Consumer Financial Protection Bureau (CFPB)

“What is the trickle-down effect [real cost] of the Dodd-Frank Act?”

“Can the CFPB outlaw my company’s financial products?"

“How does the ongoing standoff over the CFPB Directorship affect compliance efforts today?”

“How can I ensure my company’s voice is heard?”

If you think the uncertainty that has defined the consumer finance sector over the past few years is behind us, buckle up for the wild ride still ahead.

The broad regulatory mandate of the CARD Act and the Dodd-Frank Act opens a Pandora’s Box of new regulations in every segment of the industry—either directly, as with banks, lenders and card issuers; or indirectly, as with credit bureaus and the electronic payment supply chain.

But the direction and nature of the eventual rules are largely uncertain. The newly created Consumer Financial Protection Bureau (CFPB) is a wildcard, which is why our law firm is closely monitoring the discussion and advocacy taking place daily in Congress and throughout Washington, DC.

Ensuring Our Clients' Voices Are Heard in Washington

Pillsbury’s bipartisan Public Policy team is a key player in these discussions, advocating on behalf of clients throughout the consumer finance sector. During the drafting of the CARD Act, for instance, Congress tapped our attorneys' experience in privacy law and prepaid gift card rules during consideration of the new law.

Our core value proposition:

• The insight of direct involvement gained during the CARD Act and the Dodd-Frank Act lawmaking processes
• Strong relationships with Congressional leaders who created and ultimately oversee and fund the Bureau, as well as with key CFPB personnel
• Demonstrated success facilitating meetings with CFPB on rulemaking processes

Our law firm's clients include companies throughout the consumer finance sector hoping to shape future consumer finance regulations:

• Prepaid and payroll card issuers and program managers
• Electronic payment and money services businesses
• Banks and lenders
• Credit bureaus
• Mortgage lenders and services
• Retailers

All consumer finance companies face impact from the new reform laws and regulations. Pillsbury lawyers help ensure our clients' voices are heard in Congress and throughout Washington, DC.

Monitoring the Implementation of the Dodd-Frank Act

The reality of the Dodd-Frank Act is that its focus is on avoiding another bailout of the largest financial institutions in the U.S. (i.e. the 10 largest bank holding companies that now control approximately 90% of U.S. banking assets). The implementation of that goal, however, may jeopardize the competitiveness of smaller institutions by increased regulation at the local retail and small business level by substantially increasing compliance costs as the number of implementing regulations are issued.

We suggest that the risks to smaller banks might be viewed from three perspectives: the threat presented by the CFPB and related provisions of Dodd-Frank; the trickle-down effect of regulatory burdens being imposed on large banks to smaller institutions; and the inclusion/exclusion of appropriate exemptions from burdensome regulations for smaller institutions.

The CFPB and Related Retail Provisions

The Dodd-Frank Act creates an entirely new system for both consumer lending and deposit regulation by transferring to the CFPB authority to issue and interpret virtually all federal consumer protection laws. Further, state attorneys general have been provided expanded authority to litigate against national banks and federal thrifts. (In that regard, the CFPB has clearly signaled its intention to take high-visibility enforcement actions against depository institutions.)

Among other significant regulatory concerns we have identified are:

• The issuance and restatement of the federal consumer protection laws and regulations transferred to the CFPB
• The use of the newly granted power to prohibit “unfair, deceptive and abusive” acts and practices and the part of banks and other financial intermediaries
• Substantially expanded data gathering and joint consumer and fair lending examinations at the small bank level
• The proposed complete rewriting of the rules governing residential mortgage lending

Trickle-Down Effect of New Regulations

In addition to coping with numerous retail regulations, smaller banks must face the prospect that federal and state regulators will de facto begin to impose regulatory obligations originally intended for institutions identified as being “too big to fail.” Throughout the 15 Titles of Dodd-Frank we have identified many instances in which additional burdens might be placed on smaller banks with little increased safety and soundness benefits resulting—merely increased compliance costs. These include:

• The imposition of formal risk management committees at the board level
• Complex compensation committee and other corporate reporting requirements
• Increased capital
• Derivatives and hedging limitations and reporting

Creation of Appropriate Exemptions

Although closely related to the threat posed by trickle-down regulation, as the federal agencies finalize regulations, the opportunity is presented to include clear exemptions and safe-harbors that may be utilized by smaller institutions to avoid additional regulatory scrutiny and oversight.

