Friday, May 21, 2010

Who Will Watch the Watchers?

Last night the Senate voted to pass SB 3217, which is being touted as the largest financial overhaul since the Great Depression. The bill now returns to the House to be reconciled with its Financial Reform Bill. The final bill is supposed to be signed by the President before the Fourth of July.

The bill creates a new Bureau of Consumer Financial Protection which has unprecedented authority and power and whose director is appointed by the President. Yesterday we examined the makeup of the Bureau; today we are going to take a look at its power and authority.

The Bureau of Consumer Financial Protection, as we saw yesterday, will have transferred to it all of the consumer financial protection powers of a number of various agencies of the government which allow it to regulate all depository and non-depository financial institutions (for a list see yesterday's post.) Within 1 year after the creation of the Bureau, the Bureau is to issue a rule defining a class of "covered person" who will be regulated.

The Bureau shall "require reports and conduct examinations on a periodic basis" of covered persons for the purposes of "assessing compliance with the requirements of Federal consumer law; obtaining information about the activities and compliance systems or procedures of such a person, and detecting and assessing risks to consumers and to markets for consumer financial products and services." The Bureau's examinations will be based on the Bureau's determination of risks that are posed by certain products; it will take into account geographical areas of the country, how much money the entity being investigated has, the volume of financial transactions the entity is doing, the potential risks to consumers posed by financial products and services, the extent to which they are regulated by the states and other agencies, and any other information which the Bureau decides is relevant.

The Bureau has exclusive rulemaking authority and enforcement authority of its rules. For example, the Bureau can make rules regarding registration requirements for covered persons, and is required to publicly disclose the registration of covered persons to help consumers identify persons and entities regulated by the Bureau. The Bureau can require that covered persons generate, keep and maintain records to help the Bureau assess and detect risks to consumers.

The Bureau can create rules to ensure that covered persons are "able to perform their obligations to consumers." These rules can include requiring background checks for principals, officers, directors or key personnel and requiring bonding or setting financial requirements.

One of the Bureau's first mandates under the bill is to conduct a study of and report back to Congress regarding the use of arbitration agreements governing future disputes between providers of financial services and consumers. Mandatory arbitration is routinely used in the mortgage industry to keep down costs associated with law suits, but the Bureau has been given authority to prohibit or set limitations or conditions on the use of arbitration agreements.

The Bureau has the power to make rules regarding disclosures for any consumer financial product or service. The bill specifically states that one of the first acts of the Bureau is to look at creating a new disclosure combining the good faith estimate and the truth in lending. The Act does not acknowledge that the current good faith estimate, which was just implemented January 1, 2010 at great cost to the entire mortgage industry, was the result of 8 years of study by HUD.

The Bureau can make rules regarding what types of financial products may offered and how they may be sold. The bill makes it "unlawful to advertise, market, offer, or sell a consumer financial product not in conformity with this title or the rules issued by the Bureau." It is also illegal to enforce or attempt to enforce any agreement with a consumer or to impose any charge on a consumer as part of a financial product or service that is not prescribed by the rules issued by the Bureau. All financial activity outside of the scope of the Bureau is illegal, so if you are a person who routinely uses the private money guy down the street to get your financing, be warned.

How is this enforced? Well, remember that the Bureau has supervisory authority over the entire lending community, including the authority to conduct routine examinations and investigations. In case of an investigation of a possible infraction, the Bureau can demand that all "tangible things" pertaining to an investigation be turned over to the Bureau. Each question or reporting requirement which is part of a Bureau investigation must be answered in writing under oath. If the Bureau investigator takes oral testimony, this is also under oath and must be recorded by a stenographer. After the testimony has been transcribed, it must be turned over to a "Custodian" of the Bureau.

A person being required to answer questions of an investigator may have an attorney present during questioning, and the attorney may object to the questioning and a person being questioned may plead the fifth amendment to a specific question; however, the investigator may petition the U.S. District Court to require the person being investigated to answer the question--even questions on which he has invoked the fifth amendment.

After the testimony is transcribed, the person answering the questions is required to sign it. If he refuses to sign it, the investigator signs it with a notation that the witness refused to sign, but that the transcription is a true and correct record of the testimony.

If the investigation determines that a rule has been violated, the Bureau can issue a cease and desist order. A covered person can appeal a cease and desist order, but unless the court specifically issues a stay, the order must be complied with pending appeal.

If the investigation finds that the financial records of the company being investigated are incomplete or inaccurate "so that the Bureau is unable to determine the financial condition of that person" the Bureau can issue a cease desist order or issue an order requiring the covered person to get their financial records up to date in a "complete and accurate state." If the investigator/examiner suspects that the records may not match those filed with the IRS, he is required to send his report to IRS commissioner that an audit needs to be done. (This is not just in case of an investigation of possible misconduct, but it is also mandated during the course of a routine examination.)

The penalties are harsh for violating the Bureau's rules. Penalties include: Rescission of contracts, refund of moneys, restitution, public notification of penalities imposed on violators, and other penalties. "Any person who violates through any act or ommission, any provision of the Federal consumer financial law" shall be penalized based on a Tier system as follows: Tier I not to exceed $5000.00 for each day during which the violation or failure to pay continues; Tier II not to exceed $25,000 for each day of violation or failure to pay and for Tier III fines not to exceed $1,000,000 per day for each violation.

Finally, the Bureau investigators can refer the examination of a covered person to the Attorney General of the United States for criminal prosecution if the investigator feels that such action is warranted.

Who will watch the watchers themselves? Congress and the Senate are creating a mammoth agency with the power to force citizens to give sworn statements to the federal government, to create and regulate financial products, and to decide what we can borrow, what we can pay, and effectively what we as citizens can have and own. To me, that's horrifying.

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