CFPB Updates Nonbank Supervisory Designation Procedures
The CFPB issued a rule to update the agency's procedures for designating nonbank covered persons for supervision. The rule would update proceedings for "determination and voluntary consent" and "post-determination" and make other technical changes.
Under the proposed rule's "Determination and Voluntary Consent Procedures," a proposed consent agreement would continue to be enclosed with the Notice of Reasonable Cause ("Notice"), and consent agreements can be agreed at any other time. The proposed rule combines two previous provisions (that established separate procedural avenues for entering into consent agreements) into one and "harmoniz[ed] their differences, in order to reduce complexity and risk of confusion." The CFPB clarified that a consent agreement does not constitute an admission and allows the duration of the period for supervision to be addressed on a case-by-case basis. The CFPB said that additional notice updates can include permitting methods of service that are "reasonably calculated to give notice," and codified that the initiating official may withdraw a Notice.
The rule also:
- makes minor technical changes to the provision governing the respondent’s opportunity to respond to the Notice;
- provides the initiating official with the option of filing a written reply to the response;
- codifies that the Director might sometimes request a supplemental briefing;
- provides the Director with more flexibility regarding whether a supplemental oral response has to be in person at the Bureau’s headquarters, by telephone, or by video conference;
- requires a separation of functions between CFPB employees who advise the Director in the Director’s adjudicative role on the one hand and CFPB employees who advise the initiating official on the other;
- makes technical changes to conform to changes elsewhere in the post-determination procedures;
- updates miscellaneous provisions regarding the methods of filing and service, calculating time limits and word limits, confidentiality of proceedings, multiple respondents and issue exhaustion.
The rule is effective upon publication in the Federal Register.
Commentary
The issuance of the procedural rule was not unexpected. In 2013, the CFPB issued procedures to govern nonbank supervisory designation proceedings; in 2022, the agency announced that it would begin to make active use of the supervisory designation authority; and in 2023, the CFPB initiated a first round of supervisory designation proceedings under the procedures. On February 23, 2024, the CFPB publicly released the first decision and order in a contested proceeding, in which it discussed the CFPB’s view of this supervisory authority (12 U.S.C. 5514(a)(1)(C)). In this rulemaking, the CFPB notes that other institutions have consented to CFPB supervision, in some cases without a proceeding and in other cases during a proceeding.
The CFPB stated that the rule “will streamline the designation proceedings for both the CFPB and nonbanks.” As described in the rulemaking, in late February 2024, the CFPB began a transition to a new organizational structure for its supervision and enforcement work. The functions of the Associate Director of the Division of Supervision, Enforcement, and Fair Lending are being transferred to the Supervision Director as head of a Division of Supervision and the Enforcement Director as head of a Division of Enforcement. This rule is, in part, intended to implement that change in the context of supervisory designation proceedings and is also informed by the CFPB’s experience with the first round of supervisory designation proceedings.
Importantly, this rule is effective immediately upon publication in the Federal Register. It applies to proceedings initiated on or after the effective date. The rule also applies to proceedings that are pending on the effective date, except to the extent the CFPB determines that is not just or practicable.
As the CFPB continues to widen the scope of its examination authority to nonbank technology companies that provide payment services and continues to designate additional companies subject to risk-based supervision, companies facing the prospect of CFPB examination should begin preparing for that scrutiny well in advance. Being well-prepared for supervision is not merely an exercise in avoiding enforcement referrals. Maintaining a constructive working dialogue and relationship with the examination team and with CFPB Supervision—including through use of qualified outside counsel at the appropriate stages—is a critical component of that strategy.