CFPB follows through on promise to use dormant authority to supervise high-risk nonbanks // Cooley // Global Law Firm

On February 23, 2024, the Consumer Financial Protection Bureau (CFPB) released a order establishing supervisory authority over a non-bank installment lender on the basis that the institution poses risks to consumers. The order provides insight into the procedural aspects of the CFPB's exercise of this never-before-used power — and the standards it might use to assess whether an institution poses a risk to consumers and therefore warrants continued oversight. Although the CFPB has a long-standing nonbank oversight program in the area of ​​mortgages, student loans, and small-dollar short-term loans, and may also examine larger players in certain markets financial services (e.g., automobile and debt collection), the order charts a path for the CFPB to supervise smaller, but “risky” non-bank financial service providers, as well as fintechs offering new products.

Consumer Complaints, Product Offerings May Guide CFPB Oversight Decision

Consistent with the CFPB's April 25, 2022 announcement, the CFPB's determination that the installment lender poses risks to consumers was based on a mix of consumer complaints and the nature of the lender's products, services, and operations. Specifically, the CFPB said it had reasonable cause for concern based on:

• How the lender describes optional insurance products to consumers and integrates them into loans.
• Debt collection practices, including allegations of harassment and coercion that jeopardize consumers' employment or cause stress.
• Accuracy in providing information to consumer reporting agencies.
• Percentage of existing small-dollar loans that are refinanced with new small-dollar loans.

The CFPB's decision appears to rest largely on the content of consumer complaints — a reliance the lender warned against during the determination process because such complaints may be inaccurate, not credible, or contradicted by other evidence . Interestingly, the CFPB turned this argument against the lender during the proceedings, suggesting that this is the very reason monitoring is necessary: ​​to learn more about the lender's practice and resolve any factual uncertainties between the conduct alleged in the complaints and reality. The CFPB also uses the order to criticize how the lender responds to customer complaints, saying the institution's responses inappropriately ignore the substance of the complaint, offer a conclusive denial of wrongdoing, or describe the relevant facts differently from those presented by the consumer. without supporting evidence.

The designation process lasted approximately eight months and required at least three submissions by the now-supervised lender.

The order makes clear that the designation process will require significant institutional resources. The CFPB issued the lender its formal notice of intent to supervise on March 10, 2023, a year after announcing its intention to begin using this authority. The lender submitted a written response to the notice on April 12, 2023, and then made an oral presentation to the CFPB on May 17, 2023. The CFPB reviewed the lender's filing and briefings, collected additional information – including this which appeared to be an in-depth review of consumer complaints – and allowed the lender to file a supplemental brief on October 16, 2023, even though it is not required by CFPB procedures. CFPB Director Rohit Chopra ruled that the CFPB would subject the lender to supervision on November 30, 2023, although the order, lightly redacted, was made public three months after it was issued.

And after?

This order serves to alert entities not subject to the CFPB's automatic supervisory authority that the CFPB still monitors the broader market. For those who need a refresher, the CFPB exercises automatic supervisory authority over institutions engaged in mortgage lending and servicing, private student loans, payday loans, as well as larger players involved in consumer reporting, debt collection, student loan servicing, international money transfers and auto loan. In November 2023, the CFPB also proposed establishing a supervisory authority over digital wallet and payment app providers. Institutions not subject to the CFPB's supervisory authority must nevertheless maintain comprehensive compliance management systems and properly resolve consumer complaints filed with the CFPB, as well as other regulatory agencies.

This content is provided for general information purposes only, and your access or use of the content does not create an attorney-client relationship between you or your organization and Cooley LLP, Cooley (UK) LLP or any other affiliated practice or entity (collectively referred to as “Cooley”). By accessing this content, you agree that the information provided does not constitute legal or other professional advice. This content is not a substitute for obtaining legal advice from a qualified attorney licensed in your jurisdiction and you should not act or refrain from acting on the basis of this content. This content is subject to change without notice. It is not guaranteed to be complete, accurate or up-to-date and may not reflect the most recent legal developments. Previous results do not guarantee a similar result. Do not send any confidential information to Cooley, as we have no obligation to keep any information you provide to us confidential. This content can be considered Lawyer advertising and is subject to our legal notices.