Non-Bank Entities Providing Financial Services: Get Ready to be Examined

The Consumer Financial Protection Bureau (CFPB) announced in a press release last Thursday the launching of its nonbank supervision program. Following the recess appointment of Richard Cordray as its Director, the CFPB announced that, effective immediately, it has authority to oversee, regardless of size, nonbank mortgage companies, private education lenders, and payday lenders. Cordray has indicated that the CFPB will be aggressive despite the fact that he is a recess appointment.

Nondepository providers of consumer financial products and services are subject to federal supervision for the first time under the Dodd-Frank Wall Street Reform and Consumer Protection Act. While the Dodd-Frank Act grants the CFPB authority to supervise nonbank mortgage companies, private education lenders, and payday lenders, regardless of size, the CFPB can generally only supervise entities in other markets for consumer financial products or services if the entity is deemed to be a "larger participant" of such market. Examples of other markets that could be subject to a "larger participant" rule include debt collection, consumer reporting, auto financing, and money service businesses.

Last June, the CFPB issued a notice seeking comment on how "larger participants" are to be identified. The CFPB stated on Thursday that it will issue an initial "larger participant" rule in the near future. The Dodd-Frank Act provides that the CFPB may also supervise any nonbank that it has a reason 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." The CFPB also stated that it plans to publish rules regarding the implementation of this provision.

The CFPB's nonbank supervision program will be a risk-based program. The CFPB will assess whether nonbanks are conducting their business in compliance with federal consumer financial laws, such as the Truth in Lending Act, the Real Estate Settlement Procedures Act, and the Equal Credit Opportunity Act. An examination may include, among other things, a review of marketing materials, products, and lines of business, and a requirement that nonbanks file certain reports. According to the CFPB, the agency will apply the same approach to nonbank examination as it does to bank examination, including notifying nonbanks in advance of examinations. Nonbanks should familiarize themselves with the CFPB's Supervision and Examination Manual, published on its website, to prepare themselves for eventual examinations.

© Arnold & Porter Kaye Scholer LLP 2012 All Rights Reserved. This blog post is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.