In that regard, we believe that efforts should be made to include in final regulations specific exemptions for small institutions to prevent federal regulators from second-guessing appropriate compliance in the following and similar areas:

• Prohibiting duplicative and overlapping examination and enforcement
• Minimizing compliance obligations for smaller institutions for derivatives, swaps and proprietary trading (the so-called “Volcker Rule”)
• Protecting and enhancing exemption from interchange rules
• Actively lobbying to increase exemption for small companies from securities registration requirements

Case Study: Unanimous Congressional Vote Saves Trees, Energy and Significant Costs for Prepaid Card Issuer

In these fractious political times, it is rare for both the House and Senate to pass bipartisan legislation that receives unanimous support. But Pillsbury’s Public Policy team drafted legislation that did just that—on behalf of several clients, including Blackhawk Network—successfully persuading Congress to extend the compliance date for disclosure requirements under the newly enacted Credit Card Accountability, Responsibility and Disclosure (CARD) Act by six months. In so doing, Pillsbury helped save Blackhawk significant production, advertising and printing costs by enabling them to use their current inventory of gift cards.

Unintended Consequences of CARD Act Deadline

Pillsbury’s Consumer & Retail practice attorneys have been advising numerous clients on compliance issues related to the federal CARD Act, which went into effect on August 22, 2010.

The CARD Act, which covers all prepaid gift, loyalty, award and promotional cards offered by retailers, credit cards or financial services companies, restricts inactivity, dormancy, and service fees, prohibits the expiration of such cards in less than five years and requires strict disclosure requirements that educate consumers as to the terms, conditions and use of such cards.

Blackhawk Network, the leading provider of prepaid and financial payments products for consumers and businesses, asked Pillsbury to assist with a possible public policy effort, as it would cost Blackhawk a significant amount to comply with the August 22 deadline. The current gift and promotional card stock it had on hand—as well as related advertising and promotion materials—would have to be pulled from the marketplace, replaced, and discarded as waste.

Pillsbury’s Multidisciplinary Response

Pillsbury’s Consumer & Retail practice attorneys turned to the firm’s Public Policy group for help. The firm had already represented Blackhawk and several other prepaid card clients during a congressional debate over the CARD Act itself and also had been lobbying for Blackhawk on issues raised by comprehensive financial regulatory reform legislation.

In concert with the Consumer & Retail practice, the Public Policy team connected with other Pillsbury clients also subject to the new rules, to form a coalition advocating before Congress to give companies impacted by the CARD Act more time to comply with the disclosure aspects of the law.

Our attorneys were able to successfully demonstrate to members of both the House and Senate that asking companies to comply with disclosure requirements so quickly not only would cost retailers a huge amount of money during an economic downturn and period of high unemployment, but also was extremely harmful to the environment. Research showed that a road could be paved from New York to San Francisco with the number of unused plastic cards on hand that would have to be destroyed if the August 22 deadline remained in effect. That would have been a huge waste of energy, water consumption and harvested trees.

Achieving an Extended Deadline

Congress agreed, and several members introduced legislation drafted by Pillsbury that enabled companies to use up their current card stock and promotional materials by extending the compliance deadline for the disclosure requirements to January 2011.

To win over members of Congress on both the right and the left, as well as moderates, requires a deep knowledge of each member’s key priorities and an understanding of which arguments will resonate best. The coalition, which consisted of large multinationals, smaller companies and retailers facing real challenges in the recession, contributed to the legislative success because it demonstrated to Congress the vast number and diverse types of businesses impacted by the new disclosure requirements.

The other regulations implementing the CARD Act’s provisions went into effect on August 22, 2010. The Pillsbury-drafted legislation, amending the effective date of the Act’s gift card provisions, passed 357-0 in the House and unanimously in the Senate as well. President Obama signed the amendments into law on July 27, 2010.

By drawing on Pillsbury’s multidisciplinary approach and capabilities, and our Public Policy group’s experience in Washington on this matter, we were able to secure a positive, strategic outcome for Blackhawk and other affected interests. To be able to go beyond serving as compliance counsel and actually help shape public policy delivers a crucial value-add to our clients.