The Obama administration appears to be retreating from some portions of its plan to create a Consumer Financial Protection Agency. A memo sent by Barney Frank, Chairman of the House Financial Services Committee, on September 22, 2009, to Democratic committee members outlines the key changes to the administration's draft legislation that will be made in a revised discussion draft Mr. Frank plans to release. The changes include the following:

  • Nonfinancial businesses will not be subject to CFPA oversight, and instead the FTC will retain oversight authority for such businesses. This change appears to respond to concerns that the CFPA would be disruptive to merchants and retailers who may allow customers to "run a tab" or use layaway plans and to doctors and other businesses that bill customers after a service is provided, such as telephone, cable, and Internet providers.

  • The CFPA will not have authority to impose the new "reasonable" disclosure standard contemplated by the administration.

  • Financial services providers will not be required to offer "plain vanilla" products.

  • For depository institutions, (a) federal safety and soundness and consumer compliance exams will occur simultaneously, and the CFPA will be required to coordinate with the banking agencies on the timing, scope, and results of exams; and (b) a panel will hear appeals of contradictory or conflicting supervisory determinations made by the CFPA and a depository institution's prudential supervisor.

  • The CFPA's Director will be advised by a Consumer Financial Protection Oversight Board, made up of the federal banking agencies, NCUA, FTC, and HUD, and the Chairman of the State Liaison Committee of the FFIEC.

Although the financial services industry will likely welcome many of the proposed changes, some of the most troublesome features of the administration's regulatory reform plan will apparently remain part of Mr. Frank's revised draft. Those features include the elimination of federal preemption of state consumer protection laws for national banks and federal thrifts, the removal of federal preemption for subsidiaries of federally chartered institutions, the authorization of state enforcement proceedings against national banks and federal thrifts, and the authority given to the CFPA to prohibit or limit the use of arbitration provisions in consumer agreements.

The administration may also be sharpening its attack on the banking agencies as part of its effort to provide a rationale for creating the CFPA. On September 23, 2009, Mr. Frank released a report card to demonstrate the Federal Reserve Board’s slowness in responding to consumer protection initiatives by House Democrats. According to Mr. Frank, the report card shows that the motivation of federal regulators "to protect consumers has been driven more by congressional pressure rather than a sense of duty to protect the American public."

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