Limitations on the Secretary of the Treasury’s Authority to Exercise the Powers of the Bureau of Consumer Financial Protection
Released: 2011-05-18T00:00:00

Introduction

The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act; P.L. 111-203 ) substantially overhauled the U.S. financial regulatory system. Title X of the Dodd-Frank Act, the Consumer Financial Protection Act (CFP Act), established the Bureau of Consumer Financial Protection (CFPB or Bureau) within the Federal Reserve System. The CFP Act alters the consumer financial protection landscape by consolidating regulatory authority and, to a lesser extent, supervisory and enforcement authority in one regulator—the CFPB. The Bureau will have jurisdiction over an array of consumer financial products and services, including deposit taking, mortgage lending, credit card lending, loan servicing, check guaranteeing, the collection of consumer report data, debt collection, real estate settlement services, money transmitting, and financial data processing. The Bureau will serve as the primary federal consumer financial supervisor of many of the institutions that offer these products and services. It also will have the authority to prescribe regulations to implement 18 federal "enumerated consumer laws" that were in place prior to Dodd-Frank's enactment, such as the Truth in Lending Act (TILA) and the Real Estate Settlement Procedures Act (RESPA). These enumerated consumer laws provide for consumer protections over a broad and diverse assortment of consumer financial products and activities.

Not all of the CFPB's powers become effective at the same time. Some of the Bureau's authorities took effect when the Dodd-Frank Act was signed into law on July 21, 2010. However, most of the Bureau's authorities will go into effect on the "designated transfer date"—a date six to 18 months after enactment, as determined by the Secretary of the Treasury (Secretary). Currently, the designated transfer date is July 21, 2011.

In addition to the effective dates set out in the CFP Act, the authority to exercise the Bureau's powers also may be affected by the appointment of a Director, and the date of the appointment. The Bureau is designed to be headed by a single Director, who is to be nominated by the President, subject to the advice and consent of the Senate. If a Director is appointed before the designated transfer date, the Bureau will be able to exercise all of the powers provided to it pursuant to the CFP Act. To date, the President has not appointed a Director to head the Bureau.

The CFP Act provides the Secretary the authority to exercise some, but not all of the Bureau's authorities until a CFPB Director is appointed. This report explores the limitations imposed on the Secretary's authority to perform the functions of the Bureau until a Director is appointed.

The Secretary of the Treasury's Interim CFPB Authorities

The Source of Authority: CFP Act Section 1066

Section 1066 of the CFP Act serves as the primary source of the Secretary's interim authority over the Bureau. Section 1066 is divided into two subsections, each of which provides the Secretary distinct powers that expire at different times.

Subsection 1066(b) states that the Department of the Treasury (Treasury Department) "may provide administrative services necessary to support the Bureau before the designated transfer date (emphasis added)." Any administrative services provided pursuant to the authority of 1066(b) will be offered at the direction of the Secretary, as the Treasury Department's head. The CFP Act does not elaborate as to what should be considered "administrative services," leaving some questions as to how it could be interpreted. The phrase seems to refer to matters such as providing human resources services and securing access to telephone lines and Internet services. The Treasury Department's administrative support powers under section 1066(b) went into effect on the date of enactment and terminate on the designated transfer date.

The more substantive source of the Secretary's interim authorities derives from CFP Act subsection 1066(a). Subsection 1066(a) states, in its entirety:

(a) In General.—The Secretary is authorized to perform the functions of the Bureau under this subtitle [F] until the Director of the Bureau is confirmed by the Senate in accordance with section 1011.

Subsection 1066(a) does not authorize the Secretary to exercise the full panoply of the Bureau's powers. Rather, the scope of the Secretary's authority under subsection 1066(a) is limited to "the functions of the Bureau under this subtitle [F]." An examination of the powers provided to the Bureau under subtitle F follows below. Unlike the administrative powers of subsection (b) that expire on the designated transfer date, the Secretary's authorities under subsection 1066(a) do not expire until a Director is appointed . As previously mentioned, while some of the Bureau's authorities went into effect when the Dodd-Frank Act was signed into law, the majority of the CFPB's authorities—including most that are provided under subtitle F—do not go into effect until the designated transfer date. The Secretary, in exercising Bureau powers within his interim authority, will be subject to the CFP Act's general effective dates.

CFPB's Authorities Pursuant to CFP Act, Subtitle F

Generally speaking, subtitle F transfers certain consumer financial protection functions from seven "transferor agencies" to the Bureau. The transferor agencies are: the Office of the Comptroller of the Currency (OCC), the Office of Thrift Supervision (OTS), the Board of Governors of the Federal Reserve System (FRB), the Federal Deposit Insurance Corporation (FDIC), the National Credit Union Administration (NCUA), the Federal Trade Commission (FTC), and the Department of Housing and Urban Development (HUD).

