With the rapid rise of nonbank financial product and service companies in an everchanging marketplace, there is growing concern that nonbanks will evade federal oversight. To keep pace with these changes, the Consumer Financial Protection Bureau (CFPB) announced that it will expand its oversight of nonbank entities, including nonbanks that brand themselves as “fintechs.” 

CFPB Director Rohit Chopra intends to hold nonbanks to the same standards to which banks are held. To level the playing field for banks and nonbanks, the CFPB will conduct examinations of nonbank financial companies that the CFPB has “reasonable cause” to determine are posing risks to consumers. Mr. Chopra seeks to “stop harm before it spreads.”

For decades prior to the 2008 financial crisis, only banks and credit unions were subject to federal supervision. After the 2008 financial crisis, in which nonbanks played a significant role, Congress tasked the CFPB with supervising certain nonbank entities. In the past decade, the CFPB has limited its supervision of nonbanks to the mortgage loan, private student loan, and pay day loan industries and to nonbank entities with more than $10 billion in assets. 

The CFPB will now supervise nonbanks whose activities the CFPB has “reasonable cause” to determine pose risks to consumers through a largely unused procedural rule implemented in 2013. This authority is not specific to any particular consumer financial product or service, allowing the CFPB to be agile in supervising nonbanks that are outside of the existing nonbank supervision program.

Risky conduct the CFPB seeks to address includes potentially unfair, deceptive, or abusive acts or practices, or other acts or practices that potentially violate federal consumer financial law. The CFPB is expected to base such “reasonable cause” determinations on complaints collected by the CFPB, or “on information from other sources,” such as judicial opinions and administrative decisions. The CFPB will also utilize whistleblower complaints, state partners, federal partners, or news reports in making “reasonable cause” determinations.

In an effort to prevent previously unsupervised nonbanks from being blindsided by the extended regulatory enforcement, the CFPB issued a procedural rule on April 29th to increase the transparency of the risk-determination process. Entities subject to supervision based on risk are given notice and an opportunity to respond. The CFPB is also updating its procedures for risk determinations to authorize the release of certain information about any final determinations made. The Bureau will accept comments on its updated procedures through May 31, 2022.

Nonbank financial entities should be prepared to allocate additional resources to handle examinations, which may include an audit of the books and records by the CFPB. Examinations may also require nonbanks to file certain reports and to conduct an internal review of their materials, products, and services, and compliance systems and procedures to cure the risks to consumers.  

We will track the CFPB’s new procedural rule and provide updates on any enforcement of previously unsupervised nonbank entities by the CFPB.