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Consumer Watchdog Establishes Procedures To Notify Nonbanks Considered for Oversight

Monday, July 1, 2013
By Mike Ferullo

The Consumer Financial Protection Bureau completed a procedural rule June 26 that spells out how the consumer watchdog agency intends to notify a nonbank financial services provider that it is being considered for supervision.

The CFPB will issue a “Notice of Reasonable Cause'' if it has information that a nonbank entity may have engaged or is engaging in conduct that poses risks to consumers, according to the final rule.

The regulation lays out what the CFPB requires in both the notice and the company's response, as well as procedures and timelines that the agency will use to make a decision on supervision. The final rule also creates a mechanism for nonbanks to file a petition to terminate the CFPB's supervisory authority after two years.

“This is an important step in our effort to continue building a strong supervision program,” CFPB Director Richard Cordray said in a statement. “This rule clearly lays out how we plan to implement our supervisory authority over nonbanks that we determine pose risk to consumers. We are also providing industry with a streamlined process that is fair and efficient.”

The Dodd-Frank Wall Street Reform and Consumer Protection Act allows the CFPB to supervise any nonbank entity if it has reasonable cause to believe that the company's financial products or practices pose risks to consumers. Reasonable-cause determinations must be based on consumer complaints that the CFPB has received information collected from other sources, such as judicial opinions and administrative decisions.

Separately, the CFPB has explicit authority under Dodd-Frank to supervise mortgage companies, payday lenders and nonbank student lenders, as well as other “larger participants” that it designates in the nonbank financial services marketplace. 

Not a Required Rulemaking

The CFPB is authorized to require reports from and conduct examinations of nonbanks subject to its supervision. However, notifying a nonbank under the June 26 rule “simply means that the CFPB may be supervising it,” the agency also said.

“Although the Dodd-Frank Act does not require that the CFPB issue this rule, the CFPB is issuing it to be transparent in the procedures it intends to use to implement its authority under the Dodd-Frank Act,” the agency said.

A firm may be flagged for potential supervision if information points to unfair, deceptive, or abusive acts or practices, which the CFPB has broad authority to take action against under Dodd-Frank. Practices that potentially violate other federal consumer financial laws also would result in a “Notice of Reasonable Cause,” according to the rule.

Nonbanks are generally required to respond to a CFPB notice within 30 days. The regulation lays out procedures for oral and written responses, as well as documents and other evidence that a nonbank entity may wish to submit to the bureau.

The regulation also states that failure to respond may result in a default determination that the nonbank entity poses risks to consumers through its products or services, followed by an order subjecting the company to routine CFPB supervision.

The rule will be effective 30 days after publication in the Federal Register.


The regulation is available at /uploadedFiles/Content/News/Legal_and_Business/Bloomberg_Law/Legal_Reports/nonbank(2).pdf.

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