A Dealer’s Federal Regulator—Who and When?

business woman standing on question mark

It’s anyone’s guess.

So, who’s our regulator these days anyway? Well, it’s either the FTC or the new Bureau of Consumer Financial Protection depending upon several factors, including whether you have vehicle servicing operations (think repair shop) and/or whether you sell or hold your own paper (that is…retail installment contracts or leases).

The answer also depends on when you are talking about. Right now, and until the “designated transfer date,” your regulator is the FTC (without their new power to write rules for dealers). The Bureau will not come to “life” for purposes of regulating “covered” dealers until the designated transfer date. And, the FTC will not get their new authority to write rules for dealers under the FTC Act until the designated transfer date.

The designated transfer date is currently set at July 21stof this year. That could change, however.

The Secretary of the Treasury is authorized under the Dodd-Frank Act to delay the designated transfer date by up to six months. And, since we are in June and the head of the Bureau has yet to be named, there is a possibility (slim or great, who knows at this point!) the July 21stdate could be extended up to and including January 21st.

The political wrangling occurring on “the Hill” needs to be considered when trying to figure out when this new super-agency (you’ll see what I mean as you read on) comes to life and when the FTC gets its new rulemaking power. House and Senate Republicans are very concerned with how incredibly powerful and unchecked the Bureau will be—and they’re not being quiet about it either. The role of the Bureau head is also coming under fire. There are five bills in Congress aiming to make fundamental changes to the Bureau.

Some important background information:

  • The Bureau is headed by one person called the ”Director.”. This is a person appointed by the President and confirmed by the Senate. Most regulatory agencies are led by a group of persons; say, for instance, the FTC, SEC, and the FCC. They are led by a commissions that consist of five persons, with no more than three commissioners from the same political party.

  • The Bureau is housed within the Federal Reserve Board and is entitled to 10 percent to 12 percent of the Fed’s total operating budget, no questions asked. This translates into approximately 539 million dollars (calculated according to the Fed’s $5.39 billion total operating budget for 2009). And, oh yeah, the Fed is not permitted to interfere with the Bureau’s operations or funding. The Director gets to decide how much of the 10 percent to 12 percent of the Fed’s budget is necessary for the Bureau to “carry out the authorities of the Bureau under Federal consumer financial law.. Currently, only “prudential” regulators—that means regulators that are concerned with the “safety and soundness” of financial institutions, for instance, the Fed, the FDIC, and the OCC—have this type of an insulated budget. This is understandable, because we don’t want to taint their judgment with respect to financial stability issues. Other regulators that regulate how consumers are treated, on the other hand, are subject to the political appropriations process, such as, for instance, the FTC, the FCC, and the FDA.

  • The Bureau is authorized to prescribe rules and issue orders and guidance as necessary or appropriate(what does that mean?)to enable the Bureau to “administer and carry out the purposes and objectives” of the federal consumer financial laws. The federal consumer financial laws include TILA<, plusa prohibition on abusive practices). And, the rules it prescribes can be overturned only by the Financial Stability Oversight Council. The FSOC is comprised of the Secretary of the Treasury, the Chairman of the Board of Governors, the Comptroller of the Currency, the Director of the Bureau, the Chairperson of the Securities and Exchange Commission, Chairperson of the Federal Deposit Insurance Corporation, the Chairperson of the Commodity Futures Trading Commission, the Director of the Federal Housing Finance Agency, the Chairman of the National Credit Union Administration Board; and an independent member appointed by the President. This power to overturn is very limited. It can only be done with a two-thirds vote, and only for very limited reasons that relate to safety and soundness.

The Bureau and the Director are pretty powerful, huh! Well, many Congresspersons and Senators agree.

Now back to the five bills. There are four in the House and one in the Senate. H.R. 1121, entitled the “Responsible Consumer Financial Protection Regulations Act of 2011,” aims to change the leadership of the Bureau from a single Director to the five-person commission structure, with not more than three commissioners from the same political party. H.R. 1355 would take away the Bureau’s automatic funding mechanism and replace it with the annual appropriations process. H.R. 1315, entitled the “Consumer Financial Protection Safety and Soundness Improvement Act of 2011”, would strengthen the FSOC’s authority to overturn Bureau prescribed rules. Only a simple majority would be necessary and it could do so for reasons other than safety and soundness. S. 737, entitled “Responsible Consumer Financial Protection Regulations Act of 2011”, would replace the Director with a five-person Commission and make it subject to the regular appropriations process.

The final bill, H.R. 1667, entitled the “Bureau of Consumer Financial Protection Transfer Clarification Act,” would prevent the Bureau from undertaking any substantive regulatory rulemaking until a director is confirmed. Right now the Secretary of the Treasury can step into the role of the Director until a person is appointed and confirmed by the Senate.

There are other political events and influences as well. On May fifth, 44 Republican Senators sent a letter to President Obama stating that they will not confirm any appointment to the position of Director unless fundamental changes were made to the Bureau to make it more accountable. In the letter, the Senators demanded (i) the Director position be replaced with a commission, (ii) the Bureau be subject to the appropriations process, and (iii) that the FSOC have greater power to overrule Bureau prescribed rules. Is there a theme developing?

The fun continues …

Elizabeth Warren, the “Assistant to the President and Special Advisor to the Secretary of the Treasury” who is functioning as the de facto Director, has been testifying before Congress in an effort to fend off efforts to trim the Bureau’s sails. In March she testified before the House Subcommittee on Financial Institutions and Consumer Credit. Then on May 25, she was hauled in to testify before the House Oversight subcommittee. That session got pretty testy, with Warren claiming that the subcommittee was demanding more time for her testimony than the one hour she’d agreed to give. Perhaps in response to that heated session, on June first the Chairman of the Oversight Committee, Darrell Issa (R-Calif.), asked Warren to testify before the full Oversight committee, stating that she should be prepared to testify for a full day.

So, how the Bureau will be lead and when it will begin its work in earnest is unclear as I write this. Politics will dictate…stay tuned.

Patty Covington, is a partner in the Maryland office of Hudson Cook, LLP. She has significant experience in the areas of dealer, credit and privacy law. Patty can be reached at 410.865.5409 or pcovington@hudco.com.



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