Financial Regulatory Reform: Analysis of the
Consumer Financial Protection Agency
(CFPA) as Proposed by the Obama
Administration and H.R. 3126
David H. Carpenter
Legislative Attorney
Mark Jickling
Specialist in Financial Economics
September 9, 2009
Congressional Research Service
7-5700
www.crs.gov
R40696
CRS Report for Congress
P
repared for Members and Committees of Congress

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Financial Regulatory Reform: Analysis of the Consumer Financial Protection Agency

Summary
In the wake of what many believe is the worst U.S. financial crisis since the Great Depression, the
Obama Administration has proposed sweeping reforms of the financial services regulatory
system, the broad outline of which has been encompassed in a nearly 90-page document called
the President’s White Paper (the White Paper or the Proposal). The Proposal seeks to meet five
objectives:
(1) “Promote robust supervision and regulation of financial firms”;
(2) “Establish comprehensive supervision and regulation of financial markets”;
(3) “Protect consumers and investors from financial abuse”;
(4) “Improve tools for managing financial crises”; and
(5) “Raise international regulatory standards and improve international cooperation.”
The Administration likely will offer specific legislative proposals that would implement each of
the five objectives of the White Paper. On June 30, 2009, the Obama Administration made
available the first such legislative proposal, called the Consumer Financial Protection Agency Act
of 2009 (the CFPA Act or the Act). The Act would establish a new executive agency, the
Consumer Financial Protection Agency (the CFPA or the Agency), to protect consumers of
financial products and services. On July 8, 2009, Representative Barney Frank, Chairman of the
House Financial Services Committee, introduced similar legislation, H.R. 3126, which also is
entitled the CFPA Act of 2009.
This report provides a brief summary of the President’s CFPA Act and delineates some of the
substantive differences between it and H.R. 3126, as introduced. It then analyzes some of the
policy implications of the proposal, focusing on the separation of safety and soundness regulation
from consumer protection, financial innovation, and the scope of regulation. The report then
raises some questions regarding state law preemption, sources of funding, and rulemaking
procedures that the Act does not fully answer.

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Financial Regulatory Reform: Analysis of the Consumer Financial Protection Agency

Contents
Introduction ................................................................................................................................ 1
Summary of the CFPA Act .......................................................................................................... 2
H.R. 3126, Chairman Frank’s CFPA Act of 2009 ......................................................................... 6
Would the CFPA Be an Improvement? ........................................................................................ 7
Redundancy? ........................................................................................................................ 7
Financial Innovation ............................................................................................................. 8
Jurisdiction ........................................................................................................................... 9
Questions Left Unanswered ...................................................................................................... 10
Preemption.......................................................................................................................... 10
Funding .............................................................................................................................. 10
Rulemaking ........................................................................................................................ 10

Contacts
Author Contact Information ...................................................................................................... 11

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Financial Regulatory Reform: Analysis of the Consumer Financial Protection Agency

Introduction
In the wake of what many believe is the worst U.S. financial crisis since the Great Depression, the
Obama Administration has proposed sweeping reforms of the financial services regulatory
system, the broad outline of which has been encompassed in a nearly 90-page document called
the President’s White Paper (the White Paper or the Proposal).1 The Proposal seeks to meet five
objectives:
(1) “Promote robust supervision and regulation of financial firms” through the
creation of an oversight council of the primary federal financial regulators; the
provision of systemic risk oversight powers for the Federal Reserve; heightened
prudential standards for financial firms; and increased federal oversight of
institutions that are unregulated or only lightly regulated under current law;
(2) “Establish comprehensive supervision and regulation of financial markets” by
enhancing regulation over credit rating agencies; requiring originators and issuers to
retain a long-term interest in securitized loans; regulating over-the-counter (OTC)
derivatives; and providing the Federal Reserve with new oversight authority of
payment, settlement, and clearing systems;
(3) “Protect consumers and investors from financial abuse” through the creation of a
new executive agency devoted exclusively to consumer protection of financial
products and services;
(4) “Improve tools for managing financial crises” by establishing an insolvency
regime for systemically significant financial institutions and improving the Federal
Reserve’s emergency lending powers; and
(5) “Raise international regulatory standards and improve international cooperation”
by coordinating oversight of international financial firms and other regulatory
changes.2
The Administration likely will offer specific legislative proposals that would implement each of
the five objectives of the White Paper. On June 30, 2009, the Obama Administration made
available the first such legislative proposal, called the Consumer Financial Protection Agency Act
of 2009 (the CFPA Act or the Act).3 The Act would establish a new executive agency, the
Consumer Financial Protection Agency (the CFPA or the Agency), to protect consumers of
financial products and services. On July 8, 2009, Representative Barney Frank, Chairman of the
House Financial Services Committee, introduced similar legislation, H.R. 3126, which also is
entitled the CFPA Act of 2009.
This report provides a brief summary of the President’s CFPA Act and delineates some of the
substantive differences between it and H.R. 3126, as introduced. It then analyzes some of the
policy implications of the proposal, focusing on the separation of safety and soundness regulation
from consumer protection, financial innovation, and the scope of regulation. The report then

