New finance watchdog: how much bite?

Look out, credit-card companies, consumers have a new sheriff.

The launch of the Consumer Finance Protection Bureau (CFPB) in July gives Americans a new ally – potentially, a powerful one – to guard against wrongdoing by financial companies, such as payday lenders and mortgage firms. Most of the bureau's tools are still in development, but a few have made their debut. The most prominent tool is the credit-card complaint process, where consumers can file a complaint and the bureau will monitor the card issuer's response.

Observers call it a milestone.

"Protecting the average American has been so far down on the list of priorities for financial regulators that nobody ever gets to it," says Ruth Susswein, deputy director of national priorities at Consumer Action, a nonprofit advocacy group based in San Francisco. "Now there is finally a regulator whose job it is to represent the consumer. That is brand-new."

So what will it do?

Born of last year's Dodd-Frank financial reform act, the CFPB consolidates consumer-protection powers that had been spread across seven different agencies. Its responsibilities range from enforcing new regulations to sharing financial literacy resources with consumers and simplifying credit application forms. The big question is: How will the bureau use its clout to handle individuals' complaints?

The new credit-card complaint system will be an early test for that.

Here's how it works. Consumers who have a beef with their credit-card company can file a complaint either at the CFPB's website (www.consumerfinance.gov) or by calling toll free at 855-411-CFPB. Complaints may touch on anything, from false advertising to billing disputes. Filers get a tracking number for their cases. If a firm does not respond within 10 days, or if filers reject the proposed resolution within 30 days, then CFPB specialists will investigate.

Card issuers and consumer advocates aren't sure how far the CFPB can or will go to resolve complaints.

Banks expect it will "look into whether there was a violation of some sort of law," says Nessa Feddis, senior counsel for the American Bankers Association, based in Washington. "They wouldn't be interpreting the contract and saying to the consumer, 'You agreed to pay this interest rate and therefore you have to pay it.' "

But Ms. Susswein says the bureau might go further and rule on whether terms of a contract have been properly honored by both parties. Others say it might use moral suasion.

"There's been pressure against banks to change some of their overdraft practices, which some large banks have done, regardless of whether there's a law passed or not," says Ellen Schloemer, of the Center for Responsible Lending, an advocacy group in Durham, N.C. "There is that kind of public pressure that can be brought to bear, and now you've got [an office] that can really be the megaphone."

For its part, the CFPB says it intends for investigative specialists to review disputes that aren't resolved within 30 days, but the bureau has not been specific about how they will adjudicate or otherwise settle issues.

The CFPB's power will be limited unless Congress approves a director. Powers transferred from other agencies are already vested with the CFPB, but any new rulemaking authority from the 2010 statute won't take effect until a director is in place. The Senate Banking Committee has held a confirmation hearing on President Obama's choice for the post, former Ohio Attorney General Richard Cordray. But GOP senators have vowed to block any nominee until the bureau is led by a board instead of a single director, Congress has the power to approve its budget, and other regulators have more say in bank oversight.

When should consumers contact the bureau with a complaint? Advocates disagree. In Susswein's view, the best approach is to work first with one's company to see if a fair and efficient solution can be found. Ms. Feddis agrees that consumers should go first to their card issuer before getting regulators involved.

Others, however, see value in putting the CFPB's muscle to work as soon as problems arise.

"I would [go first to the CFPB] because I would know that somebody would be watching the company," says Pamela Banks, senior policy counsel for Consumers Union, the nonprofit group based in Yonkers, N.Y., that publishes Consumer Reports. "Then you know the complaint won't be with the company for months and months without hearing anything."

Although mortgage-related issues rank as a priority for the CFPB, consumers for now need to use other channels to get concerns resolved while the agency ramps up. People facing foreclosure, for instance, are being referred to counselors in the Department of Housing and Urban Development's HOPE hot line.

Within the coming year, mortgage applicants can expect to use simplified forms that CFPB is now developing. Also in the works are resources to educate certain groups about their special rights as borrowers, such as military families and senior citizens.

"I would encourage people to reach out to the CFPB, though not with the expectation that it will solve their individual problems," Ms. Schloemer says. "By reaching out, they might keep someone else from falling [into financial trouble]."