The CFPB has announced that it plans to invoke its “sleeping authority” to oversee non-banks engaging in risky consumer behavior. Along with this announcement, the CFPB issued a rule of procedure regarding the confidentiality of proceedings in which the CFPB invokes such authority. These steps by the CFPB are noteworthy for two reasons. First, they are consistent with the agency’s stated intention to increase oversight of fintech companies, as this could allow the CFPB to conduct in-depth reviews of fintech companies over which it currently has no clear oversight jurisdiction. Second, they will allow the CFPB to publicize the Director’s decision to extend its supervisory jurisdiction to a non-bank engaged in behavior that “poses risk” to consumers – and thus send signals to the industry on his vision of certain practices.
The Consumer Financial Protection Act authorizes the CFPB to supervise any non-bank business, regardless of size, that the CFPB has reasonable grounds to determine “is engaging or has engaged in conduct that poses risks to consumers with respect to the offer or provision of services to consumers”. financial products or services”. The CFPB’s authority covers not only non-bank providers of consumer financial products or services, but also extends to service providers affiliated with such non-banks. A risk-based determination shall be made by issuance of an order by the CFPB after providing notice to the non-bank institution and giving it a reasonable opportunity to respond.
Although the CFPB adopted a final rule in July 2013 (12 CFR Part 1091) setting out its procedures for monitoring non-banks engaging in risky consumer behavior, it has not yet invoked those procedures. According to Director Chopra, the CFPB will now invoke these procedures to deal with “the rapid growth of consumer offerings by non-banks”. He stated that “[t]its authority gives us critical agility to act as quickly as the market, enabling us to conduct reviews of financial companies posing risks to consumers and stop the damage before it spreads. The CFPB suggests that using its supervisory authority may be preferable to using its enforcement authority, as 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 that is one of the following:
- Regardless of size, a provider of residential mortgages 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”; and
- Regardless of its size, a service provider to another entity subject to the supervision of the CFPB.
To date, the CFPB has used its most participatory authority to issue rules regarding consumer reporting, consumer debt collection, student loan servicing and international money transfers.
The CFPB’s procedural rule for invoking its risk-based supervisory authority requires that the CFPB send the non-bank target a “reasonable cause notice” outlining the basis for the CFPB’s assertion that it may have reasonable cause to determine that the non-bank is a covered person who is engaging or has engaged in conduct that poses risks to consumers. The opinion must include “a summary of the documents, records or other matters on which the originating agent relied in issuing an opinion”. A “reasonable cause notice” must be based on consumer complaints that the CFPB receives through its complaints system or on “information from other sources”.
The procedures allow a non-banking company to consent at any time to the supervision of the CFPB. Unless the non-bank institution consents to the supervision, the Associate Director of the Lending Supervision, Enforcement and Equity Division should make a recommended decision after the conclusion of the procedure to determine whether there is a reasonable basis for the CFPB to determine that the Non-Bank Institution is a Covered Institution. a person who engages or has engaged in behavior that poses risks to consumers. The director will then render a decision on whether the non-bank institution should be subject to the supervisory authority of the CFPB.
As originally enacted, the procedural rule made confidential all aspects of a proceeding, including all documents submitted by a non-bank, all documents prepared by, or on behalf of, or at the use of the CFPB, and any communication between the CFPB and a non-bank. The new rule of procedure amends the existing rule to add a new provision that provides an exception to confidentiality for the Director’s final decisions and orders, such as a decision in which the Director determines that a non-bank should be subject to the supervisory authority of the CFPB. The non-bank will have seven days after service of the decision or order to make a submission and the Director will then decide whether the decision or order will be published on the CFPB website, in whole or in part.
The rule of procedure appears to provide a separate procedure for each entity that the CFPB seeks to oversee. However, by making decisions and orders in these 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 pose a risk to consumers. and may be subject to further monitoring or enforcement activities. .
On May 11, 2022, Ballard Spahr will host a webinar, “CFPB Director Rohit Chopra: Do His Words Speak Louder Than His Actions?” The webinar will discuss this development of the CFPB as well as several other actions undertaken under the leadership of Director Chopra. Click here to register.
The CFPB’s plan to supervise more nonbanks could also have implications for state control over nonbanks. Over the past few years, we’ve seen a number of states adopt mini-CFPBs to fill the “regulatory void” that many feared under the Trump administration, including California, New York, New Jersey, Maryland, Pennsylvania and Virginia. When these laws were enacted, these states expressed concern about the deregulation of consumer loan providers, including those engaged as non-bank partners in banking partnerships and non-bank providers of alternative credit products. With increased surveillance of non-banks by the CFPB, one would expect to see increased scrutiny of non-banks by the state mini-CFPBs, at least. In addition to inquiries from regulators such as the Maine inquiry earlier this year sent to non-banks in banking partnerships, non-banks engaged in these business activities may see increased scrutiny from prosecutors. state generals, additional and more substantial state exams, and new licenses and regulations for an old “unregulated” trade.