1 Financial Regulatory Reform, Obama Administration White Paper, available at http://www.financialstability.gov/
docs/regs/FinalReport_web.pdf (hereinafter, White Paper).
2 White Paper at 3-4.
3 Consumer Financial Protection Agency Act of 2009, available at http://www.financialstability.gov/docs/CFPA-
Act.pdf (hereinafter, CFPA Act).
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raises some questions regarding state law preemption, sources of funding, and rulemaking
procedures that the Act does not fully answer.
Summary of the CFPA Act
Under the Act, the CFPA would be headed by a board consisting of four members appointed by
the President, subject to the advice and consent of the Senate, for five-year staggered terms and
subject to removal only for cause. The board also would have one ex officio member, the Director
of the National Bank Supervisor4 (proposed in the White Paper to be a new government agency,
which would be established under subsequent legislation, in charge of prudential regulation of all
federally chartered insured depositories).5 The Agency would be funded through appropriations
and potentially through fees assessed by the CFPA against covered entities.6
The CFPA would be established to “seek to promote transparency, simplicity, fairness,
accountability, and access in the market for consumer financial products and services” and to help
ensure that consumers are able to make educated decisions regarding financial products and
services; that they are “protected from abuse, unfairness, deception, and discrimination”; that
markets operate efficiently and fairly; and that “traditionally underserved consumers and
communities have access to financial services.”7
To implement these goals, the CFPA would have authority over a vast array of financial activities,
including deposit taking, mortgages, credit cards and other extensions of credit, investment
advising to entities not subject to registration or regulation by the Securities and Exchange
Commission or the Commodity Futures Trading Commission, loan servicing, check-
guaranteeing, collection of consumer report data, debt collection, real estate settlement, money
transmitting, financial data processing, and others.8 The CFPA would not have authority over
insurance activities other than mortgage, title, and credit insurance.9 The range of entities engaged
in financial activities that would be subject to the CFPA also is expansive under the Act, including
banks, credit unions, and mortgage brokers to name a few. The proposed legislation defines those
covered by the Act to be
any person who engages directly or indirectly in a financial activity, in connection with the
provision of a consumer financial product or service [used primarily for personal, family, or
household purposes]; or any[one who] provides a material service to, or processes a
transaction on behalf of, [such] a person.10
Additionally, the Act would consolidate in the CFPA consumer protection regulatory and
enforcement authority, which is currently shared by a number of federal agencies. The Act would

