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President Obama's recess appointment earlier this month of Richard Cordray as Director of the Consumer Financial Protection Bureau, a new federal agency borne out of the Dodd-Frank Wall Street Reform and Consumer Protection Act, has some constitutional experts and political pundits in an uproar, and many wondering how the recent developments will affect consumers and the financial industry. It appears that the CFPB will dramatically alter the consumer finance regulatory environment yet the full extent of these changes is not yet known. While the CFPB has provided considerable guidance regarding its intentions, it is still in the process of transferring rulemaking authority for several consumer protection laws to the CFPB, revising pre-existing regulations and rolling out new rules and programs.
Although the CFPB was originally created last summer when the President signed the Dodd-Frank Act into law, its initial authority was limited to overseeing banks until a director was appointed. Mr. Cordray's recess appointment now allows the CFPB to greatly expand its reach, immediately announcing the launch of its "nonbank supervision program."
The CFPB broadly defines a "nonbank" as "a company that offers or provides consumer financial products or services but does not have a bank, thrift or credit union charter." The nonbank supervision program will be implemented in phases. First, effective immediately, the CFPB intends to oversee the following nonbank businesses, regardless of size: mortgage companies (originators, brokers and servicers, and loan modification or foreclosure relief services); payday lenders; and private education lenders. In a CFPB blog post dated Jan. 4, 2012, Mr. Cordray accused many of these nonbank entities of leading "a race to the bottom that pushed aside responsible businesses, including community banks and credit unions, and greatly harmed consumers." He further stated that oversight of these entities is a top priority and that the CFPB will announce more information about its oversight program in the coming weeks.
However, for other markets – such as debt collection, consumer reporting, auto financing and money services businesses – the CFPB may only supervise "larger participants" after defining what "larger participant" means. In order to develop a larger participant rule, the CFPB is currently seeking public comments, including how to set thresholds and criteria for defining larger participants and what markets to include in the initial proposed rule, which should be issued very soon.
Additionally, the Dodd-Frank Act authorizes the CFPB to 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 consumer financial products or services. However, the CFPB has yet to publish rules establishing procedural guidelines for implementation of this vague and potentially broad provision.
So, what does this all mean? The CFPB intends to assess whether nonbanks are conducting their businesses in compliance with federal consumer financial laws, such as the Truth in Lending Act and the Equal Credit Opportunity Act. The CFPB has signaled it will approach nonbank examinations like traditional bank examinations and may require filing of certain reports and/or a CFPB review of the materials companies use to offer products and services, compliance systems and procedures, and representations and promises made to consumers. The CFPB also intends to implement a risk-based nonbank supervision program. When considering whether and how to supervise particular nonbanks, the CFPB will consider several relevant factors, including the nonbank's volume of business, types of products or services, and the extent of state oversight.
Although Mr. Cordray's appointment is likely to produce further political wrangling and legal challenges, it is clear that all members of the financial services industry can expect changes to the way they do business.
Gardere Attorneys Chris Converse (firstname.lastname@example.org or 214.999.4903) and Glenn T. Singleton (email@example.com or 214.999.4646), authors of this alert, are available to discuss any questions you might have regarding the CFPB. Please also feel free to contact any members of Gardere's Corporate Team.
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