CFPB Asserts "Dormant" Supervisory Designation Authority
In a partially redacted Order in a "Supervisory Designation Proceeding," the CFPB determined that it has supervisory authority over an installment lender after concluding that the lender met the legal standard for supervision under the Consumer Financial Protection Act. The Order, dated November 30, 2023, marked the CFPB's first supervisory designation determination in a contested matter.
In the Order, the CFPB maintained that it has explicit supervisory authority over a variety of institutions which include banking entities with assets over $10 billion and their affiliates, as well as over variety of other credit providers such as payday lenders and private student lenders. The CFPB stated that pursuant to 12 U.S.C. 5514(a)(1)(C) ("Supervision of non depository covered persons"), the CFPB may designate other non-depository institutions for supervision if the CFPB has reasonable cause to determine that the institution's conduct poses risks to consumers. This authority was left dormant by the CFPB until 2022, when the CFPB, in an internal assessment, identified that the agency was failing to conduct oversight using this authority. As a result, the CFPB stated that it began to utilize this dormant authority and issued procedures relating to the use of such authority.
Rationale for Supervisory Designation
The CFPB's finding that the installment lender's conduct poses "risks to consumers" was based on consumer complaints alleging that the entity:
- failed to adequately explain to its customers that its offered insurance was optional (what the CFPB describes as the lender's "conduct with regard to bundling loans with insurance products").
- "[h]arasse[d]" and "embarrasse[d]" borrowers in default of their loan obligations, including contacting defaulted borrowers at their places of employment or contacted their employers, even after being told not to do so, and disclosing debts to borrowers' friends, family members, and other third parties.
- furnished inaccurate information to consumer reporting agencies and failed to adequately investigate disputes.
- engaged in "serial refinancing" practices that risked trapping consumers in debt for years.
The Order does not constitute a finding that the installment lender has violated any law.
Commentary
Practically speaking, the low bar for the CFPB's authority to subject a covered person to supervision using this specific legal authority reflects the somewhat limited impact of such a determination on the entity. The determination does not require an immediate action on the part of the covered person. The determination also does not necessarily entail a finding that the covered person has violated any law, nor does it impose any monetary penalties or new legal requirements (other than the requirement to provide reports or participate in examinations in accordance with lawful supervisory directives). The determination does not even definitively label the covered person as a "risky" business; it merely indicates that the CFPB has "reasonable cause" to determine that the covered person's conduct poses risks to consumers.
That said, such a determination means that the CFPB may periodically "require reports" from, and "conduct examinations" of, the covered person. The CFPB prioritizes supervisory activity among nonbank covered persons on the basis of risk, taking into account, among other factors, the size of each entity, the volume of its transactions involving consumer financial products or services, the size and risk presented by the market in which it is a participant, the extent of relevant State oversight, and any field and market information that the CFPB has on the entity. Such field and market information can include, for example, information from complaints and any other information the CFPB has about risks to consumers and to markets posed by a particular entity. Examinations may involve issuing confidential examination reports, supervisory letters and compliance ratings. Examiners use the CFPB’s Supervision and Examination Manual as a resource in conducting exams and other supervisory activities. In addition, the CFPB also may conduct other supervisory activities, such as periodic monitoring.
Although this is the first public announcement of the use of the CFPB's supervisory designation authority, the CFPB has designated several nonbanks for supervision under this authority, keeping those designations confidential in exchange for the nonbanks' agreements not to contest the designations. It is likely that the CFPB will continue to designate additional entities for supervision going forward, whether publicly or confidentially, and regardless of whether such entities are already supervised by state regulators.
Supervision is, in many ways, the CFPB's most powerful tool for finding out what goes on within a company; it allows the CFPB to find things that are not evident from the outside, things that the agent won't see through complaints, or things that are not necessarily visible on a public-facing website. Accordingly, the CFPB's ability to discover issues that it may identify as problematic is massively higher when the agency has the opportunity to do a supervisory exam than when it is just relying on consumer complaints and other public information. The CFPB has historically used supervisory exams as a way to exert pressure on supervised entities to make business process changes.
Accordingly, any firm that is subject to such a determination by the CFPB must consider, first, whether it is worthwhile to contest the designation given the breadth of the CFPB's authority. Assuming that the designation goes forward, it behooves the firm to do a full review of its business processes to determine whether any of its existing activities makes it vulnerable to CFPB criticism.