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Which Entity Had the Job of Writing Rules to Implement ECOA?

The new rules for conducting financial activities under the auspices of the Dodd-Frank Act’s new consumer-protection rule, commonly known as the “Consumer Financial Protection Bureau” have been publicly released. One of the most contentious issues surrounding the new rules has been who had the responsibility of writing them?

The new regulator of consumer financial products and services, the CFPB, was created by the Democrats in Congress in October of 2010 in response to the Great Recession. The mission of the new watchdog agency is to “ensure fair and honest practices in the financial services industry in order to protect consumers from misconduct and make markets safer and more efficient.”

One of the first tasks the CFPB undertook once it was established was to develop the rules that would give rise to the new agency. As a result of this effort, the Bureau issued a request for comments on the subject of consumer financial protection, which was published in the Federal Register on April 24, 2011. The deadline for filing comments on the subject was June 24, 2011.

The Consumerist, a popular American news website, recently published an article by Elizabeth Warren (D-MA), the Senator who led the fight to create the Bureau, entitled “Which Entity Had The Job Of Writing Rules to Implement the Dodd-Frank Act?” In the piece, Warren details how she and other key policymakers had the responsibility of writing the rules to implement the Act, which created the Bureau, as well as the Consumer Product Safety Commission and the Securities and Exchange Commission.

Senators’ Comments

Warren’s article offers an interesting perspective into the legislative process of writing and passing the Dodd-Frank Act. Not only did she have the responsibility of writing the rules to implement the act, but she also helped craft the legislation that became the Act. Here are some of the most interesting excerpts from the article:

  • “It was a collaborative effort. I had the privilege of working with several Members who had a significant interest in ensuring that the consumer protection functions of the CFPB were strengthened and that there were additional consumer protections throughout the financial system.”
  • “One of the things that made this such a special effort is that we had a number of different viewpoints, but we were able to find a way to work them all together.”
  • “The challenge was to distill all of that into something that was precise and clear and could withstand the legal challenges that were certainly sure to come.”
  • “Another significant challenge was ensuring that we did not duplicate efforts, and that instead we coordinated as much as possible with the other federal agencies that have a role to play in protecting consumers.”

The Biggest Challenge

In the article, Warren details how she and other policymakers had to tackle the issue of what defines a “financial product” in order to write the rules implementing Dodd-Frank.

“The first step in the rulemaking process was figuring out what financial products are covered by the statute,” Warren writes. “This was a significant challenge because the definition of ‘financial product’ is quite broad and could encompass a number of different products including checking accounts, credit cards, student loans, and retirement accounts.”

Warren’s explanation of the difficulty of defining a “financial product” demonstrates the importance of this initial rule-writing effort:

  • “This was an issue that we struggled with for a good amount of time because it is quite difficult to articulate what exactly constitutes a ‘financial product.’…To be very clear, determining the scope of the new agency’s jurisdiction is critical, and I believe this definition will prove very useful when challenged in court.”
  • “Although a number of financial products are currently exempt from the statute’s [§ 560] jurisdiction, we have to ensure that this does not become a loophole that undermines consumer protection.”
  • “This definition is critical because it will become the ‘road map’ for the CFPB’s enforcement actions, and it sets the boundaries of the agency’s authority.”
  • “This challenge taught us how complicated it can be to define basic business practices in a way that all stakeholders can understand. It also made us appreciate more how helpful professional legal and technical staff can be in distilling the legislative language into something that can be easily implemented.”
  • “For example, checking accounts and other forms of direct banking are generally considered to be ‘banking products,’ but these are also the kinds of products that consumers are going to be using to interact with the new CFPB. It would be nearly impossible to regulate the practices of a financial institution if you do not even know what a checking account is.”

How The CFPB Fills An Important Public Purpose

Warren also emphasizes in the article that the new agency will play an important role in protecting consumers and filling an important public purpose:

  • “The financial services industry has changed a great deal since the passing of the [Dodd-Frank Act] almost four years ago. Back then, the biggest challenge for consumers was securing enough money to make the initial down payment for a home. Now, with the exception of mortgages, the biggest challenge is protecting the personal information that we entrust to these institutions.”
  • “The CFPB’s primary focus will be on protecting consumers from unfair, deceptive, and improper practices, and a lack of adherence to fair and honest practices will make the markets and the economy healthier and more agile.”

Who Will Watch The CFPB?

According to Warren, it was incumbent upon Congress to establish a mechanism to ensure that the new watchdog agency was “not simply a political patronage job” and would instead be “an independent agency that will actually police the financial industry.”

To this end, the statute creating the new agency (the Dodd-Frank Act) provides that the Director of the Consumer Financial Protection Bureau will be appointed by the President with the advice and consent of the United States Senate. This Director will serve a five-year term, with the possibility of reappointment. The Director is protected from removal except by impeachment, and, in the event of a vacancy, the Deputy Director will serve as Acting Director. Furthermore, to establish the CFPB as a truly independent agency, the Director is prohibited from being involved in the day-to-day operations of the agency.

These details establish that the new agency is meant to be an independent check and balance on the big banks and Wall Street. When a bank or other financial institution provides services to consumers, the CFPB will be able to ensure that these services are provided in a fair and honest manner. As a result, consumers will be better able to trust the financial products and services that they encounter. This in turn will make the economy healthier and more stable. (Related: The Case For the New Consumer Protection Bureau)

The Director of the CFPB will also have the authority to issue orders requiring banks, credit card companies, and other financial institutions to comply with the rules that he or she enacts. These orders can be enforced through the courts, and the CFPB can also refer cases to the Justice Department for prosecution.

According to Warren, the “creation of the CFPB was a significant step toward restoring the public’s trust in their financial institutions. It was an effort that spanned nearly four years of hard work by many people.”

Indeed, the CFPB’s existence proves how much the financial services industry needs a capable and independent watchdog.