4 H.R. 3126 refers to “the head of the agency responsible for chartering and regulating national banks,” rather than a
National Bank Supervisor. See the “H.R. 3126, Chairman Frank’s CFPA Act of 2009” section of this report.
5 CFPA Act § 1012. See, also, H.R. 3126 § 112.
6 CFPA Act § 1018. See, also, H.R. 3126 § 118.
7 CFPA Act § 1021. See, also, H.R. 3126 § 121.
8 See definition of “financial activity,” CFPA Act § 1002(18). See, also, H.R. 3126 § 101(18).
9 See definition of “financial activity,” CFPA Act § 1002(18). See, also, H.R. 3126 § 101(18).
10 CFPA Act § 1002(9). See, also, H.R. 3126 § 101(9).
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transfer to the CFPA the “consumer financial protection functions”11 and many of the employees
performing those functions from the Board of Governors of the Federal Reserve System (Federal
Reserve), the Office of the Comptroller of the Currency (OCC), the Office of Thrift Supervision
(OTS), the Federal Deposit Insurance Corporation (FDIC), the Federal Trade Commission (FTC),
and the National Credit Union Administration (NCUA).12 However, according to the guidelines of
the White Paper, these agencies, with the exception of the OTS,13 would retain safety and
soundness supervisory and examination powers outside the purview of consumer protection over
certain regulated entities.14
The CFPA also would be the primary federal regulator, examiner, and rulemaker15 with
enforcement authority under many of the federal consumer protection laws, including
(A) the Alternative Mortgage Transaction Parity Act16;
(B) the Community Reinvestment Act17;
(C) the Consumer Leasing Act18;
(D) the Electronic Funds Transfer Act19;
(E) the Equal Credit Opportunity Act20;
(F) the Fair Credit Billing Act21;
(G) the Fair Credit Reporting Act22 (except with respect to sections 615(e), 624, and 62823);
(H) the Fair Debt Collection Practices Act24;

11 The CFPA Act defines “consumer financial protection functions” as “research, rulemaking, issuance of orders or
guidance, supervision, examination, and enforcement activities, powers, and duties relating to the provision of
consumer financial products or services, including the authority to assess and collect fees for these purposes.” CFPA
Act § 1061(d). See, also, H.R. 3126 § 161(d).
12 CFPA Act §§ 1061-1066. See, also, H.R. 3126 §§ 161-166.
13 The White Paper proposes the elimination of the thrift charter. White Paper at 32-34.
14 White Paper at 19-42. The White Paper does propose changes with regards to who regulates whom and the scope of
supervision. For a detailed discussion of the current regulatory system, see CRS Report R40249, Who Regulates
Whom? An Overview of U.S. Financial Supervision, by Mark Jickling and Edward V. Murphy.
15 CFPA Act § 1022. See, also, H.R. 3126 § 122.
16 12 U.S.C. §§ 3801 et seq.
17 12 U.S.C. §§ 2901 et seq. This act is not included as an “Enumerated Consumer Law” in H.R. 3126. See the “H.R.
3126: Chairman Frank’s CFPA Act of 2009” section of this report.
18 15 U.S.C. §§ 1667 et seq. This act is not specifically referenced in H.R. 3126’s definition of “Enumerated Consumer
Law”; however, the bill does transfer enforcement authority over this act to the CFPA. H.R. 3126 § 184(b)(2).
19 15 U.S.C. §§ 1693 et seq.
20 15 U.S.C. §§ 1691 et seq.
21 15 U.S.C. §§ 1666-1666j. This act is not specifically referenced in H.R. 3126’s definition of “Enumerated Consumer
Law”; however, the bill does transfer enforcement authority over this act to the CFPA. H.R. 3126 § 184(b)(2).
22 15 U.S.C. §§ 1681 et seq.
23 15 U.S.C. §§ 1681m(e), 1681s-3, 1681w. These provisions primarily pertain to “red flag” identity theft prevention
measures for federal financial institutions, the use of credit report information among affiliates to market and solicit
consumers, and credit report record retention by federal financial institutions.
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(I) the Federal Deposit Insurance Act, subsections 43(c) through (f)25;
(J) the Gramm-Leach-Bliley Act, sections 502 through 50926;
(K) the Home Mortgage Disclosure Act27;
(L) the Home Ownership and Equity Protection Act28;
(M) the Real Estate Settlement Procedures Act (RESPA)29;
(N) the S.A.F.E. Mortgage Licensing Act30;
(O) the Truth in Lending Act (TILA)31; and
(P) the Truth in Savings Act.32
The CFPA would be required to monitor the market and the innovation of new products and
services. In order to do so, the Act would provide the Agency the authority to examine covered
persons, including national banks, federal credit unions, and federal savings and loan
associations.33 Under current law, examination powers generally rest exclusively in the
institutions’ primary regulators.
Rather than explicitly imposing new regulation on financial activities and products, the Act
primarily (though, not exclusively34) leaves such decisions to be made by the CFPA through
future rulemaking and guidance. The Agency would have the authority to promulgate rules and
issue guidance and orders to meet the objectives of the CFPA Act.35 The standard rulemaking
procedures provided by the Act would require the Agency to weigh the costs and benefits to both
consumers and industry, including the potential effect the rule would have on the availability of
financial products and services.36 The Agency also would have to “consult with the Federal
banking agencies ... regarding the consistency of a proposed rule with prudential, market, or

