This is the first of several posts I’ll do on the Consumer Financial Protection Agency that the Obama Administration has proposed to protect consumers and investors from financial abuse.

The Administration released an 88 page white paper on financial services reform on June 17th. The CFPA is a major new proposed agency and accounts for a significant portion of the text. Here is a synopsis based on my reading.

1. It covers all financial products but for investment products and services that the SEC and CFTC already regulate.
2. It has broad jurisdiction to make sure consumers have information they need; to protect consumers from abuse, unfairness, deception or discrimination; to make sure financial services markets operate fairly and efficiently; and to make sure traditionally
under served consumers have access to lending and other financial services.
3. It relieves the FTC of its primary role in consumer protection for financial services products.
4. Its regulations provide a floor on regulation for the states. States can adopt tougher laws if they want.
5. It can restrict or ban mandatory arbitration clauses.

The proposed CFPA would have wide authority to determine what financial services products could be marketed. This comes in two provisions.

1. It is authorized to define “plain vanilla” products which financial institutions would have to market alongside other products. That is a bank would have to offer a plain vanilla mortgage designed by the new agency.
2. It has a certain degree of pre-approval authority over the marketing and design of financial services products. Financial service providers would have to obtain a “no action” letter for a new product unless the CFPA took too long to respond.

The CFPA has far reaching powers that I don’t have space to go into here. One discussion I’ve had with other experts is whether the CFPA is closer to the Consumer Product Safety Commission which deals with problems after the fact, pulls bad products, and punishes wrongdoers; or whether it is closer to the Food and Drug Administration which doesn’t let pharmaceutical companies do much of anything that hasn’t been approved. It goes too far to say that the proposed CFPA is like an FDA for the financial services industry. But for better or for worse it is more intrusive in product design and marketing decisions that is the Consumer Product Safety Commission.

Congress will have to go along with this for the CFPA to come into being. It is sure to be subject to considerable debate.

My next blogs will discuss the pros and cons of this new agency.