Although the Consumer Financial Protection Bureau (CFPB) has been in existence since July 2011, it wasn’t until January 2012, when Richard Cordray was confirmed as its director, that it got its full powers to oversee all financial markets and provide the utmost in consumer protections.
On January 5th, 2012, the CFPB launched the first ever program to supervise nonbank financial institutions. This supervision is an extension of the CFPB’s bank supervision program that began last July and will ensure that banks and nonbanks follow federal consumer financial laws. Essentially, the CFPB will approach nonbank examination the same as it does for banking institutions.
It is crucial to provide consumer protections from nonbank financial institutions. For instance, it is estimated that 20 million Americans use payday loans, roughly 200 million Americans rely on credit reporting agencies to report their credit histories accurately, 14 percent of consumers have one or more debts in collections, and nonbank lenders originated 10% of mortgages.
A “nonbank” is a non-depository business that offers financial products or services but does not have a bank, thrift, or credit union charter. Nonbanks include mortgage lenders, payday lenders, debt collectors, money service companies and others.
Despite the large portion of the financial industry that nonbanks cover, prior to passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the law that created the CFPB, there was no federal program to supervise nonbanks. Other federal regulators examined banks, credit unions, and thrifts to make sure they were complying with the law, but generally the primary tool used to address issues with nonbanks was “after-the-fact” law enforcement.
The CFPB recently requested comments on a proposed rule to establish procedures for determining whether a nonbank is engaging in activities that pose risks to consumers and, therefore, should be supervised. Under the proposed rule, a nonbank that is being considered for supervision, because the CFPB has reasonable cause to determine that it poses risks to consumers, will be notified. The nonbank is given a reasonable opportunity to respond both in writing and orally, if requested by the nonbank. After considering the response, the CFPB would make a final determination either subjecting the nonbank to its supervision or not.
The proposal also permits a nonbank to voluntarily consent to the CFPB’s supervisory authority either by singing the consent agreement attached to the original notice or at any time during the proceedings. There is also a mechanism for nonbanks to file a petition to terminate supervision authority after two years, however, when a nonbank has voluntarily submitted to the CFPB’s jurisdiction for a specified period of time, it is not entitled to petition for early termination.
The CFPB has asked for comments from the public on how to enforce these rules and how to best protect consumers from all participants in the financial market.
Please submit your comments to the CFPB by July 23, 2012. Learn more about how to submit comments.