(...continued)
24 15 U.S.C. §§ 1692 et seq.
25 12 U.S.C. § 1831t(c)-(f). These provisions pertain to disclosure requirements for depository institutions that do not
hold federal deposit insurance.
26 15 U.S.C. §§ 6802-6809. These provisions deal with financial institutions’ use and protection of non-public
consumer information.
27 12 U.S.C. §§ 2801 et seq.
28 15 U.S.C. § 1639.
29 12 U.S.C. §§ 2601-2610.
30 12 U.S.C. §§ 5101-5116.
31 15 U.S.C. §§ 1601 et seq.
32 12 U.S.C. §§ 4301 et seq.
33 CFPA Act §§ 1022(c) and 1024. See, also, H.R. 3126 §§ 122(c) and 124.
34 However, the Act would impose some substantive regulations. For example, the Act would require disclosure of new
data points under the Home Mortgage Disclosure Act. CFPA Act § 1086(f).
35 CFPA Act § 1022(a). See, also, H.R. 3126 § 122(a). The CFPA would be expressly prohibited from setting a usury
cap without specific authorization by law. CFPA Act § 1022(g). See, also, H.R. 3126 § 122(g). The Act specifically
provides the Agency the authority to prohibit or limit arbitration clauses. CFPA Act § 1025. See, also, H.R. 3126 § 125.
36 CFPA Act § 1022(b). See, also, H.R. 3126 § 122(b).
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systemic objectives administered by such agencies.”37 Within three years38 of any CFPA
“significant rule or order” becoming effective and after a public comment period, the Agency
must publish a report assessing the effectiveness of the rule or order.39 The Act does not specify
what would be considered “significant,” presumably leaving these determinations to the Agency.
The Act imposes additional procedures upon specific types of rulemaking. For instance, the
Agency would be authorized to promulgate rules on unfair or deceptive practices in connection
with consumer financial services and products. However, the Agency could only promulgate a
rule deeming an act unlawfully unfair if
the Agency has a reasonable basis to conclude that the act or practices causes or is likely to
cause substantial injury to consumers which is not reasonably avoidable by consumers and
such substantial injury is not outweighed by countervailing benefits to consumers or to
competition.40
Other examples of specific rulemaking authority for which the CFPA Act would impose
requirements in addition to the Act’s standard rulemaking procedures outlined above include
disclosure requirements;41 minimum standards for the prevention and detection of “unfair,
deceptive, abusive, fraudulent, or illegal transactions”;42 provision of “standard consumer
financial products or services” that may serve as a comparison to similar, but less traditional
products or services;43 and imposition of duties, including compensation practices, on covered
persons.44
All of these steps and restrictions exceed the normal notice and comment procedures of the
Administrative Procedure Act, which generally apply to agency rulemaking.45
With regard to preemption of state laws, the preemption language of the “enumerated consumer
laws” largely would remain unchanged by the CFPA Act.46 However, for matters unrelated to
enumerated consumer laws that include provisions explicitly delineating how such federal laws
shall interact with state laws,47 the Act would not preempt state consumer protection laws and

