The CFPB is proposing a rule that standardizes determinations that nonbanks pose “risks to consumers,” a move that could result in fewer nonbanks being designated as posing risk and thus subject to CFPB supervisory jurisdiction.
The proposed rule states that “conduct that poses risks to consumers with regard to the offering or provision of consumer financial products or services” consists of conduct that:
- Presents a high likelihood of significant harm to consumers; and
- Is directly connected to the offering of a consumer financial product or service as defined by the CFPA.
This proposal follows on the heels of a May proposal by the Bureau to rescind certain Biden-era amendments to the procedures for supervisory designation proceedings.
Those amendments were widely viewed by industry as enabling the CFPB to pressure a company to consent to supervisory jurisdiction in order to avoid the CFPB making public its conclusion, in a contested determination, that the company did pose a risk to consumers.
In referring to the most recent proposal, the Bureau said, “This will ensure that the Bureau acts within the bounds of its statutory authority and provide clarity to institutions about the standard the Bureau applies.”
Until now, the bureau has considered the risks posed by nonbanks on a case-by-case basis—a practice that the Trump Administration’s CFPB is criticizing.
“The Bureau has not, to date, issued a rule addressing the meaning of “risks to consumers” in the context of section 1024(a)(1)(C) (The Consumer Financial Protection Act of 2010),” the CFPB said, in proposing the rule. “Instead, the Bureau has issued orders in individual cases.”
That section of the law authorizes the CFPB to supervise a nonbank covered person that the Bureau has a “reasonable cause” to determine, by order and after proper notice, is engaging or has engaged in conduct that poses risk to consumers with regard to the offering or provision of consumer financial products or services.
However, it provides little guidance to providers of consumer financial services about such determinations.
It does state that the CFPB can base such determinations on consumer complaints or on information it obtains from other sources. It also states that such determinations should be based on the assessment of the risks in the relevant product markets and geographic markets.
In addition, it allows the CFPB to consider a company’s size, transaction volume, the inherent risk of the product or service at issue, the extent to which the company is subject to state oversight for consumer protection, and any other factors the CFPB deems relevant.
But it does not define “risks to consumers” in this context.
Noting that to date there have been less than 20 companies designated as posing risk to consumers, out of an estimated population of 154,430 entities in covered industries, the CFPB said that it has three concerns regarding the current process of designating a nonbank a risk to consumers on a case-by-case basis.
First, the agency said, the ad hoc nature of individual orders creates a danger that the application of “risks to consumers” might be inconsistent.
Second, because precedents in past orders can be unclear and because the Bureau might depart from existing precedents, institutions may be uncertain what standard the CFPB might apply in their case.
Third, without a binding framework, on the meaning of “risks to consumers,” the Bureau might not conform to the best reading of the law in individual cases.
The Bureau states that Congress would not have expected it to spend resources on issues that are speculative. “Section 1024(a)(1)(C) indicates that Congress intended the Bureau to be squarely focused on serious conduct,” the CFPB said.
Under the proposed rule, firms would have more clarity as to what conduct might trigger supervision, potentially lowering compliance review costs, according to the Bureau.
Comments on the rule are due by September 25.
Although it has not yet submitted a comment letter, America’s Credit Unions, the trade group representing those institutions, criticized the proposal. “America’s Credit Unions supports strong, even-handed consumer protection across the marketplace, and as drafted, the proposal could create a carveout for nonbank actors whose practices can harm consumers and disadvantage supervised credit unions,” the group said.
However, we support the Bureau’s approach in the proposal. Moreover, numerous provisions of the Consumer Financial Protection Act direct the CFPB to identify, detect, or monitor “risks to consumers.” These phrases appear, for example, in Section 1021(c)(3) (specifying that identifying risks to consumers from market functioning is one of the primary functions of the Bureau), in Section 1022(c)(1) (directing the Bureau to monitor risks to consumers to support its rulemaking and other functions), in Section 1024(b)(1) (generally directing the Bureau to require reports and conduct examinations to detect and assess risks to consumers), in Section 1025(b)(1)(C) (giving the Bureau the exclusive authority to require reports and conduct examinations of larger financial institutions to detect and assess risks to consumers) and in Section 1026(b) (giving the Bureau the authority to require reports from other financial institutions to assess and detect risks to consumers). Accordingly, we would urge the Bureau to apply the same standard across the board.
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