CFPB Announces Invocation of Authority to Examine Nonbank Companies
On April 25, 2022, the Consumer Finance Protection Bureau (“CFPB” or “Bureau”) announced that it will be “invoking a largely unused legal provision” that permits it to examine nonbank financial institutions, such as financial technology companies (“fintech”), based on the potential risk that fintechs' operations pose to consumers.
Statutory Authority
Under the Wall Street Reform and Consumer Protection Act (12 U.S.C. § 5514), the CFPB has authority to supervise certain nonbank financial institutions, in addition to large depository institutions with more than $10 billion in assets, and the service providers of those institutions.
There are three instances in which a nonbank institution may be regulated under this provision:
Where the nonbank entity’s practice involves “origination, brokerage, or servicing of loans secured by real estate for use by consumers primarily for personal, family, or household purposes, or loan modification or foreclosure relief services in connection with such loans[.]”
Where a nonbank entity is considered a “larger participant” in other nonbank markets that service consumer financial products or services.
Where “the Bureau has reasonable cause to determine . . . that such covered entity 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.”
“Reasonable cause” may be based on consumer complaints or other information which the CFPB’s press release stated includes judicial opinions, administrative decisions, whistleblower complaints, state partners, federal partners, or news reports.
Agency Justification
The CFPB adopted the above provision in 2013, but had declined to exercise the authority granted to it then. Now, the CFPB has expressly stated that it intends to regulate these nonbanking entities under the third basis—the risk posed to consumers.
According to the CFPB, exercising this authority will “help protect consumers and level the playing field between banks and nonbanks[,]” which the CFPB director Rohit Chopra indicates may be a recently pressing matter due to the “rapid growth of consumer offerings by nonbanks.” Chopra further stated exercising this authority will give the CFPB “critical agility to move as quickly as the market.”
Procedural Rule
In addition to this announcement, the CFPB has issued a procedural rule intended “to increase the transparency of the risk-determination process,” which will be utilized in the exercise of its authority to examine nonbank institutions.
Under this procedural rule, the following rules are established:
All documents produced and conversations conducted pursuant to this authority will be “deemed confidential supervisory information.”
Final decisions made by the Director of the CFPB “will be publicly released on the Bureau’s website, in whole or in part.” However, the party subject to the report may, within 7 days after service of the decision or order made by the Director, object to the publication. Objections will be considered by the Director.
Due to the procedural nature of this rule, the CFPB is not required to engage in the notice and comment procedures required by the Administrative Procedures Act or in any initial or final regulatory flexibility analysis.
Request for Public Comment
Although the CFPB is not accepting commentary on the procedural rule regarding confidentiality or publication, the CFPB is still seeking public comment on a procedural rule that will be utilized to make the process of regulating these nonbank entities “more transparent,” until May 25, 2022.