37 CFPA Act § 1022(b). See, also, H.R. 3126 § 122(b).
38 The Agency may delay the report for up to five years after the effective date if it determines that three years is not
enough time to adequately review the rule. CFPA Act § 1024. See, also, H.R. 3126 § 124.
39 CFPA Act § 1024. See, also, H.R. 3126 § 124.
40 CFPA Act § 1031. See, also, H.R. 3126 § 131.
41 CFPA Act §§ 1032 and 1034. See, also, H.R. 3126 §§ 132 and 134.
42 CFPA Act § 1035. See, also, H.R. 3126 § 135.
43 CFPA Act § 1036. See, also, H.R. 3126 § 136.
44 CFPA Act § 1037. See, also, H.R. 3126 § 137. The Agency would only be able to enforce violations of duties
prescribed under the authority of § 1037 in accordance with an adjudicatory proceeding described in great detail in §§
1051-1058 of the Act. CFPA Act § 1037. See, also, H.R. 3126 § 137.
45 5 U.S.C. § 553. See, also, CRS Report RL32240, The Federal Rulemaking Process: An Overview, by Curtis W.
Copeland.
46 CFPA Act § 1041(b) (The one exception is with regard to the preemption language of the Alternative Mortgage
Transaction Parity Act). See, also, H.R. 3126 § 141(b) (H.R. 3126 cites § 175 of the bill, which does not exist.
Presumably, the proper citation would be to § 183, which pertains to the Alternative Mortgage Transaction Parity Act).
47 For example, 15 U.S.C. § 1610 of the Truth in Lending Act states in part: “Except as provided in subsection (e) of
this section, this part and parts B and C of this subchapter, do not annul, alter, or affect the laws of any State relating to
the disclosure of information in connection with credit transactions, except to the extent that those laws are inconsistent
with the provisions of this subchapter and then only to the extent of the inconsistency.”
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regulations that provide greater protections to consumers, but would preempt otherwise
conflicting state laws. The CFPA would decide whether or not particular state laws conflict with
the Act,48 with specific decisions subject to judicial review.49 Any generally applicable state
consumer law would apply to national banks and savings and loans unless it discriminates against
them (presumably to the benefit of intrastate financial institutions) or conflicts with the Act.50
Additionally, any state consumer law regulating state banks or state savings and loans that was
enacted in compliance with federal law also would apply to national banks and savings and loans
unless it discriminates against the federally chartered institutions or conflicts with the CFPA
Act.51 Depending on how they are interpreted by the Agency and the courts, these provisions
could result in a departure from current federal banking law, which the OCC and other banking
regulators interpret as preempting many state consumer laws.52
The CFPA would be provided the authority to enforce the requirements of the CFPA Act and the
enumerated consumer laws, as well as the rules and regulations promulgated under the authority
of those laws.53 State attorneys general also would be given authority to enforce the CFPA Act
and its regulations on behalf of residents of their state; however, before doing so, state attorneys
general, under most circumstances, would have to provide advance notice to the CFPA, and the
Agency would have the authority to intervene in the civil action. The Act would not alter the
authority (or lack thereof) of state attorneys general to enforce the enumerated consumer laws.54
H.R. 3126, Chairman Frank’s CFPA Act of 2009
There are three major substantive differences between H.R. 3126, as introduced, and the Obama
Proposal. One is that H.R. 3126 does not transfer oversight and enforcement authority over the
Community Reinvestment Act to the CFPA, as proposed by the Obama Proposal.55 A second is
that H.R. 3126 does not envision the elimination of the thrift charter, and by extension, the Office
of Thrift Supervision. The President’s White Paper proposes eliminating the thrift charter and
converting such entities into state or national banks, while also modifying the regulatory
framework to which banks are subject.56 It is still unclear how (or if) Congress will propose to
change the prudential regulation of financial institutions, including banks and thrifts. The fact that
H.R. 3126 continues to reference thrifts and the Office of Thrift Supervision is not an indication
that changes will not be made to them in the future—just that such changes have yet to be made
and are not proposed in H.R. 3126.57 As a result of their variant treatment of thrifts, the