More specifically, the powers that will be transferred to the Bureau under subtitle F include

"all authority to prescribe rules or issue orders or guidelines pursuant to any Federal consumer financial law," including the rulemaking authority under the 18 enumerated consumer laws, held by the HUD, FRB, OCC, OTS, FDIC, and NCUA; certain consumer compliance examination and other supervisory authorities over "larger depository institutions" (i.e., banks, thrifts, savings associations, and credit unions with more than $10 billion in assets); primary enforcement authority of consumer financial laws and regulations over larger depositories; subject to certain limitations, the FTC's authority "to prescribe rules, issue guidelines, or conduct a study or issue a report mandated under [the enumerated consumer laws] ... "; the authority to coordinate a process by which certain employees of all of the transferor agencies other than the FTC are identified to be transferred to the CFPB, as necessary to perform the transferred authorities.

The authority associated with identifying and transferring personnel from the transferor agencies to the CFPB went into effect on the date of enactment. All identified personnel are required to be transferred to the Bureau "not later than 90 days after the designated transfer date." Virtually all of the other authorities that are provided to the Bureau under subtitle F will go into effect on the designated transfer date.

Although not beyond debate, CFP Act subsection 1066(a) appears to provide the Secretary the power to exercise all of the Bureau's transferred authorities, as provided under subtitle F, when they become effective and until a CFPB Director is appointed. These authorities include consumer compliance supervisory and enforcement powers over larger depository institutions, as well as the power to issue rules to implement the 18 enumerated consumer laws. The Secretary also has the authority to provide the Bureau necessary administrative support functions until the designated transfer date, pursuant to CFP Act subsection 1066(b). Although the authorities established under subtitle F are expansive, they do not encompass the entire universe of the CFPB's powers.

Authorities Established by Provisions Other Than Subtitle F

The powers provided to the Bureau pursuant to provisions other than those of subtitle F generally are the Bureau's "newly established" powers – i.e., the enhanced consumer protection authorities that were not explicitly provided by law to federal regulators before the Dodd-Frank Act. The Bureau's newly established authorities largely consist of: enhanced, up-front supervisory powers over covered non-depository financial institutions; new rulemaking powers, distinct from the rulemaking authorities provided under the 18 enumerated consumer laws; and certain limited consumer compliance enforcement and examination powers over "smaller depository institutions" (i.e., banks, thrifts, savings associations, and credit unions with $10 billion or less in assets).

The CFPB's newly established powers to supervise certain non-depository financial institutions are provided for in CFP Act section 1024, which is part of subtitle B. Section 1024 explicitly provides that the Bureau shall supervise non-depository providers of payday loans, mortgage loans, mortgage brokerage services, foreclosure relief services, and student loans. Rather than establishing an exhaustive list, the CFP Act provides the Bureau some flexibility to identify other types of institutions that may be subject to its supervision. For example, the CFP Act allows the CFPB, in consultation with the FTC, to prescribe regulations identifying "larger participant[s]" in a consumer financial market to be subject to the Bureau's supervision. The supervisory powers provided to the Bureau under section 1024 include the authority to conduct periodic examinations of and impose reporting requirements on covered non-depository financial institutions. The goals of the examination and reports are to verify that these institutions have policies and procedures in place to ensure compliance with consumer laws and to assess and detect risks to consumers. Section 1024 also establishes the CFPB's authority to require covered non-depository financial institutions to register with the Bureau and to maintain minimum eligibility standards (e.g., submitting to background checks and meeting bond requirements) before permissibly participating in certain consumer financial markets. In short, these powers will give the Bureau the potential to supervise covered non-depository financial institutions in a much the same way that the federal banking regulators historically have been able to supervise depository institutions. Section 1024 also provides the CFPB consumer compliance enforcement powers over covered non-depository financial institutions. The powers of section 1024 went into effect on the date of enactment.

The Bureau's new rulemaking powers largely are provided for in subtitle C and section 1022 of subtitle B of the CFP Act. Section 1022 establishes the Bureau's general authority to prescribe regulations, issue orders, and issue guidance "as may be necessary or appropriate to enable the Bureau to administer and carry out the purposes and objectives of the Federal consumer financial laws, and to prevent evasions thereof." Subtitle C provides the CFPB the authority to prescribe more specific regulations. For example, one section of subtitle C provides the Bureau the power to issue regulations declaring acts or practices pertaining to consumer financial products and services to be unfair, deceptive, or abusive. Another provision of subtitle C provides the Bureau the rulemaking authority to require disclosures regarding consumer financial products and services, including the power to establish model disclosure forms. The general rulemaking provisions of subtitle B went into effect on the date of enactment, while the specific rulemaking authorities provided under subtitle C will go into effect on the designated transfer date.

