The U.S. Treasury Department, on behalf of the Consumer Financial Protection Bureau ("CFPB"), recently published a Notice and Request for Comment ("Notice") regarding various aspects of Dodd-Frank's "larger participant" rule. Dodd-Frank granted the CFPB supervisory authority over non-banks in the residential mortgage, private education lending, and payday lending markets. In addition, the CFPB also has supervisory authority over "larger participants" in certain consumer financial markets, but Dodd-Frank left the definition of these participants and the relevant consumer markets to the CFPB to define through rulemaking. Those non-banks considered "larger participants" in a defined market will be subject to increased compliance costs through registration, reporting, and examination requirements. Non-banking entities in the consumer financial products and services market, especially those in markets identified below, should consider submitting comments by August 15, 2011.
CFPB's Non-Bank Supervisory Authority
Dodd-Frank granted the CFPB supervisory power over non-banks to assess compliance with federal consumer financial law, collect information about compliance systems and procedures, and detect and assess risks to consumers and the consumer financial products and services market. Dodd-Frank authorizes the CFPB, when assessing risk, to consider a company's asset size, volume of transactions involving consumer financial products or services, extent of state oversight, and any other relevant factor. Dodd-Frank left open the issues of the markets and size of non-banks over which the CFPB will exercise this authority.
In this Notice, the CFPB seeks assistance in determining: (1) which markets to include in the "larger participants" rule; (2) what criteria to use to define "larger participants"; (3) what data to use in measuring the threshold of "larger participants"; (4) the appropriate assessment time period; and (5) the appropriate length of CFPB supervision.
Potentially Affected Markets
The CFPB identified six markets it will likely cover in its initial rule: (1) debt collection; (2) consumer reporting; (3) consumer credit and related activities; (4) money transmitting, check cashing, and related activities; (5) prepaid cards; and (6) debt relief services. The CFPB seeks comments on whether each consists of a single or multiple markets. The CFPB is also considering whether other markets should be included in the initial rule. And even after the initial rule, the CFPB may still add markets and expand the scope of the "larger participants" rule. The final definition of the relevant markets, specifically whether the markets are broadly or narrowly defined, may be the most critical determinant of whether a non-bank is a "larger participant."
The CFPB focused on markets with high volumes of consumer-related transactions. For example, the debt collection market affects 14 percent of consumers. The consumer credit market in the auto lending and finance industry alone generates $60 billion in revenue annually. And the prepaid card products market collected more than $140 billion in transactions in 2009. Companies should consider the consumer transactions' volume in its market, as it may indicate which additional markets may be included in this rule.
But the CFPB also selected the debt relief services market, which includes providers of both debt management plans and debt settlement services. The CFPB noted that statistics on the size of the industry and the size of debt relief services are not readily available. This may signal the CFPB's intent to explore other markets that potentially affect a large number of consumers when little information about the market can be gathered. Companies in markets with little information, but a high volume of consumer transactions, should use this comment period to educate the CFPB and reduce the prospect of federal supervision.
Suggested Criteria to Define "Larger Participants"
A critical element in determining which companies may be subject to supervision is the criteria the CFPB will use to define "larger participants." The definition should include a list of relevant criteria and quantitative elements. The CFPB is specifically considering whether larger participants should be defined based on a relative measure (e.g., the annual transactions of the market participants) or on an absolute threshold (e.g., doing business in a specified number of states). The CFPB is also considering which criteria should be used to determine the size of a market participant. The CFPB has additionally requested comments on whether different criteria and thresholds should be used for every market.
Companies should carefully consider what criteria are most appropriate, particularly since Dodd-Frank requires market participants' activity levels to be aggregated with affiliated companies. Dodd-Frank broadly defines an "affiliate" to include any person that controls, is controlled by, or is under common control with another person, excluding insured depository institutions and insured credit unions. This expansive definition has the potential to subject a significant number of non-banks to increased federal supervision, and the associated increase in compliance costs, based on affiliate activity alone. Moreover, the Notice did not specifically address this issue or how a non-bank with affiliates across multiple markets will be treated.
Selecting Data to Measure the "Larger Participants" Threshold
Companies also have the opportunity to assist the CFPB in determining what reliable data sources are available and suitable for the CFPB to use to measure the "larger participants" threshold. To accurately assess which companies meet the threshold of a "larger participant," the CFPB will require objective data regarding the relevant markets. The CFPB is considering both public data (e.g., SEC's online EDGAR database, state and federal licensing and registration records) and private data (e.g., nonpublic state or federal supervisory data and proprietary industry market analyses).
The CFPB will also likely collect data directly from market participants through a registration program for covered entities. The CFPB has indicated that it may collect data even from entities that will not be subject to CFPB supervision. Companies may use this commentary period to educate the CFPB on what data should be collected through this registration process.
Time Period for Assessing "Larger Participants" Threshold
The CFPB must also determine the appropriate time period in which to assess whether a particular company meets the "larger participants" threshold. The CFPB is considering three options: the immediately preceding calendar year, a certain number of immediately preceding calendar years, or at one or more specific points in time. The initial rule will also need to consider the effect of significant events relevant to the "larger participants" determination, such as mergers and acquisitions of market participants. The CFPB is open to alternative approaches for establishing an assessment time period.
Length of CFPB Supervision over "Larger Participants"
The CFPB has not yet determined how long "larger participants" should be subject to CFPB supervision once they meet the threshold. The CFPB has indicated that it may require sufficient supervision to allow it to conduct a subsequent investigation if an initial examination finds violations of the law or yields compliance concerns.
The "larger participant" rule may subject non-banking companies to federal supervision for the first time, resulting in a potentially dramatic increase in compliance costs for non-banks. Non-banks providing consumer financial products or services should take this opportunity to analyze the issues raised by this Notice and submit comments assisting the CFPB to define the relevant markets in accordance with economic and business realities.
Those companies in markets specifically identified by the CFPB particularly should use this opportunity to identify the best criteria for defining the CFPB's regulatory authority over "larger participants." Comments are due by August 15, 2011.