CFPB Proposes New “Riskiness” Standard for Nonbanks
On May 24, 2012, the Consumer Financial Protection Bureau announced a proposal for a rule that would set up procedures to supervise nonbanks that may have engaged in activities that pose risks to consumers. Director Richard Cordray stated that “this is an important step in the development of our nonbank supervision program. This proposal allows us to reach nonbanks that we would not otherwise supervise….”
The CFPB defines a nonbank as a company that offers or provides consumer financial products or services but does not have a bank, thrift, or credit union charter. Nonbanks include companies such as mortgage lenders, mortgage servicers, payday lenders, consumer reporting agencies, debt collectors, and money services companies.
Proposed Rule – How Does This Work?
If the proposed rule is adopted, the CFPB would provide a nonbank covered person a notice (Notice) stating that the Bureau may have “reasonable cause to determine that such covered person is engaging, or has engaged, in conduct that poses risks to consumers with regard to the offering or provision of consumer financial products or services.” The CFPB is required to provide a reasonable opportunity to respond to this Notice, which will include a description of the basis for the assertion that the Bureau may have reasonable cause to determine that a respondent poses a risk to consumers. These “risky” businesses or persons will have two opportunities to respond to a Notice – first in writing and then, if requested by the nonbank – through a supplemental oral response (generally to be conducted by telephone).
The Proposed Rule offers two ways in which a respondent could consent to the Bureau’s supervision. First, the expedited method provides for the execution of a consent agreement form, which would be provided in lieu of a response to the Notice. Second, at any time during a proceeding, a respondent may voluntarily consent to the Bureau’s supervisory authority under such terms as the parties may agree.
Once the Notice is issued and a response received, the Director will make the final determination as to whether the nonbank will be subject to the CFPB’s supervisory authority.
What Does This Mean?
While the CFPB has made great strides in its attempt to supervise as many financial service companies as possible, this proposed rule is truly the most far reaching. Although the Bureau currently has authority over both banks and nonbanks, including the larger players in the consumer finance world (i.e., larger participants), as well as specific areas that the CFPB has claimed (i.e., mortgages, payday lenders), this new “riskiness” determination will allow the CFPB to supervise nonbanks that it would otherwise not be able to reach. Likewise, the CFPB could theoretically try to assert supervision over entire industries based on the CFPB’s riskiness assessment. The Bureau will be able to do so merely because of a purely subjective decision based upon company or industry conduct. This is an obvious and troublesome backdoor around the larger participant rule, which limits the CFPB’s supervision to nonbanks offering consumer reporting whose annual receipts from consumer reporting exceed $7 million, and nonbanks providing consumer debt collection whose annual receipts from such consumer debt collection exceed $10 million.
Nonbanks who may not fit under the larger participant rule should be ready for notice and inquiry from the CFPB. It will be important to be prepared so that further inquiry can be headed off in the early stages.
Public comment on the proposed rule is due by July 24, 2012.
Troutman Sanders is an accomplished and experienced leader in providing litigation and regulatory advice to a broad spectrum of financial services institutions. Troutman Sanders’ CFPB Team monitors the development and activities of the CFPB on its CFPB Report Blog and also advises clients on CFPB and Dodd-Frank issues. Additionally, Troutman Sanders’ Financial Services Litigation Group has successfully litigated a wide number of individual and class action litigation, as well as other federal and state consumer protection laws now under the umbrella of the CFPB.
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