The Bureau's enforcement and supervisory powers over smaller depository institutions are relatively limited; they will leave the Bureau largely playing a back-up role to those institutions' banking regulators. Although the CFP Act does not provide the Bureau primary enforcement power over these institutions, it does establish a process by which the Bureau may refer potential enforcement actions against smaller depository institutions to their banking regulators. Also, the Bureau, "on a sampling basis," may participate in examinations of these smaller depository institutions that are conducted by their banking regulators. The Bureau generally will have access to examination reports prepared by the banking regulators of these smaller depository institutions. Although the CFPB will have to rely on existing reports "to the fullest extent possible," it also will have the authority to require smaller depository institutions to create and submit reports directly to the Bureau. The Bureau's limited supervisory and enforcement authority over smaller depository institutions generally will take effect on the designated transfer date.

As previously noted, the newly established powers are provided for by provisions other than subtitle F. They also likely could not be considered "administrative services" under subsection 1066(b) of the CFP Act. Therefore, they do not appear to be within the scope of the Secretary's interim Bureau authorities as defined by CFP Act section 1066 and likely may not be exercised until a Bureau Director is appointed.

The Secretary's Performance of Bureau Functions Since the Date of Enactment and Potential Issues After the Designated Transfer Date

Based on a review of information made publicly available by the Secretary and the Bureau, as well as the congressional testimony of multiple Treasury Department officials, it appears that the actions taken thus far by the Bureau predominately have been either administrative functions or measures taken in preparation for the exercise of the substantive authorities that will go into effect on the designated transfer date. The Bureau has neither prescribed nor formally proposed regulations; it has not entered into any binding enforcement actions; and it has not attempted to exercise supervisory powers over financial institutions. Instead, actions taken thus far include talking to interested parties, such as depository institutions, consumer groups, and state and federal regulators; collecting information on consumer financial products and services; collecting information on consumer complaints; coordinating efforts to transfer personnel from the transferor agencies to the Bureau; conducting planning meetings with personnel from the Treasury Department and the transferor agencies; hiring new personnel; securing office space and websites; and similar actions. These administrative and preparatory steps appear consistent with the description of the Treasury Department's CFPB responsibilities as provided in its 2010 annual report, as well as the explanation of the Bureau's planned activities that was provided in the Federal Register notice in which the Secretary identified July 21, 2011 as the designated transfer date.

Each of the actions described above seem to comport with either the administrative support functions authorized to be exercised by the Secretary under CFP Act subsection 1066(b) or the CFPB's transferred authorities that went into effect on the date of enactment, which are authorized to be performed by the Secretary under subsection 1066(a).

The majority of the Bureau's transferred powers that are established by subtitle F do not go into effect until the designated transfer date. For example, after the designated transfer date, the Bureau will acquire its consumer compliance supervisory and enforcement powers over larger depository institutions, as well as the rulemaking authority under TILA, RESPA, and the other enumerated consumer laws. As a result, the Secretary's interim Bureau powers arguably will be more expansive after the designated transfer date if a Bureau Director has not yet been appointed. This potential expansion of interim powers would increase the likelihood that the Bureau would move beyond administrative and preparatory steps to engaging in substantive actions that directly, and potentially significantly, impact financial institutions that participate in consumer financial markets.

For example, the FRB proposed regulations under its TILA authority that, among other things, would impose origination standards on certain mortgage lenders. The 474-page proposal was issued on April 19, 2011 and is open for comments from interested parties until July 22, 2011—one day after the designated transfer date. On July 21, 2011, the authority to prescribe regulations under TILA will transfer to the Bureau. Therefore, if final regulations are to be issued imposing mortgage origination standards similar to those proposed on April 19, those regulations must be prescribed by the Bureau, not the FRB. Prescribing these final regulations clearly would be within the authority of an appointed Bureau Director, because the authority to prescribe regulations to implement TILA will be transferred to the Bureau under CFP Act, subtitle F. Although not beyond debate, it appears the Secretary also would have the authority to issue these final regulations until a Bureau Director has been appointed, pursuant to CFP Act subsection 1066(a).

In practice, however, the limits of the Secretary's authorities may not always be clear. As is the case for virtually every complex piece of legislation, portions of the CFP Act may be open to multiple reasonable interpretations. Parties who believe their business interests are negatively impacted by certain actions taken by the Secretary under the authority of the CFP Act might be inclined to initiate lawsuits claiming that those actions exceed the Secretary's authority. Outcomes of such lawsuits are difficult to predict in the abstract, in part, because of the innumerable facts and circumstances that could give rise to these legal claims.