The Consumer Financial Protection Bureau (CFPB or Bureau) is taking a significant step to modify its supervisory approach to nonbanks by publishing a proposed rule advancing a more stringent definition of “risks to consumers” in the context of § 1024(a)(1)(C) of the Consumer Financial Protection Act (CFPA) when designating nonbanks for supervision. This move aims to limit the Bureau’s oversight of nonbanks to cases where there is a high likelihood of significant harm to consumers, thereby narrowing the scope of its supervisory authority.
Background
Section 1024(a)(1)(C) of the CFPA authorizes the CFPB to supervise a nonbank covered person that the Bureau has reasonable cause to determine, by order, after notice to the covered person and a reasonable opportunity for such covered person 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. The CFPB maintains procedures found at 12 C.F.R. part 1091 that govern the process by which the Bureau provides notice to the nonbank and a reasonable opportunity to respond.
To date, the CFPB has not issued a rule addressing the meaning of “risks to consumers” in the context of § 1024(a)(1)(C). Instead, the Bureau has issued orders in individual cases. By adopting a standard definition of “risks to consumers,” the CFPB believes that it will provide clarity to nonbanks about the supervisory standard to be applied and will “ensure that the Bureau acts within the bounds of its statutory authority.”
Key Aspects of the Proposed Rule
- Stricter Definition of “Risks to Consumers”: The CFPB’s proposed rule introduces a more rigorous standard for determining “risks to consumers.” The rule specifies that only conduct: (a) presenting a high likelihood of significant harm, and (b) directly connected to the offering or provision of consumer financial products or services, will be subject to supervision by the Bureau. This change is intended to focus the Bureau’s resources on serious consumer protection issues, rather than speculative or minor concerns.
- Limiting Supervisory Scope: By tightening the criteria for what constitutes a risk to consumers, the CFPB aims to reduce the number of nonbank entities subject to its supervision. This approach is expected to decrease regulatory burdens on nonbank financial institutions, allowing them to operate with greater certainty regarding the Bureau’s standards.
The CFPB is seeking 30-day public input on this proposed rule, with comments due by September 25, 2025.
Our Take
The CFPB’s proposed rule is consistent with the Bureau’s 2025 supervision and examination priorities outlined in Chief Legal Officer Mark Paoletta’s April 16, 2025 memo to Bureau staff. One of those priorities was for the CFPB to return to a focus on the largest banks and depository institutions instead of nonbanks. As noted in Mr. Paoletta’s memo, the Bureau has performed 60% of its examinations on nonbanks since its inception. The CFPB aims to return to 2012 proportions when 70% of its supervisory activities were focused on large banks and depository institutions and 30% on non-banks. The CFPB’s proposed rule would further that goal.
If the proposed rule is finalized without any material changes, nonbank financial institutions can anticipate a reduction in supervisory actions by the CFPB under the new rule. The clearer standard concerning “risks to consumers” will help nonbanks better understand and manage their compliance obligations, potentially lowering costs associated with regulatory oversight.