48 CFPA Act § 1041. See, also, H.R. 3126 § 141.
49 For a description of judicial review of statutory interpretation by agencies, see CRS Report R40595, Cuomo v.
Clearing House Association, L.L.C: National Banks Are Subject to State Lawsuits to Enforce Non-Preempted State
Laws , by M. Maureen Murphy.
50 CFPA Act §§ 1043(b)-(c) and 1046(b)-(c). See, also, H.R. 3126 §§ 143(b)-(c) and 146(b)-(c).
51 CFPA Act §§ 1042(d) and 1046(d). See, also, H.R. 3126 §§ 142(c) and 146(d).
52 See, e.g., 12 C.F.R. §§ 7.4000 et seq. and Part 34. See, also, CRS Report RL32197, Preemption of State Law for
National Banks and Their Subsidiaries by the Office of the Comptroller of the Currency, by M. Maureen Murphy.
53 CFPA Act § 1022. See, also, H.R. 3126 § 122.
54 CFPA Act § 1042. See, also, H.R. 3126 § 142.
55 H.R. 3126 § 101(16).
56 White Paper at 30-31.
57 However, Chairman Frank has reportedly stated that he does not believe the House Financial Services Committee
will pass legislation that would eliminate the thrift charter. Bill Swindell, Frank: No Need to Scrap Federal Thrift
(continued...)
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President’s CFPA Act and H.R. 3126 divide regulatory authority differently, which is primarily
manifested in the two proposals’ conforming amendment sections. Similarly, H.R. 3126 does not
make reference to a National Bank Supervisor (NBS) like the President’s CFPA Act. Instead, H.R.
3126 refers to “the head of the agency responsible for chartering and regulating national banks,”58
which basically describes the NBS as proposed by the White Paper.
Would the CFPA Be an Improvement?
The Treasury’s White Paper argues that the CFPA is necessary because recent events in financial
markets have exposed the inadequacy of the current regulatory framework. As an example, the
White Paper cites overly complicated, nontraditional mortgages that were unsuitable for the many
borrowers who lost their homes to foreclosure.59 By creating an agency dedicated exclusively to
consumer protection, Treasury hopes to raise standards for financial intermediaries and ultimately
foster a culture of consumer protection within financial firms. In the White Paper’s analysis, the
imperative to protect consumers was simply overwhelmed by profit considerations—by its very
existence, the CFPA is intended to right the balance.60
There are benefits to having a single agency in charge of virtually all consumer financial products
and services and consumer protection laws. But there are also costs, which may fall either on
regulated financial institutions or on consumers. The CFPA proposal raises a number of basic
questions about the structure and purposes of regulation.
Redundancy?
The powers that the CFPA would have are primarily derived from federal banking statutes. This
raises the objection that the existing bank regulators already have full authority to do what the
new agency would do. What would prevent failures in regulation from being addressed within the
existing structure?
One can argue that there is a conflict between safety and soundness regulation and consumer
protection. When a banking activity is profitable, regulators tend to look upon it favorably, since
it enables the bank to meet capital requirements and withstand financial shocks. According to the
White Paper, professional bank examiners are trained “to see the world through the lenses of
institutions and markets, not consumers.”61 This conflict may be especially sharp in consumer
lending.
Over the past several decades, banks and other financial institutions have expanded the scale and
scope of their consumer lending programs. Partly driven by competition from the securities
industry (which has largely supplanted banks as a source of funds for large corporations), and
partly by the availability of computerized credit scoring models (which dramatically reduce the

(...continued)
Charter, CongressDaily, July 15, 2009.
58 See, e.g., H.R. 3126 § 112(a).
59 White Paper at 55.
60 White Paper at 57.
61 White Paper at 56.
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cost of evaluating borrowers’ creditworthiness), mainstream lenders have made credit available to
consumers who not long ago would have been viewed as too risky and unqualified.62
Credit card and subprime mortgage lending are perhaps the most visible results of this trend. On
the one hand, they represent a great expansion in the availability of credit and have allowed many
consumers to raise their standard of living. On the other hand, both have been criticized for high
costs to borrowers, hidden fees, and/or excessive complexity, to the extent that lending practices
have been described as unscrupulous and abusive. If one believes that banks have sought to
maintain their profits by offering credit to consumers with limited financial resources and
sophistication, many of whom accumulate heavy debt burdens,63 the case for a CFPA may
be strong.
On the other hand, it can be argued that even very expensive forms of credit—such as predatory
or payday lending—are welfare-enhancing,64 that the balance between safety and soundness
regulation and consumer protection ought not to be shifted in favor of the latter, and that the
CFPA would add a redundant layer of regulation.
Financial Innovation
An argument against the CFPA is that it could stifle financial innovation. Innovative practices are
by definition less well understood than traditional ones,65 and financial institutions tend to earn
higher margins on new products, at least until their competitors enter the market and compete
away excess profits. Both factors might appear problematic to a consumer protection regulator,
though not necessarily to a safety and soundness regulator.
The White Paper is explicit about favoring and promoting traditional, “plain-vanilla” financial
products. The White Paper stresses the need to achieve simplicity, fairness, and reasonable
disclosure;66 and the Act would provide the CFPA the authority to impose duties of care and
suitability requirements on financial firms. Opponents of the CFPA might argue that this attitude
could lead to the creation of barriers and hurdles—perhaps in the form of slow approval of
disclosure forms—to the introduction of new products.
Treasury officials have made clear their concern that the classical economic model of rational,
informed consumers, able to act in their self-interest, is not a sound basis for regulation. For
example:
Michael Barr [Assistant Secretary for Financial Institutions], who is leading the consumer-
protection efforts, said the “plain-vanilla” financial products have their roots in behavioral

