On April 25, 2022, the Consumer Financial Protection Bureau (CFPB) announced plans to revitalize its authority to review “non-bank” financial companies that pose risks to consumers. Although the CFPB has held this authority since its creation in 2010, the agency has rarely invoked it, leaving it largely “dormant”. The CFPB’s announcement marks a possible reversal of this trend.
Supervision of “non-banks”
In addition to large depository institutions, the CFPB’s supervisory authority extends to certain “non-banks”, ie non-custodial financial institutions that do not have a banking charter. Many “fintechs” are not banks. In general, fintechs use technology to provide financial products and services to consumers nationwide.
Three categories of non-banks currently fall under the CFPB’s non-bank supervision program:
firstall non-bank mortgages, private student loans and payday loans, regardless of size;1
secondnon-banks in certain other markets – such as consumer reporting, debt collection, student loan servicing, international remittances and auto loan servicing – if they qualify as a “larger participant” in the market, as determined by thresholds set by CFPB rules;2 and
third, non-banks that operate in any sector or market, if the CFPB has reasonable grounds to determine that their activities pose risks to consumers. Actionable risks include unfair, deceptive, or abusive acts or practices, or any other act or practice that may violate federal consumer finance law.3
This is the third category in which CFPB oversight has been largely dormant. The CFPB noted that while a 2013 rule of procedure sets out the procedures for the CFPB to determine whether the conduct of a non-banking business poses risks to consumers, the CFPB has not used this rule and comes “to begin to invoke that authority”. CFPB Director Rohit Chopra noted that “CFPB is now using dormant authority to compel non-banks to the same standards as banks,” which will provide CFPB with “critical agility to move as quickly as the market, allowing [the CFPB] to conduct reviews of financial companies posing risks to consumers and stop the damage before it spreads. Director Chopra’s words therefore signal the CFPB’s intention to make full use of its supervisory authorities to regulate non-bank providers of consumer financial products and services, including firms that would not qualify for supervision under the CFPB “large participant” rule.
Increased transparency on risk determinations
With its new invocation of authority to regulate risks posed by non-banks, the CFPB issued a new rule of procedure to shed light on the process it uses to determine risk.
The CFPB uses a variety of sources to identify risks, including CFPB complaints, whistleblower complaints, court and administrative decisions, information obtained from state or federal partners, and news reports. When faced with a potential decision by the CFPB that their activities pose risks to consumers, non-banks are warned and given the opportunity to respond.4 Existing CFPB rules consider all documents, records and communications related to these risk determination procedures to be “confidential”, protecting them from public disclosure.
The CFPB’s new procedural rule creates an exception to the rule of confidentiality for a final “decision or order” by the Director that determines that the respondent is subject to the CFPB’s supervisory authority because of the risks that his conduct poses to consumers.5 Within seven days of being served with the Director’s decision or order, the respondent may file a submission regarding their confidentiality. The Director will then determine whether the decision or order will be deemed confidential or made public, in whole or in part, on the CFPB website. The proposed rule notes that this exception is based on “a public interest in transparency regarding those potentially important decisions of the director as head of the agency.” The rule also opens the door to decisions or orders being used as a “precedent in future proceedings”.
The CFPB said its new rule of procedure is exempt from the notice and comment requirements of the Administrative Procedure Act because it is a “rule of organization, procedure or practice of the agency “. Nevertheless, the CFPB welcomes public comments and may modify the rule of procedure based on the comments. Comments are expected by May 31, 2022.
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The CFPB’s decision comes amid growing pressure from some congressional lawmakers who have called for tougher regulation of fintechs and other emerging banking alternatives. Director Chopra has previously raised concerns about the risks of consumers turning to less heavily regulated non-banks for an ever-expanding range of financial services. Last October, the CFPB issued orders to collect information on the business practices of major technology companies operating payment systems in the United States, including Apple, Facebook and Google. This was followed by a survey last December of companies offering increasingly popular buy now, pay later (BNPL) credits: Affirm, Afterpay, Klarna, PayPal and Zip.
It’s too early to tell if the CFPB’s announcement signals the start of an era of heightened scrutiny for non-banks, or if it was a token gesture to allay the concerns of fintech critics. . Along with some members of Congress, those critics include traditional banks, who have accused fintechs of playing on a level playing field given their less stringent regulatory environment.
The CFPB’s new transparency rule leaves significant open questions about its application, at least in its current form. The proposed rule does not codify any standard governing the Director’s determination of when to make a decision or order public, although the CFPB “welcomes” comments on whether such a standard would be appropriate in the final rule. The rule also does not specify how soon a decision or order will be published after the Director determines that publication is appropriate. There is also no administrative mechanism to appeal the Director’s decision. This means that a non-bank wishing to challenge the agency’s supervisory authority assertion under the rule must seek other avenues of redress, including possibly seeking judicial review under the Banking Act. administrative procedures.
1 12 USC § 5514(a)(1)(A), (D), & (E).
2 Identifier. § 5514(a)(1)(B) (covering “a larger participant in a market for other consumer financial products or services, as defined by” the CFPB rules). To see 12 CFR Part 1090 (containing CFPB rules defining major participants in certain markets for consumer financial products and services).
3 Identifier. § 5514(a)(1)(C).
4 Identifier. § 5514(a)(1)(C).
5 To see 12 CFR §§ 1091.103(b)(2), .109(a), & .113(e).
© Copyright 2022 Cadwalader, Wickersham & Taft LLPNational Law Review, Volume XII, Number 124