The agency just revived its dormant authority to supervise nonbank financial entities that it determines pose risk to consumers.
On April 25, 2022, the Consumer Financial Protection Bureau (CFPB) — the US government agency established under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank) and responsible for consumer protection in the financial sector — announced that it is invoking a largely unused legal provision to examine nonbank financial companies that pose risks to consumers.
In July 2013, the CFPB adopted a final rule (Final Rule) setting forth its procedures for supervising nonbanks engaged in conduct that poses risk to consumers, but it has not yet invoked that authority. Doing so now will “allow the CFPB to be agile and supervise entities that may be fast-growing or are in markets outside the existing nonbank supervision program,” according to the announcement.
What Is a Nonbank?
According to the announcement, nonbanks are entities that “do not have a bank, thrift, or credit union charter, and many operate nationally and brand themselves as ‘fintechs.’”
The CFPB was authorized by Congress to supervise three categories of nonbank entities, including:
- Nonbank entities in the mortgage, private student loan, and payday loan industries (regardless of size)
- Larger participants in other nonbank markets for consumer financial products and services (e.g., consumer reporting, debt collection, student loan servicing, international remittances, and auto loan servicing)
- Any nonbank (regardless of product, service, or size) that the CFPB has reasonable cause to determine has or is engaging in conduct that poses risk to consumers with regard to consumer financial products or services
Risky conduct may involve potentially unfair, deceptive, or abusive acts or practices, or other acts or practices that potentially violate federal consumer financial law. Under Dodd-Frank, the CFPB has authority to use traditional enforcement mechanisms (including adversarial litigation) to stop companies from engaging in conduct that poses a risk to consumers. However, as a less severe alternative, the law also gives the CFPB authority to conduct supervisory examinations to review the documents, books, and records of regulated entities.
The Risk-Determination Process
The Final Rule requires the CFPB to send a nonbank target a “Notice of Reasonable Cause” describing the basis for the CFPB’s assertion that it may have reasonable cause to determine the nonbank is a covered entity that is engaging in, or has engaged in, conduct that poses risks to consumers. The notice must include “a summary of the documents, records, or other items relied on by the initiating official to issue a Notice,” and a reasonable opportunity for the entity involved to respond (i.e., within 30 days of service of the notice).
The CFPB may determine that it has reasonable cause for heightened supervision based on complaints that it receives, or on information obtained from other sources (e.g., judicial opinions, administrative decisions, whistleblower complaints, state partners, federal partners, and news reports). The CFPB noted in the Final Rule that it considers many factors relating to complaints and information from other sources in its determination to initiate a proceeding, including “the nature of the conduct relating to the complaints or other information, the severity of risk alleged, the number of consumers potentially affected, and the number of complaints or amount of information from other sources received.”
In tandem with the announcement, the CFPB issued a proposed procedural rule and request for comment intended to balance the needs of transparency and confidentiality in the CFPB’s risk-determination process. A procedural mechanism is now under consideration whereby, after the CFPB renders a final decision or order, the nonbank entity under investigation may respond within seven days to contest the decision’s or order’s public release. The CFPB director will then determine whether the decision or order will be released in whole or in part on the CFPB’s website.
Consumer Protection Theme
This latest announcement continues a theme: federal regulatory agencies invoking consumer protection as a critical factor underlying their regulatory and supervisory agendas. In the announcement, the CFPB noted that it “believes that utilizing this dormant authority will help protect consumers and level the playing field between banks and nonbanks.” This same language (“leveling the playing field”) was recently used by the Securities and Exchange Commission in its Proposal to Expand the Definition of an “Exchange” and also its Proposal to Expand the Definition of “Dealer” (see Latham’s posts on these Proposals, here and here).