Questions for public comment
On June 23 2011 the Consumer Financial Protection Bureau (CFPB) issued a notice and request for comment on defining the non-bank entities that will be subject to its supervision as 'larger participants' in a market for consumer financial products or services under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.(1)
Financial service providers that are not banks (other than residential mortgage lenders, brokers and servicers, private student lenders and payday lenders) should consider whether, under the notice, they might be subject to supervision by the CFPB as a larger participant in designated markets for other consumer financial services or products. Under the notice, those other markets include:
- debt collection;
- consumer reporting;
- consumer credit and related activities;
- money transmitting, cheque cashing and related activities;
- pre-paid cards; and
- debt relief services.
Section 1024 of the Dodd-Frank Act gives the CFPB authority to supervise non-depository 'covered persons' that offer or provide residential mortgage loan origination, brokerage or servicing, private education loans or payday loans.(2) In addition, Section 1024 gives the CFPB authority to supervise non-depository covered persons that are larger participants in markets for other consumer financial products or services, as defined by the CFPB. These non-depository covered persons have not previously been subject to examination by the federal authorities; instead, they have been subject to supervision only on a state-by-state basis. The CFPB's authority under the act, with respect to non-depository institutions, is intended to promote "fair competition" with respect to consumer financial products and services by enforcing federal consumer financial laws "without regard to the status of a person as a depository institution".
The CFPB's non-depository supervisory authority includes the power to require reports and conduct examinations - on a periodic basis - for the purposes of:
- assessing compliance with federal consumer financial law;
- obtaining information about activities and compliance systems or procedures; and
- detecting and assessing risks to consumers and the consumer financial markets.
The act requires that the CFPB issue an initial rule under Section 1024, after consultation with the Federal Trade Commission (FTC), by July 21 2012. However, until a director has been appointed and confirmed, the CFPB does not appear to have the authority to examine non-depository institutions, or (possibly) even to issue a rule. Appointment of a director for the CFPB has been stalled by ongoing disagreements between the president and congressional leadership regarding the CFPB.
The notice seeks comment on the markets to be included in the rule, and the criteria and thresholds to be used to define larger participants in those markets.
The CFPB identified six 'other market' categories for potential inclusion in an initial rule and solicited comment on whether:
- the identified categories should be covered in the initial rule;
- each category consists of a single market or multiple markets; and
- other markets should also be addressed.
The CFPB indicated that it anticipates that it will include certain markets in the initial rule, but that additional markets may be added through subsequent rulemakings. The six categories and the potential scope of each are summarised below:
- Debt collection - this may include persons that collect a debt on behalf of another entity that owns the debt, or collect on their own behalf after purchasing the debt from a creditor or another holder of the debt. The notice would include persons that purchase debts when they are not in default and thus could (possibly unintentionally) cover many participants in indirect lending or secondary market programmes that are not traditionally considered debt collectors.
- Consumer reporting - this may include:
- large credit bureaux that compile and maintain data and provide credit reports on individual consumers, creditors and other entities that furnish credit history and other credit-related information to them; and
- other market participants that resell information compiled by large credit bureaux or operate as specialty reporting agencies (eg, by verifying consumers' cheque-writing history in order to facilitate acceptance of consumers' personal cheques by retailers).
- Consumer credit and related activities - this may include finance companies, consumer lenders and loan servicers and brokers (other than residential mortgage originators, brokers and servicers, payday lenders and private education lenders - all of which are specifically covered by Section 1024).
- Money transmitting, cheque cashing and related activities - this may include persons that provide money transmitting alone or money transmitting with related consumer financial products and services such as cheque cashing.
- Pre-paid cards - this may include persons who provide:
- general purpose reloadable open-loop payment cards;
- non-reloadable open-loop payment cards;
- closed-loop gift or store cards;
- electronic benefit transfer (EBT) cards; or
- payroll cards.
- Debt relief services - this may include persons that provide provide 'debt management plans', which typically are non-profit credit counselling agencies that work with creditors to develop repayment plans that permit a consumer to repay the full credit balance owed under renegotiated terms, and 'debt settlement' entities that offer to negotiate with a consumer's creditors to enable the consumer to make a lump-sum payment of less than the entire balance owed to the creditor, thereby settling the debt obligation.
Definition of 'larger participants'
The CFPB seeks comment on the criteria and thresholds to be used to define 'larger participants' in a particular market. The CFPB indicated that it is seeking criteria that will allow it to identify larger participants based on objective available data, and that for the purposes of computing the activity levels of a market participant, the activities of the participant will be aggregated with those of non-depository 'affiliated companies'. Examples of potential criteria include:
- annual number of transactions;
- annual value of transactions (eg, total loan volume);
- annual receipts or revenue;
- geographic coverage (eg, number of states in which business is conducted);
- asset size; and
- outstanding loan balances.
The CFPB also requests comment on whether it should tailor the criteria and thresholds to each market or apply a single set of criteria and thresholds across all markets. Furthermore, it seeks comment on available data sources that may prove suitable for use in its larger participant determinations, as well as which data it should collect through a registration process for use in these determinations. Some possibilities include:
- public data (eg, the Securities and Exchange Commission's online EDGAR database, and state and federal licencing and registration records);
- non-public state or federal supervisory or other data;
- commercial data (eg, proprietary industry market analyses); and
- data obtained directly from market participants.
The CFPB is also considering establishing a registration programme that would include a wider range of covered persons than those subject to CFPB supervision, through which it could receive information relevant to determining whether covered persons meet applicable thresholds.
The CFPB invites public comment on any issues relevant to development of its rule, including a series of specific questions. Members of the public have until August 15 2011 to submit comments. After considering the comments received, the CFPB will draft and publish a proposed rule.
For further information on this topic please contact John K Van De Weert, James A Huizinga or Susan White Haag at Sidley Austin LLP by telephone (+1 212 839 5300), fax (+1 212 839 5599) or email ([email protected] or [email protected] or [email protected]).
(1) See 76 Fed Reg 38059 (June 29 2011), available at http://www.gpo.gov/fdsys/pkg/FR-2011-06-29/pdf/2011-15984.pdf.
(2) A 'covered person' is defined as "(A) any person that engages in offering or providing a consumer financial product or service; and (B) any affiliate of a person described [in (A)] if such affiliate acts as a service provider to such person" (Dodd-Frank Act, Pub L No 111-203, § 1002(6), 124 Stat 1956 (to be codified at 12 USC § 5481)). A 'service provider' is defined as a person that provides a material service to a covered person in connection with the offering or provision of a consumer financial product or service (Id § 1002(26)).