New and existing money services businesses frequently ask when or if the CFPB will “examine” them. All consumer financial services businesses naturally worry about the CFPB’s reach and want to be prepared. This article outlines the factors that could lead to CFPB examination of an MSB.

It’s important first to understand the distinction between “supervisory” authority and enforcement authority. The former relates to whether the CFPB can conduct a formal examination of the company, while the latter relates to when the CFPB can bring an enforcement action.

The CFPB’s enforcement authority is extremely broad. The CFPB can bring an enforcement action under any of the “Federal consumer financial laws,” including UDAAP and eighteen other enumerated consumer laws. UDAAP alone will give the CFPB very broad authority to bring an enforcement action against an MSB for its acts and practices involving consumers.

In contrast, the CFPB’s supervisory and examination authority is comparatively limited. MSBs that engage solely in MSB activities, and that do not provide services to a supervised bank or nonbank, usually will not be subject to CFPB examination. However, all MSBs can become subject to CFPB examination if they experience consumer compliance problems.

General Supervisory Authority

The authority for the CFPB to examine an institution is part of its statutory supervisory authority. The CFPB has this supervisory authority only over the following institutions:

  1. Banks, savings associations and credit unions with total assets of more than $10 billion.
  2. Essentially any consumer loan broker, originator, lender or servicer, and companies that provide loan modification or foreclosure relief services in connection with consumer loans.
  3. A “larger participant of a market for other consumer financial products or services,” as defined through rule-makings (“Larger Participants”).
  4. Companies that the CFPB has determined are engaging, or have engaged, in conduct that poses risks to consumers with regard to the offering or provision of consumer financial products or services (“Risky Companies”).
  5. Certain service providers of supervised banks and nonbanks, which would include certain service providers to the first three categories of institution listed above.

Because banks, thrifts and credit unions are not MSBs, there really are 4 ways that the CFPB can reach an MSB for examination.

Lending Activities

The CFPB can examine an MSB if it is directly engaged in consumer lending activities, including by providing loan modification or foreclosure relief services. The examination could focus only on those lending activities, but there’s no guarantee that the CFPB would limit its examination to those activities once it has its foot in the door.

Larger Participants

The CFPB can designate a company as being a Larger Participant and subject it to examination only through a formal rule making. At this time, the only MSBs that are deemed to be Larger Participants are those that provided at least $1 million aggregate international money transfers during the preceding calendar year, which includes transfers made by the MSB through an agent.

The CFPB has, however, identified other Larger Participants that should be kept in mind by those MSBs that engage in activities in addition to MSB activities. Those other Larger Participants include, in broad terms:

  1. Participants in the consumer reporting market, with annual related receipts of more than $7 million.
  2. Participants in the consumer debt collection market, with annual related receipts of more than $10 million.
  3. Participants in the student loan servicing market, with an annual account volume of more than one million.

If you’re a Larger Participant you likely know it. In any case, at some point you will receive a written communication from the CFPB that they are initiating a supervisory activity. At that time you’ll have 45 days to respond to the CFPB if you want to dispute that you are a Larger Participant.

Risky Companies

The Risky Company and service provider grounds for CFPB examination pose the greatest uncertainties for MSBs.

The Risky Company process begins when the CFPB issues a Notice of Reasonable Cause to the target, stating that the CFPB has reasonable cause to determine that the target is engaging, or has engaged, in conduct that poses risks to consumers relating to the offering or providing of consumer financial products or services. Alternatively, the CFPB can provide a notice and opportunity to respond in a notice of charges pursuant to adjudication proceedings.

The Notice of Reasonable Cause must be based on consumer complaints or “information from other sources.” These other source can include, among other things, court decisions or administrative decisions made by other regulators. Therefore, if your company is frequently named in the CFPB’s Consumer Complaint Database, or recently lost an ugly consumer class action based on UDAP or other violations of consumer protection law, the CFPB might soon be knocking.

All of the various procedural requirements for responding or consenting to the CFPB’s notice are outlined in 12 CFR Part 1091. If you receive a notice, whether directly or as part of a notice of charges, it will be important to review those rules immediately, and at least consider seeking the assistance of legal counsel.

Service Providers

CFPB Bulletin 2012-03 reminded banks and other supervised financial institutions that they may be held responsible for the actions of their service providers, and that those institutions should maintain an effective process for managing the risks of service providers. Of more importance to this article, the Bulletin states that the CFPB has supervisory and enforcement authority over “supervised service providers,” including the authority to examine the operations of such entities on site. It also notes that the CFPB will exercise “the full extent of its supervision authority” over these companies, including its authority to examine for compliance with UDAAP.

So the important question is who these “supervised service providers” are. They are “service providers” for supervised banks and nonbanks – the first two categories of supervised entity listed above, and service providers to “a substantial number” of small insured depository institutions and credit unions.

“Service providers” then include any person that provides a material service to a covered person in connection with the offering or provision by such covered person of a consumer financial product or service. This includes companies that design, operate or maintain the product or service, and generally includes companies that process transactions relating to a consumer financial product or service. The term does not include companies providing ministerial services or general mass media advertising space.

It’s unclear where this line is going to be drawn over time. However, an MSB that processes consumer transactions for a bank could well be a service provider and subject to CFPB examination jurisdiction. Likewise, an MSB that provides material marketing services to a bank for consumer financial products could be a service provider and subject to CFPB examination. In at least one instance already, the CFPB’s examination of a bank led to the examination of a service provider that designed and marketed the bank’s car loan program. Although the bank was the actual lender, the service provider’s active role in marketing and selling the loans was enough for the CFPB to examine them for unfair and deceptive practices.

It should be said that whether the CFPB believes it can examine an MSB does not necessarily mean that it will do so tomorrow or this year. This is a risk-based question. However, if your MSB engages in a significant number or dollar amount of transactions, has a high number of consumer complaints, or is otherwise actively involved in a bank’s consumer financial services program that has attracted the CFPB’s displeasure, the CFPB might choose to examine your company.

MSBs have historically focused on their anti-money laundering programs, for good reason. However, given the CFPB’s potential examination scope, some MSBs might want to review their consumer compliance programs to reduce the risks of examination, or at least the risks of negative examination results.