While passing a bill that would create a consumer protection agency has proved challenging enough, that task may pale in comparison to actually setting up the new regulator.
The regulatory reform bill lays out an ambitious agenda for the Consumer Financial Protection Bureau (CFPB), including quickly detailing the scope of its powers and harmonizing regulations that implement two of the most complex lending laws on the books.
But the legislation largely leaves the new regulator on its own for how to accomplish those goals in addition to hiring needed personnel and getting itself up and running.
"While Congress has laid out the structure, it's going to take a long time and be very complicated to translate the concept into something that works," said Andrew Sandler, a partner at Buckley Sandler.
Under the final bill, which was approved by the House this week but must still be passed by the Senate, the Treasury secretary must transfer consumer protection powers to the bureau between six months to a year after enactment of the legislation, with the option to extend it to 18 months if necessary.
The bill directs the president to nominate a director, who must be confirmed by the Senate, and a deputy director. Until he or she is in place, the Treasury secretary would serve as interim director.
Once the transfer of power occurs, the bill would give the new agency broad authority over a long list of consumer protection laws, such as the Truth-in-Lending Act, the Real Estate Settlement Procedures Act, the Home Mortgage Disclosure Act and the Home Ownership and Equity Protection Act. It would also have the power to identify services or products that it considers deceptive or abusive.
Beyond those laws, however, the new CFPB director has a relatively free hand to claim jurisdiction over other consumer issues. Under the law, he or she must publish in the Federal Register a list of the rules and orders under its purview before the transfer of authority takes place.
"How far this gets pushed will be interesting to observe," said Jeremiah Buckley, the president of Corporate Risk Advisors. "The standards that are set out are very open-ended and they give the bureau very significant discretionary power to redefine what the rules will be. Whoever has that job will have: one, a lot of focus on them; two, a very broad mandate. If they decide they want to exercise the full sweep of those powers, they will be able to transform consumer protection powers."
Robert Cook, a partner at Hudson Cook, said the new regulator will first be focused on the areas under which it clearly has control, but may eventually extend its reach. "I don't expect to see major changes across the board anytime soon," he said.
Observers differed over where the new agency would first focus its attention, with some saying it will target payday lending and pending overdraft protection rules. Others said the agency should analyze HMDA data and appraisal practices.
"This will take a matter of years on an incremental basis," said David Berenbaum, the chief program officer for the National Community Reinvestment Coalition.
Carmen Balber, Washington director of Consumer Watchdog, said the recent credit card law is an opportunity for the new bureau. "One of the big places the agency will start is … to make sure credit card companies are living up to the letter and intent of the law," she said. "I think that's the most obvious place to hit the ground running."
The bill does detail certain rules and studies the bureau must eventually undertake. For example, the CFPB must conduct a study on reverse mortgages, and complete reports on educational lenders and mandatory arbitration.
Far more daunting, within its first year of existence, it must create a rule to harmonize implementation of TILA and Respa, two lending laws that overlap and, at times, conflict. Many saw that provision as the toughest for the agency to complete, noting it took the Department of Housing and Urban Development (HUD) six years to complete new rules implementing Respa.
"I don't know if all the provisions of TILA and Respa can be reconciled in one form without modification of the statutes themselves," Buckley said. "I'm not saying the goal isn't a worthwhile goal. They should make every effort to get there but it may involve changes in law and it will be a very large challenge."
Still, Travis Plunkett, legislative director of the Consumer Federation of America, said the bureau must move quickly to prove it is up to the job. "To some extent this agency is going to have to prove its mettle," Plunkett said. "There's been a big debate in Congress. Whether you agree or disagree with the agency, it's going to happen and now it's going to be up to the agency to prove its warranted."
Raj Date, the chairman of the Cambridge Winter Center for Financial Institutions Policy, said the initial rules would be critical. "Any new director of any new bureau is going to feel some pressure to put some points on the scoreboard," he said. "There's nothing wrong with that but the things you would do to get some quick visible wins are not necessarily the same things you'd do to create a long-term robust compliance engine. In a world of scarce resources, you can't do too much at once."
One key unresolved question is how fast the agency can be staffed up. The bill calls for the CFPB to take employees from the Federal Reserve Board, Federal Deposit Insurance Corp., National Credit Union Administration, Office of the Comptroller of the Currency, Office of Thrift Supervision and the HUD. If the CFPB and those regulators disagree over which personnel should be transferred, the issue must be resolved by the president.
It is unclear how many will be tapped for the new regulator or exactly where it will be located. The bill would house the agency under the Fed, but the central bank's existing consumer and community affairs division currently works from an annex office in Washington, not the agency's headquarters.
The legislation would require the CFPB to create several divisions, including a unit for research, analysis and reporting, a unit for consumer complaints, an Office of Fair Lending and Equal Opportunity, an Office of Financial Education, an Office of Service Members Affairs and a Consumer Advisory Board.
The bill also calls on the CFPB to establish regional offices and suggests they could be housed inside the 12 regional Fed banks.
But the agency cannot afford to gut the federal regulators, either. Although the CFPB will have the power to enforce its rules against banks with more than $50 billion of assets and certain nonbanks, smaller institutions will continue to be examined for consumer compliance by the banking regulators.
Steve Zeisel, vice president and senior counsel for the Consumer Bankers Association, said supervising nonbanks will be the hardest role of the CFPB. "The hardest part is figuring what Congress means when it says they are supposed to be undertaking regulator supervisory examinations of mortgage originators as well as larger entities not in consumer finance," he said. "It would be very hard for them to do the expansive job they are being charged to do unless they are fully staffed up quickly."
Also still unclear is the funding of the CFPB. The bill calls for the bureau to be funded by the Fed's operating budget equal to 10% of the central bank's operating expenses in fiscal year 2011, 11% in the following fiscal year and 12% in fiscal 2013. The bill does not define "operating expenses," but the most recent estimates indicate it would have a budget of $400 million to start with — more than the Federal Trade Commission's budget. The CFPB could request up to $200 million more from Congress if necessary.
"Overall, implementation of the agency is just as important as its enactment," Balber said. "It has the tools to be a strong advocate for consumer protection. The devil's always in the details."