The Consumer Financial Protection Bureau (“Bureau”), pursuant to its authority to extend its supervision to persons that offer or provide any consumer financial product or service that poses a risk to consumers, has adopted a final rule (“Rule”) establishing procedures to provide such persons with notice of their proposed designation for supervision. The Rule took effect on August 2, 2013.

The Rule gives broad discretion to the Bureau regarding the standards it may apply to make case-by-case designations, which may leave Bureau actions subject to challenge on several grounds.

Overview of the Rule and Comments

Under the Rule, an Associate Director of the Bureau or other specified persons (“Initiating Official”) may issue a Notice of Reasonable Cause (“Notice”) to a person that the Bureau proposes to designate. The person notified (“Respondent”) must be advised that the Bureau may have reasonable cause to determine that the Respondent 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 Notice must describe the basis for this assertion and include a summary of the documents, records or other items relied on by the Bureau.

• Risks to Consumers. The key operative term in the final rule, “risks to consumers,” is not defined in the Dodd-Frank Act (“DFA”) or in the Rule. However, according to the Bureau, the contents of a Notice and the opportunity to respond will provide Respondents with sufficient opportunity to address the proposed application of the Bureau’s supervisory authority. “Risks to consumers” may be based entirely on past behavior without any showing that the behavior is likely to recur, “to the extent that such past conduct indicates weak compliance systems that might lead to other potential law violations or harms to consumers.”

Under Section 1024 of the DFA, a determination by the Bureau to designate a nonbank person for supervision must be based on complaints collected from consumers or on information obtained from other sources, and the company proposed to be designated must be provided with notice and a reasonable opportunity to respond.

• Use of Complaints. The Bureau is not required to verify or screen the complaints or other information on which it relies in issuing a Notice.

It is important to recognize that this case-by-case authority applies to persons engaged in the full range of activities that qualify as providing a consumer financial product or service under the DFA. Moreover, the Bureau takes the position that if an entity becomes subject to its supervisory jurisdiction based on a particular product or service, the Bureau may examine the entire entity for compliance with all federal consumer financial laws related to any consumer financial product or service that the entity provides.

In response to the proposed rule, commenters generally requested greater safeguards in the determination process, such as more detailed notice, more time in which to respond to a notice, additional opportunities to present facts and arguments to the Bureau and restrictions on the Bureau’s reliance on unverified consumer complaints. The Bureau declined to make most of the requested changes, based in general on three propositions:

1. The proposed procedures were prescribed by or consistent with the terms of Section 1024;
2. Since the Rule was intended only to identify persons who were subject to supervision, and did not impose any supervisory burden of its own, the Rule was not subject to due process considerations or certain administrative law requirements; and
3. Maintaining speed and flexibility in, and avoiding committing excessive resources to, the designation process were administrative priorities.
    

Respondent’s Opportunity to Reply

A Notice must inform the Respondent that it has the right to file a written response within 30 days after the date the Notice is served. The response must set forth the basis for the Respondent’s contention that it is not or has not engaged in offering or providing a consumer financial product or service that poses risks to consumers with regard to the offering or provision thereof. The response must include all documents, records or other evidence that the Respondent wishes to use to support its contentions, and must be certified by an affidavit or declaration. Alternatively, the Respondent may consent to the Bureau’s assertion of supervisory jurisdiction by completing and executing a form of consent to be provided by the Bureau to accompany the Notice. Failure by the Respondent to file a timely response shall constitute a waiver of its right to respond and shall permit the Bureau to issue a proposed and final decision and order of designation.

• Supplemental Oral Response. The Respondent may request an opportunity to make a supplemental oral response, in person or by telephone. The Bureau may set limits on the conduct of all supplemental oral responses, including a time limit and a limit on the subject matter that may be addressed. No witnesses may be called.
• Confidential Treatment. All documents, records or other items submitted by the Respondent to the Bureau, all documents prepared by, on behalf of or for the use of the Bureau in connection with a proceeding and all communications between the Bureau and any person in connection with a designation proceeding are deemed to be confidential supervisory information.
• Limited Nature of Proceedings. The Bureau is not required to provide any documents or other information to a Respondent in connection with a Notice, except as described above. No discovery by the Respondent is permitted in connection with the filing of a response or a request to make a supplemental oral response. No written motions or objections related to the conduct of a supplemental oral response may be filed.
• Waiver. Failure by a Respondent to timely raise an issue in a response or to submit documents, records or other evidence constitutes a waiver of its right to raise the issue or submit the items at any future stage of the proceeding or in any petition for judicial review. This waiver also covers any information that may come to the attention of the Respondent only after it has filed its response. However, according to the Bureau, since a Notice proceeding is conducted only for the purpose of determining the Bureau’s supervisory authority, failure to timely raise an issue or to submit an item would not constitute a waiver in connection with a claim or a proposed finding of a violation of federal consumer financial law.
   

Timing of Determination by the Bureau

If a Respondent requests the opportunity to make a supplemental oral response, an Associate Director of the Bureau must recommend a determination to the Director within 90 days after service of the Notice on the Respondent. The recommendation must be accompanied by a proposed decision and order of designation and the basis for the recommendation, or by a proposed notification to the Respondent that it is not subject to the Bureau’s supervisory jurisdiction. If a Respondent does not request the opportunity to make a supplemental oral response, the Associate Director must make a recommendation to the Director within 45 days after the date on which the Respondent files its timely written response to the Notice.

The Director must make a final determination within 45 days after receiving the Associate Director’s recommendation. If the Director decides to designate, the decision and order must be accompanied by a statement of the basis for designation, which may adopt the basis set forth in the Associate Director’s recommendation. A decision and order constitutes final agency action for purposes of judicial review.

• Voluntary Consent. If a Respondent voluntarily consents to the Bureau’s supervisory jurisdiction, no recommendation to the Director or decision and order to designate are required.
• Decision Not to Designate. A proposed or final decision not to designate has no precedential effect and does not prevent the issuance of a subsequent Notice.
   

Petition for Termination of Designation

A person that is designated for supervision may petition the Director to terminate the designation not sooner than two years after the date on which the order of designation was issued, and such person may petition for termination annually thereafter. However, a person that consents voluntarily to the Bureau’s supervisory jurisdiction may not file a petition for early termination of the period set forth in its consent agreement. A petition must set forth the reasons for termination, including any actions taken by the petitioner since its order of designation was issued.

The Initiating Official may file a response to the petition within 30 days after receiving it, stating whether the Director’s order should be terminated or modified or the petition should be denied and providing the basis for the recommendation. The Associate Director must serve a copy of the recommendation on the petitioner, but the petitioner is not authorized to respond.

The Director must issue a written decision within 90 days after the date on which a petition is filed. If the Director denies a petition or modifies but does not terminate an order, he or she must send the decision to the petitioner with an explanation of the basis for the decision. A decision regarding a petition constitutes final agency action for purposes of judicial review.

• Confidential Treatment. All documents, records or other items submitted by the petitioner, all documents prepared by, on behalf of or for the use of the Bureau in connection with a petition for termination and all communications between the Bureau and any person in connection with a petition are deemed to be confidential supervisory information.