CFPB Order Makes it Clear: Nonbanks Should Prepare for CFPB Supervision

The CFPB recently published a decision and order subjecting a nonbank consumer lender to its supervisory authority based on its determination that the lender may be “engaging, or has engaged, in conduct that poses risks to consumers.”

This marks the first time the agency has made such a determination after a contested administrative proceeding, the CFPB said in a press release. As the CFPB acknowledged, it will serve as an important precedent guiding the agency’s exercise of this authority.

Here are five key takeaways:

1. The CFPB has unliteral authority to subject individual nonbank financial services companies to its supervisory authority.
2. The CFPB has set a low bar for what constitutes “reasonable cause” to believe a nonbank’s conduct poses risks to consumers.
3. Refusing to consent may delay CFPB supervision, but only for a matter of months.
4. The CFPB has only publicized risk to consumers determinations after a nonbank refused to consent to supervision.
5. Nonbank providers of consumer financial products or services that are not currently subject to supervision should prepare for it.

The CFPB has unilateral authority to subject individual nonbank financial services companies to its supervisory authority.

Congress expressly granted the CFPB supervisory authority over the thousands of nonbanks that offer residential mortgage loans, private education loans and payday loans. Congress also provided the CFPB two avenues to extend its supervisory authority over other nonbanks:

• The CFPB has authority to issue rules defining who is a “larger participant” in a market for a consumer financial product or service other than the markets for mortgage, private student and payday loans.
  • In its first four years, the CFPB issued five “larger participant” rules, which extended the CFPB’s supervisory authority to larger participants in the consumer debt collection, consumer reporting, student loan servicing, international remittances and automobile financing markets.
  • After nearly a decade, the CFPB recently proposed another larger participant rule for the “market for general-use digital consumer payment applications.”
• Congress authorized the CFPB to supervise any nonbank provider of consumer financial service products or services when “the Bureau has reasonable cause to determine … that [the nonbank] 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 issued a procedural rule in 2013 that governs Risks to Consumers Determinations. Under that rule, the process begins when the CFPB provides a notice to a nonbank setting forth the basis for a possible Risks to Consumers Determination. The recipient has the right to respond in writing and orally, and the CFPB Director makes the ultimate determination of whether reasonable cause exists to determine that the nonbank is engaging in conduct that poses risks to consumers.

Many nonbanks have “consented” to the CFPB’s supervisory authority pursuant to this rule, often as a term of a negotiated consent order resolving an enforcement action. Increasingly, however, nonbanks have “consented” pursuant to a procedure in which a company that receives a Risks to Consumers Notice can forgo its procedural rights and consent to supervision. In fact, last week’s press release stated that the CFPB has issued such Notices to nonbanks operating “across [the] consumer financial services” industry, and a recent edition of the CFPB’s Supervisory Highlights publication noted that “several entities have voluntarily consented to the CFPB’s supervisory authority” after receiving a Risks to Consumers Notice.

Last week’s order represents the first time a nonbank has refused to consent and chosen instead to insist on its procedural right to contest the Risks to Consumers Notice. Nonbanks that choose this route have a heavy burden. The statute provides that the CFPB will be both prosecutor and judge in these proceedings. Indeed, the proceeding that resulted in the recently published order was initiated by the Assistant Director for Supervision, a political appointee, and resolved by the CFPB’s Director, her immediate supervisor and the person who appointed her.

Read the full article at Orrick