62 Darryl E. Getter, “Consumer Credit Risk and Pricing,” Journal of Consumer Affairs, vol. 40, Summer 2006, p. 41.
63 According to the Federal Reserve’s Survey of Consumer Finances, 26.9% of the families in the bottom 20% of the
income distribution devoted more than 40% of their incomes to debt repayment in 2007.
64 There is empirical evidence for this. See, e.g., Paige Marta Skiba and Jeremy Tobacman, “Measuring the Individual-
Level Effects of Access to Credit: Evidence from Payday Loans,” The Mixing of Banking and Commerce: Proceedings
of the 43rd Annual Conference on Bank Structure and Competition, Federal Reserve Bank of Chicago, 2007, p. 280;
and Jonathan Zinman, “Restricting Consumer Credit Access: Household Survey Evidence on Effects Around the
Oregon Rate Cap,” Federal Reserve Bank of Philadelphia Working Paper 08-32, December 2008.
65 This is the case for all financial products, not just those designed for consumers.
66 White Paper at 63-67.
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economics and psychology. It isn’t enough to provide consumers with more disclosure and
more information, since people often get easily overwhelmed and make mistakes, said Mr.
Barr, a former academic who studied the financial markets.
Most people, for example, don’t understand the effects of compounding of interest—which
leads them to undersave and to overborrow—a basic human failing that some financial
institutions have an incentive to exploit.67
The debate over strengthened consumer protection, in other words, involves the age-old question
of how much government intervention into markets is warranted: should consumers be protected
from their mistakes, or trusted to make decisions that will enhance individual and common
welfare? The issue of financial innovation can be framed similarly: is development of new and/or
exotic financial products to be encouraged, or are they potentially troublesome if they gain wide
currency before the risks are fully understood by regulators and market participants?
Jurisdiction
Under the Treasury proposal, the SEC and CFTC would retain their consumer protection role in
securities and derivatives markets.68 This could be viewed as a flaw, which would preserve the
existing fragmented federal regulatory structure. The banking and securities industries have for
years offered products that compete with each other—money market funds, brokerage checking
accounts, investment advice through bank trust departments, etc.—and issues of overly complex
products, inadequate disclosure, conflicts of interest, and the extent of fiduciary duties are
common to both.
Since the onset of the financial crisis, households’ losses in real estate have been exceeded by
their losses in securities investments.69 Not all those losses resulted from fraud or regulatory
failure, but the SEC’s recent record is not notably better than the bank regulators’. The logic of
creating a single agency exclusively concerned with consumer financial protection, and excluding
securities (and futures70) may not be clear.
For comparison, the Financial Services Authority in the United Kingdom has consumer protection
powers over all financial industries, including banking, securities, derivatives, and insurance. Its
objectives, as posted on its website, appear to mirror those of the proposed CFPA. The Financial
Services and Markets Act gives the FSA four statutory objectives:
• Market confidence: maintaining confidence in the financial system;
• Public awareness: promoting public understanding of the financial system;
• Consumer protection: securing the appropriate degree of protection for
consumers; and

