The Secretary of the Treasury has announced July 21, 2011, as the “designated transfer date” upon which the newly-created Consumer Finance Protection Bureau (CFPB) will assume responsibility for the consumer protection and fair housing laws currently administered by, as applicable, the Federal banking agencies, the Department of Housing and Urban Development and the Federal Trade Commission (the transferor agencies). That date, which is one year from the date of the signing of the Dodd-Frank Wall Street Reform Act (Dodd-Frank Act), which created the Bureau, has other significant implications, including relating to the Dodd-Frank Act’s new preemption provisions.

The Dodd-Frank Act established the CFPB as a nominal bureau of the Federal Reserve Board. For more information on the CFPB, please refer to Kilpatrick Stockton’s legal alert entitled "Dodd-Frank Wall Street Reform and Consumer Protection Act – Scope of Coverage of the Bureau of Consumer Financial Protection" dated August 6, 2010. The CFPB has a dedicated budget under the Federal Reserve Board (with backup appropriations if the Federal Reserve’s contribution is insufficient). However, the Federal Reserve is prohibited from intervening in the affairs of the CFPB or directing or removing any of its employees. The CFPB will be headed by a director appointed by the President and subject to Senate confirmation. The director has not yet been appointed, but the Secretary of the Treasury has authority to organize the Bureau until the director assumes his or her position.   

On July 21, 2011, designated transfer date, the CFPB will assume primary responsibility for administering a long list of federal consumer protection and fair lending laws, including the Truth in Lending Act, the Real Estate Settlement Procedures Act, the Fair Debt Collection Practices Act, the Equal Opportunity Act and the Electronic Fund Transfers Act. Also on that date, the Bureau will acquire responsibility for supervising compliance of depository institutions of greater than $10 billion in assets (and their affiliates) with such laws and those institutions will start having their compliance examinations conducted by the Bureau. Depository institutions with less than $10 billion in assets will continue to be examined for compliance by, and subject to the enforcement of, their federal prudential regulator. However, the Bureau may participate in certain examinations on a “sampling basis.”

The Bureau receives additional powers on the designated transfer date. Those include rulemaking authority to prohibit “unfair, deceptive or abusive” acts, to prescribe disclosures in connection with consumer financial transactions and to address consumer complaints. The designated transfer date also triggers a 90-day time frame during which certain employees of the transferor agencies must assume positions with the Bureau.   

The CFPB also has the responsibility to supervise compliance by various non-depository institution financial service providers, such as mortgage brokers, payday lenders, student lenders and certain other providers that are deemed “covered persons.” The CFPB must issue its rule defining the covered persons that are subject to such supervision within one year of the designated transfer date.

Of particular importance to many depository institutions is that the Dodd-Frank’s provisions governing federal preemption of state consumer laws are also effective on the designated transfer date. The Dodd-Frank Act imposes substantive and procedural limitations on the broad preemption of state consumer laws applicable to national banks, federal branches and, particularly, federal savings associations. It provides for three circumstances under which such a state consumer law will be preempted as to a national bank, federal branch or federal savings association:  (i) the application of the state law would have a discriminatory effect on national banks, federal branches or federal savings associations compared to the effect on banks chartered by the state; (ii) as specified by the U.S. Supreme Court in the Barnett Banks case, 517 U.S. 25 (1996), the state law “prevents or significantly interferes” with the exercise by the national bank, federal branch or federal savings association of its authorized powers or (iii) the state law is preempted by a federal law other than the Dodd-Frank Act.

Along with the courts, the Office of the Comptroller of the Currency (OCC) (which, under the Dodd-Frank Act, will be assuming the regulation of federal savings associations along with the national banks and federal branches that it currently regulates) is authorized to determine whether state consumer financial laws are preempted as to national banks, federal branches and federal savings associations under the “prevents or significantly interferes” criteria mentioned above. Such determinations by the OCC must be made case by case and based on a standard of “substantial evidence.” The OCC can apply preemption determinations to substantially equivalent laws in other states, but first must consult with the CFPB and take its views into account. At least every five years, the OCC is required to conduct a periodic review of previous preemption determinations and specify whether to continue or rescind those determinations.   

The Dodd-Frank Act specifically provides that there is no preemption of state consumer laws as to nondepository subsidiaries and affiliates of national banks and federal savings associations. It also authorizes state attorneys general (but not state regulators) to enforce applicable laws and CFPB regulations (but not the Dodd-Frank Act itself) through court action.

The Dodd-Frank Act contains language preserving the applicability of OCC and Office of Thrift Supervision preemption regulations and interpretations to contracts entered into before July 21, 2010, the date of enactment of the Dodd-Frank Act. As noted, the Dodd-Frank Act makes its preemption provisions effective on the designated transfer date of July 21, 2011. That leaves a gap period (from July 22, 2010, to July 20, 2011) during which the state of the law on preemption is uncertain because the Dodd-Frank Act preemption provisions are not yet effective. Under the circumstances, the most circumspect approach would be to act as if the Dodd-Frank Act’s provisions were already applicable.

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