CFPB Issues Rule Establishing Supervisory Authority Over Certain Nonbank Covered Persons

by: Marissa Blundell

On June 26, 2013, the Consumer Financial Protection Bureau (CFPB) issued a final procedural rule which applies to its exercise of supervisory authority over certain nonbank covered persons based on risk determination. The rules govern the process through which the CFPB will determine whether it has reasonable cause to decide whether a nonbank covered person 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. If such reasonable cause exists, the CFPB is authorized to supervise the entity.

In accordance with the Dodd-Frank Act, the CFPB has supervisory authority over “covered persons”, not over a particular type of activity. To recap, the CFPB’s supervisory authority extends to a covered person who:

i.   offers or provides origination, brokerage, or servicing of loans secured by real estate for use by consumers primarily for personal, family, or household purposes, or loan modification or foreclosure relief services in connection with such loans
 
ii.   is a larger participant of a market for other consumer financial products or services
 
iii.  offers or provides any private education loan, or
 
iv.  offers or provides a payday loan
 
In addition, the CFPB’s has supervisory authority over a covered person if the CFPB has reasonable cause to determine the entity 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 following are key points about the procedures which will apply when the CFPB must apply this standard. 

Notice of Reasonable Cause
 
A Notice of Reasonable Cause is required to be served and must contain the following:
 
1)  a description of the basis for the assertion the CFPB may have reasonable cause to determine that respondent is a nonbank covered person that 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, including a summary of the documents, records or other items on which the assertion relies
 
2)  a statement informing the respondent that a written response to a notice of Reasonable Cause may be filed, no later than 30 days after notice has been served on the respondent and the written response shall include certain elements as set out in the following section
 
Response to Notice of Reasonable Cause 

The response must be timely as set forth in the preceding section and must include the following:
 
1)   the basis for the respondent’s contention that the respondent is not a nonbank covered person as described in the CFPB’s notice
 
2)   all documents in support of the nonbank covered person’s argument as set out in the response
 
3)   any request to present a supplemental oral response
 
4)   an affidavit or declaration affirming that the response is true and accurate and does not contain any omissions that would cause the response to be materially misleading
 
Recommended Determination by the Associate Director
 
The Associate Director must provide the Director a recommended determination of whether reasonable cause exists, which should result in an order subjecting the respondent to the CFPB’s authority, within the following timeframes:
 
1)  not later than 45 days after receipt of a timely response
 
2)  not later than 45 days after service of a Notice of Reasonable Cause, if the respondent does not file a timely response
 
3)  not later than 90 days after Service of a Notice of Reasonable Cause, if a respondent properly requests the opportunity to present a supplemental oral response Determination by Director The Director of the CFPB, or his or her designee, must issue a decision and order to the respondent within 45 days of receipt of the recommendation which either subjects the respondent to the CFPB’s supervisory authority, or notifies the respondent that the Director has determined the respondent is not subject to the CFPB’s supervisory authority.
 
The decision and order must also:
 
1)  accept, reject, or modify the Associate Director’s proposed decision
 
2)   state that the CFPB has reasonable cause to determine that a respondent is a nonbank covered person that is engaging, or has engaged, in conduct that poses risks to consumers with regard to the offering or provision of consumer financial projects or services
 
3)   provide the basis for the Director’s decision
 
4)   order that as of a specified date the respondent shall be subject to the CFPB’s supervisory authority and inform the respondent regarding the process for petitioning to terminate the CFPB’s supervisory authority
 
5)   include a copy of the recommended determination Alternatively, a respondent may voluntarily consent to the Bureau’s authority by completing the consent agreement form provided with the Notice of Reasonable Cause.     

About the Author:
Marissa Blundell, Esq., is Senior Vice President and General Counsel at Bankers Advisory, Inc.  She can be reached at marissa@bankersadvisory.com