The CFPB has announced that it plans to invoke its “latent authority” to supervise non-bank entities involved in conduct that represents a risk to consumers. Along with the ad the CFPB issued a procedural rule on the confidentiality of proceedings in which the CFPB invokes such authority. These moves by the CFPB are notable for two reasons. First, they are consistent with the agency’s stated intent to increase scrutiny of fintech companies, as it could allow the CFPB to conduct in-depth reviews of fintech companies over which it currently has no clear supervisory jurisdiction. . Second, they will allow the CFPB to publish the Director’s decision to extend its supervisory jurisdiction to a non-bank entity engaged in conduct that “poses risks” to consumers, thus sending signals to the industry about its opinion on certain practices. .
The Consumer Financial Protection Act authorizes the CFPB to supervise any nonbank covered person, regardless of size, that the CFPB has reasonable grounds to determine is “engaging or has engaged in conduct that presents risks to consumers with regarding the offer or provision. of consumer financial products or services. A risk-based determination must be made by issuing an order by the CFPB after providing the nonbank with notice and a reasonable opportunity for it to respond.
Although the CFPB adopted a final rule in July 2013 (12 CFR Part 1091) establishing its procedures for supervising nonbank entities engaged in conduct that poses a risk to consumers, it has not yet invoked those procedures. According to Director Chopra, the CFPB will now invoke these procedures to address “the rapid growth of consumer offerings by non-banks.” He stated that “[t]His authority gives us critical agility to move as fast as the market, allowing us to conduct reviews of financial companies that pose risks to consumers and stop the damage before it spreads.” The CFPB suggests that use of its supervisory authority may be preferable to use of its enforcement authority because it may avoid the need for “adversarial litigation.”
This risk-based supervisory authority is in addition to the CFPB’s authority under the CFPA to supervise a non-bank entity that is any of the following:
- Regardless of size, a provider of residential mortgage loans or certain related services, payday loans, or private education loans;
- A provider considered to be “a larger participant in a market for other consumer financial products or services”; Y
- Regardless of its size, a service provider to another entity subject to CFPB supervision.
To date, the CFPB has used its increased authority as a participant to issue rules for consumer reporting, consumer debt collection, student loan servicing, and international money transfers.
The CFPB’s rule of procedure for invoking its risk-based supervisory authority requires the CFPB to send the target non-bank entity a “Notice of Reasonable Cause” that describes the basis for the CFPB’s assertion that it may have a reasonable cause to determine that the non-bank entity is a covered person who is engaging or has engaged in conduct that poses risks to consumers. The Notice must include “a summary of the documents, records, or other items relied upon by the initiating official in issuing a Notice.” A “Notice of Reasonable Cause” must be based on consumer complaints that the CFPB receives through its complaint system or “information from other sources.”
The procedures allow a non-bank entity to consent to CFPB oversight at any time. Unless the non-bank entity consents to monitoring, the Associate Director of the Division of Monitoring, Enforcement and Fair Lending must make a recommended determination after the conclusion of the proceedings as to whether reasonable cause exists for the CFPB to determine that the non-bank entity is a covered entity. person who is engaging in or has engaged in conduct that presents risks to consumers. Subsequently, the Director will issue a decision on whether the non-bank entity should be subject to the CFPB’s supervisory authority.
As originally adopted, the procedural rule made all aspects of a proceeding confidential, including all materials submitted by a non-bank entity, all documents prepared by, or on behalf of, or for the use of the CFPB , and any communication between the CFPB and a non-bank entity. The new procedural rule amends the existing rule to add a new provision that provides an exception to confidentiality for final decisions and orders of the Director, such as a decision in which the Director determines that a non-bank entity should be subject to the authority of oversight of the CFPB. The non-bank entity will have seven days after notification of the decision or order to make a filing and the Director will then decide whether the decision or order will be published on the CFPB website, in whole or in part.
The procedural rule appears to contemplate a separate procedure for each entity that the CFPB seeks to supervise. However, by making the decisions and orders in such proceedings public, the amendment will allow the CFPB to send a strong signal to all market participants about certain practices or products that it believes present a risk to consumers and could be subject to prosecution. increased oversight or enforcement activity. .
On May 11, 2022, Ballard Spahr will host a webinar, “CFPB Director Rohit Chopra: Do Your Words Speak Louder Than Your Actions?” The webinar will address the CFPB’s announcement regarding the supervision of non-banks, as well as other actions taken under Director Chopra’s leadership. For more information and to register, Click here.
The CFPB’s plan to supervise more nonbanks could also have implications for state scrutiny of nonbanks. In recent years, we have seen several states enact mini-CFPBs to fill the “regulatory loophole” that many feared during the Trump Administration, including California, New York, New Jersey, Maryland, Pennsylvania, and Virginia. When these laws were enacted, these states raised concerns about the deregulation of consumer loan providers, including those that participate as non-bank partners in banking associations and non-bank providers of alternative credit products. With the increased oversight of non-banks by the CFPB, one would expect to see increased scrutiny of non-banks by state mini-CFPBs, at the very least. In addition to inquiries from regulators, such as the Maine inquiry earlier this year sent to nonbanks in banking associations, nonbanks that engage in these business activities may see increased attention from state attorneys general, additional and more substantive state examinations; and new licenses and regulations for a previously “unregulated” line of business.