What Is the Consumer Financial Protection Act?

The Consumer Financial Protection Act is a federal law that established the Consumer Financial Protection Bureau (CFPB), giving it authority to regulate consumer-oriented financial products and services.

Definition and Example of the Consumer Financial Protection Act

The Consumer Financial Protection Act is a federal law that established the CFPB, an independent bureau within the Federal Reserve System that regulates consumer financial products and services such as banks, mortgage companies, payday lenders, student loans, and more. It is a component of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

• Alternate Names: Consumer Financial Protection Act of 2010, Title X of the Dodd-Frank Wall Street Reform and Consumer Protection Act, CFPA

In creating the CFPB, the Consumer Financial Protection Act consolidated oversight powers previously held by several financial protection authorities into one entity.

Beyond merely establishing the CFPB, the Consumer Financial Protection Act also established its place within the Federal Reserve System and granted it specific authorities and powers. For example, the CFPB can create rules requiring a financial institution to fully and clearly disclose terms of a credit card so that consumers understand the costs and risks associated with it.

How the Consumer Financial Protection Act Works

Prior to the Consumer Financial Protection Act and the creation of the CFPB, there was no single federal bureau with the sole purpose to oversee and regulate consumer financial products and services.

Instead, various types of financial institutions were regulated solely by their different agencies. The Federal Reserve System oversaw Federal Reserve member banks, the U.S. Treasury Department oversaw other national banks, the Federal Deposit Insurance Corporation (FDIC) oversaw state-chartered banks, and credit unions were regulated by the National Credit Union Administration (NCUA).

This diversity of agencies and departments overseeing similar financial institutions made it difficult to interpret consumer financial law in a consistent way. In fact, some have directly linked the 2008 financial crisis to this lack of consistency in interpreting federal consumer financial protections.

However, as a result of the passage of the Consumer Financial Protection Act, oversight and supervision of all—with limited exception—consumer-facing financial products and services is housed in one executive agency, the CFPB.

Purpose and Leadership of the CFPB

The Consumer Financial Protection Act gave the CFPB its mission to regulate consumer financial products and services by prohibiting unfair, deceptive, and abusive practices in the financial industry and making rules to prevent these practices.

The Consumer Financial Protection Act also created the Office of the Director of the CFPB. The director is nominated by the president of the United States and confirmed by the United States Senate to a five-year term.

CFPB’s Specific Authority

The Consumer Financial Protection Act gave the CFPB specific authority to establish rules designed to protect and inform consumers in several ways. They include the ability to:

• Prescribe rules to ensure that consumers are provided with full transparency when it comes to the costs, benefits, and risks of financial products and services
• Implement and enforce federal consumer finance laws to promote fairness, transparency, and competitive markets for consumer financial products and services
• Create rules consistent with federal consumer finance law
• Obtain access to information required to perform its functions
• Require reports and conduct periodic examinations of banking institutions with total assets of more than $10 billion

In addition to granting the CFPB broad authority, the Consumer Financial Protection Act also limits its authority in specific respects. For example, certain professionals—such as real estate brokers, CPAs, attorneys, and automobile dealers—are excluded from the CFPB’s rulemaking authority.

Also, while CFPB rules are the bare minimum required for consumer financial compliance in the U.S., the Consumer Financial Protection Act says that if a state has laws or regulations that provide consumers greater protections, consumers will be afforded those state-created protections in addition to CFPB protections.

Establishment of the CFPB’s Independence Within the Federal Reserve System

While the Consumer Financial Protection Act established that the Federal Reserve System would house and fund the CFPB, it ensures the CFPB has significant independence from the Federal Reserve Board.

For example, the Federal Reserve Board has limited to no say over the CFPB’s rulemaking and rule implementation functions. It cannot intervene in any CFPB action unless specifically given that authority by law and it cannot hire or fire individuals within the CFPB.

Other Provisions of the Consumer Financial Protection Act

In addition to establishing and empowering the CFPB, the Consumer Financial Protection Act also made other regulatory changes pertaining to consumer finance, such as:

• Requiring financial institutions to ask whether a business seeking a loan is a women-owned business, a minority-owned business, or a small business
• Requiring the U.S. Sentencing Commission to review and possibly amend sentencing guidelines for fraud
• Requiring the director and secretary of education to report to Congress on private student loans and lender