Despite Republican efforts to prevent such a move, on January 4, 2012, President Obama used a recess appointment to install Richard Cordray as the director of the Consumer Financial Protection Bureau (“Bureau”). The President originally nominated Cordray on July 18, 2011; however, Senate Republicans blocked a floor vote on the nomination. In a letter to the President last May, 44 Senate Republicans indicated that they would oppose the confirmation of a director unless changes were made to the Bureau’s structure. Among other things, the letter urged the replacement of the Bureau’s single director position with a board of directors (consistent with the organization of the Federal Reserve Board, the Securities and Exchange Commission and the Federal Deposit Insurance Corporation).1 The President’s use of a recess appointment was controversial in that it challenged the recent tactic, employed by both political parties, of using “pro forma” sessions to avoid a formal Senate recess even when the chamber is not conducting business. Not surprisingly, Republicans and other opponents of the President’s move have argued that the recess appointment is unconstitutional. However, even though a legal battle over the validity of the appointment is possible, Cordray and the Bureau appear prepared to move forward expeditiously.
Even without a director, Section 1066 of the Dodd-Frank Act granted the Secretary of the Treasury “interim authority” to exercise some, but not all, of the Bureau’s powers, including the authority to carry out the functions identified in Subtitle F of Title X of the Dodd-Frank Act.2 To this end, the Bureau initiated its program for supervision of large depository institutions (those with assets in excess of $10 billion) on July 21, 2011.3 Now that a director is in place, the Bureau has asserted its authority to exercise additional regulatory functions that were newly established by the Dodd-Frank Act, including the authority under Section 1024 of the Act to supervise “nondepository covered persons” (referred to herein as “nonbanks”).
“A Level Playing Field”
The Bureau wasted little time in announcing its nonbank supervision program with a notice on its website on January 5, 2012.4 Reflecting the emphasis the Bureau is likely to place on supervising nondepository consumer financial service companies that compete with banks, but have not previously been subject to federal oversight, Mr. Cordray noted in recent remarks at the Brookings Institution that the Bureau “will make sure that large banks and nonbanks are held to the same standards.”5 He also referenced the role nonbanks played in the financial crisis, stating that “many unsupervised firms led a race to the bottom that pushed aside responsible businesses …” and that the Bureau “must establish clear standards of conduct so that all financial providers play by the rules.”
Section 1024 of the Dodd-Frank Act outlines the Bureau’s supervisory authority with respect to the following nonbanks that offer consumer financial products and services:
- mortgage originators, brokers and servicers, as well as persons who offer loan modification or foreclosure relief services for mortgage loans;
- “larger participants” of a market for other consumer financial products or services;
- persons the Bureau determines to be engaging in conduct that poses risks to consumers;
- private education loan providers; and
- payday lenders.6
The Dodd-Frank Act makes the Bureau the principal supervisor and enforcer of federal consumer financial protection laws with respect to these nonbanks. Specifically, the Bureau has the authority to require reports and conduct examinations of these entities for purposes of (i) assessing compliance with federal consumer financial protection laws, (ii) obtaining information about the activities and compliance systems or procedures of such entities and (iii) detecting and assessing risks to consumers and to markets for consumer financial products and services.7 The exercise of this supervisory authority must be risk-based, meaning that the Bureau will identify nonbanks for examination based on the risk they pose to consumers, including consideration of the company’s (i) asset size, (ii) transaction volume, (iii) risk to consumers, (iv) existing oversight by state authorities and (v) “any other factors that the Bureau determines to be relevant.”8
Nonbank Supervision and the Examination Process
The Bureau’s nonbank supervision program will begin in phases. Most notably, the authority to oversee certain specified nonbank businesses regardless of size (i.e., mortgage companies, payday lenders and private education lenders) took effect immediately. For all other markets for consumer financial products and services (such as debt collection, consumer reporting, auto financing and money services businesses), the Bureau is only permitted to supervise “larger participants” in those markets. Last June, the Bureau requested comments on developing a rule to define what it means to be a “larger participant” in other markets, and it is expected to issue a proposed rule on this topic soon.9 The Bureau may also supervise nonbank entities that it has reasonable cause to determine are engaging, or have engaged, in conduct that poses risks to consumers and will publish rules outlining the procedures it will use to exercise this authority.10
The Bureau’s approach to nonbank examination will be the same as its approach to bank examination, with the Bureau’s Supervision and Examination Manual serving as a field guide for Bureau examiners.11 Examination of nonbanks may include “a combination of any of the following tools: requiring nonbanks to file certain reports, reviewing the materials the companies actually use to offer those products and services, reviewing their compliance systems and procedures, and reviewing what they promised consumers.”12 When a nonbank is in violation of federal consumer financial laws, the Bureau will seek corrective actions (such as strengthening the company’s internal programs and processes) and, when necessary, will bring appropriate legal actions. The Bureau’s nonbank supervision program will, when applicable, be coordinated with state regulators. Accordingly, in conjunction with the Conference of State Bank Supervisors, the Bureau developed a memorandum of understanding to share information between the Bureau, state regulators and state regulatory associations that has been joined by 42 states and Puerto Rico, as well as five state regulatory associations.13
The Bureau’s website indicates that it will move forward to implement the nonbank supervision program by (i) expanding its ongoing supervision of mortgage servicers to nonbank mortgage servicers, (ii) publishing additional examination procedures tailored to the types of consumer financial products and services offered by nonbanks, (iii) proposing an initial rule to begin defining who meets the test for “larger participants” in certain nonbank markets, (iv) publishing rules to establish procedures to supervise a nonbank company where the Bureau has reasonable cause to believe it poses risks to consumers, (v) continuing ongoing communications with state and federal regulators with a more specific focus on examination planning and (vi) continuing to obtain feedback on its supervision program from nonbank financial services companies, banks, thrifts, credit unions, federal and state agencies, consumer and community groups, and the public.14
In the absence of a successful legal challenge to the President’s appointment, the Bureau appears prepared to carry out its full array of statutory responsibilities under the Dodd-Frank Act, including with respect to nonbanks. In fact, recent news reports indicate that the Bureau has already contacted several nonbank financial institutions and notified them that examinations are imminent. Beyond any political motivations, the speed and precision with which the Bureau is moving to exercise this authority signals that it has been closely scrutinizing the nonbank financial services industry and is ready to advance its regulatory agenda. Because many financial service providers that have not historically been subject to regulatory examinations may now find a regulator knocking on their door, entities subject to the Bureau’s nonbank supervisory authority may wish to seek legal guidance to help them understand what to expect from a regulatory review.