The Dodd-Frank Wall Street Reform and Consumer Protection Act has created a uniquely powerful entity, the Consumer Financial Protection Bureau. Intended to be an independent bureau housed within the Federal Reserve Board, the CFPB will have authority over practically all federal consumer protection statutes.
As an administrative entity within another independent administrative agency (e.g., the Federal Reserve), the CFPB has been largely removed from political influence and the benefits associated with political compromise.
Because our domestic economy is reliant upon consumer spending and activity, the priorities adopted by the head of the CFPB — termed the director — will be subject to detailed critical analysis. Below are several strategies the director may consider as the CFPB takes shape.
First, the new director, who has yet to be nominated by the administration, must make the difficult choice between organizing the CFPB and focusing on forward-looking policy development. While the attractiveness of policy development is self-evident, the scope of the CFPB bureaucracy will be breathtaking and will require the hand of a steady and experienced manager.
Among other tasks, the director must create several offices within the CFPB, recruit and transfer staff from other federal agencies, identify the types of consumer financial companies that the CFPB will directly regulate and create an examination, supervision and enforcement staff for directly regulated companies. If this list of Herculean tasks is not enough, the 17 federal consumer protection statutes transferred to the jurisdiction of the CFPB will require comprehensive analyses and review — including initiating a long-sought homogenization of the mortgage disclosure requirements of the Truth in Lending Act and the Real Estate Settlement Procedures Act.
While clearly the director must include policy determinations in the organizational mixture, the emphasis on sound administrative organization should be the principal focus of the first director of the CFPB.
Once the director completes the initial organizational tasks for the CFPB and can turn to the development and implementation of policy, the assigned role of the director as the arbiter of appropriate behavior by the consumer financial services industry will almost certainly become apparent. However, the absence of a voting board of directors may make any determination by the director potentially subject to attack and criticism. Particularly if the first director accepts the appointment based upon an announced pro-consumer or pro-industry agenda, the political dynamics of almost any policy determination may result in diminished credibility and demands for change.
No matter who is appointed director, it is apparent that he/she will do everything possible to balance competing interests. However, the perception that valid financial industry or consumer views are not being considered may quickly undermine the effectiveness of the CFPB.
To remedy this looming problem, the director could, at an early stage in the organizational process, recommend to Congress that the bureau expand to a three- to five-person board — with the director holding management authority similar that of the chairman of the FDIC. This modification might substantially mollify all stakeholder concerns about reasonable access and ensure a fair hearing at the CFPB's policy and rulemaking levels.
Finally, the director will face with the challenge of utilizing his/her position as a bully pulpit before a wide range of engaged constituencies. Many consumer groups view the creation of the CFPB as a long-sought victory and will be interested in hearing plans for high-profile enforcement actions against lenders. At the same time, consumer financial companies will expect the CFPB to appreciate the complexities of the consumer marketplace, including a public acknowledgement by the director of the challenges presented by procedural and substantive consumer requirements in an ever-evolving technological environment.
In that regard, the assumption that current safeguards in the consumer financial system are no longer adequate to protect individuals against overreaching and unfairness is central to the creation of the CFPB. To address that perceived weakness, the CFPB has been given "UDAP" authority, which enables it to deem consumer products and services to be "unfair, deceptive or abusive." This authority stretches across the entire consumer financial sector, and includes, among other things, situations in which a consumer has been provided adequate disclosures, but the provider of a consumer product or service has overreached to the detriment of the consumer.
This expansive UDAP authority is perhaps the CFPB's most significant new authority and the director must exercise prudence when leading a public discussion regarding its proposed use. Among other things, this is because unfairness is almost always an after-the-fact and a qualitative analysis, whereas lenders and other financial providers need bright-line tests when imbedding compliance-functional capability into operational systems. It is the director's job to balance these competing interests in the public policy debate in order to secure acceptance of the CFPB in its new role as the primary regulator of the consumer financial market place.