67 Jane J. Kim, “Plain-Vanilla Financing Could Melt Bank Profits – U.S.’s Bid to Help Consumers; Mystery of
Compound Interest,” Wall Street Journal, Jun. 26, 2009, p. C1. Behavioral finance posits that consumers are “hard-
wired” to make bad financial choices, and that education is only a partial remedy.
68 The White Paper does recommend certain enhancements to the SEC’s authority: see, e.g., p. 70.
69 Between the end of 2006 and the first quarter of 2009, households lost $4.01 trillion of the value of their real estate
holdings, while the value of corporate stock and mutual funds held by households (and non-profits) fell by $5.10
trillion. Federal Reserve, Flow of Funds Accounts, Table B. 100.
70 Although relatively few individuals trade in derivatives markets.
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• The reduction of financial crime: reducing the extent to which it is possible for a
business to be used for a purpose connected with financial crime.71
Is there a different regulatory structure, where jurisdiction is split differently among multiple
regulators, that could lead to a greater balance of the regulatory costs and benefits? Are there
other products and services that should be excepted from the CFPA’s jurisdiction?
Questions Left Unanswered
Preemption
How narrowly or broadly would the Agency interpret potential conflicts between state and federal
law? If interpreted narrowly, then the Act’s preemption language could have a detrimental effect
on banks and other entities that provide consumer financial products and services in multiple
states because they would be working within multiple regulatory regimes, increasing
administrative costs that likely would be passed on to consumers.72 If the Agency interprets
conflicts broadly, then interstate actors may only have a single set of rules to follow, but
consumers may not be as fully protected from predatory products, services, and practices as they
would be otherwise.
Funding
How much funding would come from fees on covered entities? How would the annual fees be
tabulated (e.g., based on number of covered transactions or size of company)? If such fees were
assessed, would those costs be passed onto the consumer? Would that be more beneficial to the
public as a whole than paying for the Agency through normal appropriations? The agencies from
which many of the CFPA employees would be transferred are largely self-funded through fees
assessed on the companies under their regulatory jurisdiction. Some have argued that this source
of funding played a role in lax regulatory enforcement by federal agencies because banks have an
incentive to seek the regulator they believe will have the lightest regulatory touch, while the
regulators generate more fees with every institution they bring under their jurisdiction.73 Would
funding the CFPA through fees lead to similar problems? On the other hand, running the Agency
would be expensive. The ability of the CFPA to generate at least some of its own funding could
reduce the Agency’s need for general appropriations.
Rulemaking
Are the Act’s rulemaking procedures appropriately drawn? As previously mentioned, agency
rulemaking generally requires public notice of proposed rulemaking and a period for public

71 http://www.fsa.gov.uk/Pages/about/aims/statutory/index.shtml.
72 This potentially could put entities acting only within a single state at a competitive advantage over interstate actors.
73 See, e.g., Adam Levitin, Bank Regulatory Arbitrage and Deregulation: The Number of Bank Regulators Matters,
Credit Slips: A Discussion on Credit and Bankruptcy, available at http://www.creditslips.org/creditslips/2009/06/one-
of-the-key-points-of-debate-over-financial-institution-regulation-reform-is-how-many-different-bank-regulators-there-
shou.html.
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comment on the matter. The Act would require steps in addition to notice and comment. For
instance, the CFPA would have to make findings regarding the costs of potential rules on both
industry and consumers. Additionally, the Agency would have to review any significant rule
within three to five years after its effective date. The Act would impose other restrictions on
rulemaking, as well. If rulemaking procedures are too easily met, then the Agency could go too
far, promulgating rules that have a deleterious effect on consumers’ access to credit and on
industry’s profitability. If procedures are so restrictive that the Agency is unable to promulgate
rules in a timely fashion, consumers could be harmed by otherwise preventable predatory
products and practices, which also could lead to long-term harm to industry. If overly restrictive,
the rulemaking process itself could be expensive, increasing costs to taxpayers and potentially to
consumers and industry if the Agency imposes fees on products and services.

Author Contact Information

David H. Carpenter
Mark Jickling
Legislative Attorney
Specialist in Financial Economics
dcarpenter@crs.loc.gov, 7-9118
mjickling@crs.loc.gov, 7-7784




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