The CFPB has announced that it plans to invoke its “dormant authority” to supervise nonbanks engaged in conduct that poses risk to consumers.  In conjunction with the announcement, the CFPB issued a procedural rule concerning the confidentiality of proceedings in which the CFPB invokes such authority.  These moves by the CFPB are notable for two reasons.  First, they are consistent with the agency’s stated intent to increase scrutiny of fintech firms, as it could allow the CFPB to conduct in-depth examinations of fintech firms over which it presently has no clear supervisory jurisdiction.  Second, they will allow the CFPB to publicize the Director’s decision to expand its supervisory jurisdiction to a nonbank engaged in conduct that “poses risks” to consumers – and thus send signals to industry about its view of certain practices.

The Consumer Financial Protection Act authorizes the CFPB to supervise any nonbank covered person, 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.”  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.

Although the CFPB adopted a final rule in July 2013 (12 C.F.R. Part 1091) setting forth its procedures for supervising nonbanks engaged in conduct that poses risk to consumers, it has not yet invoked those procedures.  According to Director Chopra, the CFPB will now invoke these procedures to address “the rapid growth of consumer offerings by nonbanks.”  He stated that “[t]his authority gives us critical agility to move as quickly as the market, allowing us to conduct examinations of financial companies posing risks to consumers and stop harm before it spreads.”  The CFPB suggests that use of its supervisory authority may be preferable to use of its enforcement authority because it can 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 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;” and
  • Regardless of its size, a service provider to another entity subject to CFPB supervision.

To date, the CFPB has used its larger participant authority to issue rules for consumer reporting, consumer debt collection, student loan servicing, international money transfers, and auto finance.

The CFPB’s procedural rule for invoking its risk-based supervisory authority requires the CFPB to send the 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 person 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.”   A “Notice of Reasonable Cause” must be based on consumer complaints the CFPB receives through its complaint system or “information from other sources.”

The procedures allow a nonbank to consent to CFPB supervision at any time.  Unless the nonbank consents to supervision, the Associate Director of the Division of Supervision, Enforcement and Fair Lending is to make a recommended determination after the conclusion of the proceedings as to whether there is reasonable cause for the CFPB to determine that the nonbank is a covered person that is engaging, or has engaged, in conduct that poses risks to consumers.  The Director will thereafter issue a decision as to whether the nonbank should become subject to the CFPB’s supervisory authority.

As originally adopted, the procedural rule made all aspects of a proceeding confidential, including all materials submitted by a nonbank, all documents prepared by, or on behalf of, or for the CFPB’s use, and any communications between the CFPB and a nonbank.  The new procedural rule amends the existing rule to add a new provision that provides an exception from confidentiality for final decisions and orders of the Director, such as a decision in which the Director determines that a nonbank should be subject to the CFPB’s supervisory authority.  The nonbank 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 released on the CFPB’s website, in whole or part.

The procedural rule appears to contemplate a separate proceeding for each entity that the CFPB seeks to supervise.  However, by making decisions and orders in such proceedings public, the amendment will allow the CFPB to send a strong signal to all market participants about certain practices or products it believes present a risk to consumers and could be the subject of further supervisory or enforcement activity.

On May 11, 2022, Ballard Spahr will hold a webinar, “CFPB Director Rohit Chopra: Do His Words Speak Louder Than His Actions?”  The webinar will address the CFPB’s announcement regarding supervision of nonbanks as well as other actions taken under the leadership of Director Chopra.  For more information and to register, click here.

The CFPB’s plan to supervise more nonbanks could also have implications for state scrutiny of nonbanks.  In the past several years, we have seen a number of states enact mini-CFPBs to fill the “regulatory void” many feared during the Trump Administration, including California, New York, New Jersey, Maryland, Pennsylvania, and Virginia.  When these laws were enacted, these states expressed concern over deregulation of providers of consumer loans, including those engaged as nonbank partners in bank partnerships and nonbank providers of alternative credit products.  With the CFPB’s increased supervision of nonbanks, one would expect to see a heightened scrutiny of nonbanks by state mini-CFPBs, at the least.  In addition to inquiries from regulators such as Maine’s inquiry earlier this year sent to nonbanks in bank partnerships, nonbanks engaged in these business activities may see increased attention from state attorneys general, additional and more substantive state examinations, and new licensing and regulations for a previously “unregulated” business line.