve System. This helps ensure its independence.
The CFPB director is appointed by the president, with the consent of the Senate, for a five-year term.
In response to a requirement in Dodd-Frank, the CFPB has set up a database to receive consumer complaints and allow companies to respond. Under a previous director, that database was made publicly searchable. This was intended to improve the marketplace. To date, the database remains public, but the bureau recently expressed new intent against keeping the database public.
The CFPB’s Office of Financial Protection for Older Americans (age 62 and over) was created in Dodd-Frank to improve the financial literacy of older consumers. The office offers information and advice related to abusive financial practices.
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.
REGULATING CONSUMER FINANCIAL PRODUCTS: Policy
Regulatory structure and standards
Regulators should provide effective oversight of the financial industry and enhance consumer protection. Rulemaking should be open and transparent.
Regulators should ensure that banks involved in other financial functions maintain the fundamental safety and soundness of traditional banking activities, and that customer deposits remain secure.
Regulators appointed to banking agencies should have demonstrated expertise in financial services regulation and should be free from conflicts of interest that could impair their judgment.
Cost-benefit analysis on its own is not beneficial if it delays important safeguards. When cost-benefit analysis is conducted, 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 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.
Insured and uninsured operations need to be clearly separated. Depositors’ funds must be protected from inappropriate risk. Adequate supervision of any non-traditional activities must be ensured. Regulators need enhanced access to information about market developments and activities 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.
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.
Many older consumers rely on current deposit insurance. And individuals have different needs and can face unexpected, major life events. An appropriate deposit insurance ceiling must take these factors into consideration. The ceiling should consider an individual’s needs, major events, and many older consumers’ reliance on current deposit insurance levels to protect their savings. Non-deposit products should clearly state that they are not insured by the Federal Deposit Insurance Corporation or another banking agency.
Laws and regulations should strengthen and enhance consumer protection.
Policymakers should enhance protections against unfair, deceptive, or abusive practices.
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. Exceptions should be made for:
- authorized law enforcement agencies,
- adult protective services agencies, or
- financial regulators investigating elder financial exploitation, fraud, or abuse.
Consumers should have access to remedies for violations of law.
Financial institutions, including banks and insurance companies, should be required to make recommendations based on the best interests of the individual, not what is best for the salesperson or the firm. That is, they should adhere to a fiduciary standard. 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.
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.
Federal records pertaining to the financial services industry are exempt from the Freedom of Information Act. This exemption broadly prevents consumer and community groups from obtaining adequate information about the regulation of financial institutions. It 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 non-banking products.
Consumer Financial Protection Bureau—the CFPB should:
- continue to issue and enforce rules to make financial markets safe and fair as new abuses arise;
- maintain a robust regulatory system for non-bank 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;
- 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; and
- continue to collect, analyze, and publish consumer complaints to improve the financial marketplace.
Mobile financial services—mobile financial services, including banking transactions conducted via computerized systems, should have the same level of consumer protections as other financial services. This includes ensuring that customers using mobile financial services have access to the same information and disclosures that they would be able to 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.