The Consumer Financial Protection Bureau has proposed procedures for asserting its supervisory authority over nonbanks engaged in conduct that poses risk to consumers.

Under the Dodd-Frank Act, the CFPB has authority to supervise a nonbank—regardless of its size—that the CFPB has reasonable cause to determine “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.” Such a determination is to be made through the CFPB’s issuance of an order after providing notice to the nonbank and a reasonable opportunity for it to respond.

This supervisory authority is in addition to the CFPB’s authority under the Dodd-Frank Act to supervise a nonbank that (1) regardless of its size, is a provider of residential mortgage loans or certain related services, payday loans, or private education loans, (2) is a provider considered to be “a larger participant of a market for other consumer financial products or services,” or (3) is a service provider to another entity subject to CFPB supervision.

It is unclear how the CFPB intends to use its authority to supervise nonbanks using risk-based determinations. Rather than use that authority on an entity-by-entity basis, it could be used by the CFPB to extend its supervisory reach beyond mortgage loan originators and payday and private education lenders to supervise all members of other industries that involve products or practices the CFPB deems risky for consumers. It might also be used to allow the CFPB to supervise smaller entities in the same markets in which the CFPB has elected to supervise “larger participants.”

The proposed procedures contain the following highlights:

• The CFPB must send the nonbank a notice setting forth the basis for the CFPB’s assertion that it may have reasonable cause to determine that the nonbank is engaged or has engaged in conduct that poses risks to consumers. A nonbank has 20 days to respond by either contesting the CFPB’s assertions or voluntarily consenting to the CFPB’s supervisory authority pursuant to a standardized form of consent agreement. (The procedures would also allow a nonbank to enter into a negotiated consent agreement at any time.)
• A nonbank’s failure to raise an issue in, or submit any records, documents or other information with, the response constitutes a waiver of the nonbank’s right to raise such issue or rely on such materials at any future stage. The waiver is intended “to remove any incentive for a respondent to wait until after filing a response, such as at a supplemental oral response or during judicial review, to raise an argument or present documents or other information for the first time.”
• If a nonbank also wishes to present arguments in a supplemental oral response (which generally will be held via telephone), it must make a request to do so in its response to the notice. (According to the CFPB, it is not statutorily required to offer an opportunity for an oral response.) No discovery will be permitted and no witnesses will be called in connection with an oral response. Within 14 days of receiving a request for an oral response, the CFPB must notify the nonbank of the date and time of the oral response (which may not be scheduled sooner than 10 days after the date of such notification).
• If a nonbank has not voluntarily consented to CFPB supervision or requested a supplemental oral response, the CFPB’s Assistant Director must recommend a determination not later than 45 days after receipt of the nonbank’s response or, if the nonbank did not file a timely response, not later than 45 days after the service of the CFPB’s initial notice. If a nonbank requests an oral response, a recommendation must be made no later than 90 days after service of the initial notice.
• The CFPB Director must make a final determination not later than 45 days after receipt of the Assistant Director’s recommendation by issuing an order making the nonbank subject to CFPB supervision or notifying the nonbank that it is not subject to CFPB supervision. Unless an order making a nonbank subject to CFPB supervision was entered pursuant to a consent agreement, a nonbank may petition the Director for termination of such an order beginning two years after the order’s issuance and annually thereafter.
• If the CFPB has commenced enforcement proceedings against a nonbank, it can include the initial notice notifying the nonbank that it is being considered for supervision in the notice of charges. In those circumstances, the procedures described above would not apply.

The CFPB states that the proposal is not subject to the notice and comment requirements of the Administrative Procedure Act or the APA requirement for a 30-day delayed effective date because the proposal relates solely to agency procedure and practice. Nevertheless, the CFPB is inviting comments on the proposal (which must be filed by July 24, 2012) and intends to make the final rule effective 30 days after its publication in the Federal Register. The CFPB also states that the proposal, if adopted, would not have a significant economic impact on any small entities because it “sets forth only procedures by which a nonbank covered person may become subject to the Bureau’s current supervisory authority.” Accordingly, the CFPB believes it is not required to convene a Small Business Regulatory Enforcement Fairness Act (SBREFA) panel to review the proposal.

Ballard Spahr’s Consumer Financial Services Group is nationally recognized for its guidance in structuring and documenting new consumer financial services products, its experience with the full range of federal and state consumer credit laws throughout the country, and its skill in litigation defense and avoidance (including pioneering work in pre-dispute arbitration programs). We are currently conducting compliance assessments for clients to help them prepare for their first CFPB exams.

The group also produces the CFPB Monitor, a blog that focuses exclusively on important CFPB developments. To subscribe, use the link provided on the right.

For more information, please contact Practice Leader Alan S. Kaplinsky at 215.864.8544 or kaplinsky@ballardspahr.com; Practice Leader Jeremy T. Rosenblum at 215.864.8505 or rosenblum@ballardspahr.com; John L. Culhane, Jr., at 215.864.8535 or culhane@ballardspahr.com; Mercedes Kelley Tunstall at 202.661.2221 or tunstallm@ballardspahr.com; Barbara S. Mishkin at 215.864.8528 or mishkinb@ballardspahr.com; or Mark J. Furletti at 215.864.8138 or furlettim@ballardspahr.com.