The CFPB has adopted its long-awaited final rule setting forth the procedures it will use to supervise nonbanks engaged in conduct that poses risks to consumers.  The final rule will be effective 30 days after its publication in the Federal Register. 

We expect the CFPB to quickly begin asserting its risk-based supervisory authority.  In fact, a possible explanation for why it took the CFPB 13 months to finalize the rule (the proposed rule was issued in May 2012) is that it was using some of this time to identify initial nonbank targets for supervision.   

The Dodd-Frank Act authorizes the CFPB to supervise any nonbank—regardless of its size—that the CFPB has reasonable cause to determine “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’s authority covers not only nonbank providers of consumer financial products or services, but also extends to such a nonbank’s affiliate service providers.  A risk-based determination is to be made through the CFPB’s issuance of an order after providing notice to the nonbank and a reasonable opportunity for it to respond. 

This supervisory authority is in addition to the CFPB’s authority under the Dodd-Frank Act to supervise a nonbank that is any of the following: 

•             Regardless of its 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 of a market for other consumer financial products or services”

•             Regardless of its size, a service provider to another entity subject to CFPB supervision 

It is unclear how the CFPB intends to use its authority to supervise nonbanks using risk-based determinations.  If it were to find a systemic legal violation in a particular industry, it might attempt to assert supervisory authority over all companies in that industry that it identifies as having committed violations.  It might also use the rule to supervise smaller entities in the same markets in which the CFPB has elected to supervise “larger participants.”

(The CFPB has already finalized “larger participant” rules for the credit reporting and debt collection markets and has proposed such a rule for the federal and private student loan servicing market.) 

See our legal alert for detailed highlights of the final rule.