The Consumer Financial Protection Bureau (“CFPB”) has issued a final rule that establishes procedures to implement section 1024(a)(1)(C) of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank Act”), which authorizes the CFPB to supervise a nonbank after the CFPB has determined that the nonbank engages, or has engaged, in conduct that poses risks to consumers in connection with consumer financial products or services (“Nonbank Supervision Rule”). Such risks may result from conduct that involves unfair, deceptive, or abusive acts or practices, or because the conduct otherwise potentially violates applicable federal consumer financial law.
The CFPB is authorized to require reports from, and conduct examinations of, nonbanks that it subjects to its supervision. Although a rule is not required in order for the CFPB to exercise such authority under the Dodd-Frank Act, the CFPB stated that the Nonbank Supervision Rule is intended to establish a consistent procedure applicable to all affected entities for bringing a nonbank covered person under the CFPB’s supervisory authority and thereby provide transparency regarding the procedures the CFPB intends to use prior to commencement of supervision.
- Nonbank Supervisory Authority
The CFPB is authorized to supervise nonbank entities for purposes of: (1) assessing compliance with the requirements of federal consumer financial law; (2) obtaining information about the activities and compliance systems or procedures of a nonbank entity; and (3) detecting and assessing risks to consumers and to markets for consumer financial products and services.
The CFPB generally has authority to supervise a nonbank that:
- Offers or provides 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 service in connection with such loans;
- Is a “larger participant” in a market for other consumer financial products or services;
- Offers or provides to a consumer any private education loan; or
- Offers or provides to a consumer a payday loan.
In addition, the CFPB may supervise service providers to any supervised nonbank in the foregoing categories to the same extent as if such service provider were engaged in a service relationship with a bank, and the CFPB were the appropriate federal banking agency.
The Nonbank Supervision Rule provides that the CFPB may also supervise any nonbank that the CFPB “has reasonable cause to determine, by order, after notice . . . and a reasonable opportunity . . . to respond . . . 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.” Such reasonable cause determinations must be based on complaints collected by the CFPB, or on information from other sources.
- Procedural Requirements under the Nonbank Supervision Rule
The Nonbank Supervision Rule establishes the procedures the CFPB will use to determine whether a nonbank will be subject to the CFPB’s supervisory authority. These procedures provide transparency useful to nonbanks new to the burdens of federal regulation.
- Issuance of Notice of Reasonable Cause
The CFPB initiates the supervision process once the CFPB’s Division of Supervision, Enforcement, and Fair Lending (“Division of Supervision”) delivers a Notice of Reasonable Cause (“Notice”) to a person stating that the CFPB may have reasonable cause to determine that the respondent is a nonbank covered person that is engaging, or has engaged, in conduct that poses risks to consumers with regard to consumer financial products or services (“Respondent”). A Notice will be based on complaints collected through the CFPB’s newly developed Consumer Complaint Database or from other information sources.
- Opportunity to Respond
Within 30 days of receipt of a Notice, the Respondent may provide a written response to the CFPB, including a request for an opportunity to present a supplemental oral response in-person or by telephone. The Respondent may make its arguments that it does not pose risks to consumers requiring CFPB supervision. Failure to respond timely to a Notice will result in a waiver of the right to respond and may result in a default determination that the Respondent is a nonbank subject to CFPB supervision. Finally, a Respondent may voluntarily consent to the CFPB’s authority by completing and executing the consent agreement that the CFPB will provide with the Notice.
If a Respondent does not voluntarily consent to the CFPB’s authority within 45 days after receiving a timely-filed response, or within 45 days after the service of a Notice in a case in which the Respondent fails to provide a timely response, the Division of Supervision will make a recommended determination to the Director of the CFPB (“Director”) including a proposed decision on whether to subject the Respondent to the CFPB’s supervision. If the Respondent requested an opportunity to present an oral response, the Division of Supervision will make a recommended determination within 90 days after service of the Notice. The Director will make a determination whether to adopt the Division of Supervision’s recommended determination within 45 days.
- Post-Determination Procedures
A nonbank that is subjected to CFPB supervision as a result of these procedures may petition the Director to reverse the determination after two years have elapsed. The nonbank may submit only one petition per year to terminate CFPB supervision. Not later than 90 days after submission of a petition, the Director will issue a written decision either terminating or modifying the order, or denying the petition.
- Impact of the Final Rule
The impact of the Nonbank Supervision Rule has the potential to be broad and far-reaching. Although the CFPB possesses such supervisory authority even without this rule, the CFPB’s decision to adopt the Nonbank Supervision Rule reemphasizes the immense supervisory authority delegated to the CFPB by the Dodd-Frank Act. Because a CFPB determination to supervise a nonbank will be based primarily on the volume and severity of complaints, it is incumbent on a nonbank entity to develop and maintain an effective complaint monitoring and resolution process. Nonbank entities involved in consumer financial products must prepare for the regulatory maze that may soon impact their businesses. The Nonbank Supervision Rule will be effective 30 days after it is published in the Federal Register.