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The US Consumer Financial Protection Bureau (CFPB) has revived a dormant authority to examine nonbank companies that pose risks to consumers.
After making headlines with a massive junk fee inquiry and recent lawsuits against large “repeat offenders”, the CFPB has now announced it is invoking a largely unused legal provision to examine nonbank financial firms.
This group includes institutions that are considered “larger participants” or whose activities pose risks to consumers.
The move is intended to help protect consumers and level the playing field between banks and nonbanks.
“Given the rapid growth of consumer offerings by nonbanks, the CFPB is now utilizing a dormant authority to hold nonbanks to the same standards that banks are held to,” said CFPB director Rohit Chopra.
“This authority gives us critical agility to move as quickly as the market, allowing us to conduct examinations of financial companies posing risks to consumers and stop harm before it spreads.”
The CFPB’s authority to supervise nonbank financial products originates from the Dodd-Frank Act 2010 and a 2013 procedural rule that implemented the relevant sections.
The rule enables the CFPB to conduct an examination of nonbanks and bring enforcement actions against them when the bureau has “reasonable cause to determine” that they pose risks to consumers.
This legal provision has so far been largely unused. The recent announcement, however, indicates that the tide is turning and fintechs should prepare for a more agile CFPB.
“The CFPB’s announcement is a warning shot to fintechs that if a nonbank business model poses risk to consumers, the CFPB may look into their practices,” Allison Schoenthal, a partner at Goodwin Procter, told VIXIO.
The agency said it will now start looking at fast-growing entities or those that operate in markets outside the existing nonbank supervision programme.
“There is pressure on the CFPB to regulate nonbanks that compete with traditional banking services, as well as buy now, pay later (BNPL) services,” Schoenthal noted.
These companies should be preparing for potential civil investigative demand (CID) inquiries, as well as regulatory examinations, Tara Trantham, founder and CEO of TJ44 Consulting LLC, added.
Risky conduct may involve unfair, deceptive, or abusive acts or practices, or other acts or practices that potentially violate federal consumer financial law.
“Though the CFPB would be stretched thin to look at every fintech, or even a handful; it will have to pick its battles,” said Schoenthal.
Although the agency’s net has been set wide, there are a number of actions that nonbanks can take to reduce the risk of being caught in noncompliance with consumer financial laws.
If not already done so, fintechs should start actively reviewing their service offerings, advertising materials, servicing processes and their complaint and dispute management “through the lens of being subject to CFPB oversight”, Trantham stressed.
The CFPB has established a fairly robust history of intervention in industries like debt collection and payday lending that should inform and provide a roadmap of expectations that fintechs should utilise in preparing for the potential scrutiny, she added.
Tracking consumer complaints is typically one of the best indicators of systemic issues, Schoenthal said, while fintechs could also make sure they understand which regulators have authority over their business and start building up relationships with them.
They can monitor their fees charged to consumers and automated processes to ensure consumers are not inadvertently negatively impacted.
“Even unintentional mistakes, or technology glitches, can be the basis for a CFPB inquiry,” Schoenthal warned.
Since his tight approval by the Senate last September, Chopra has launched a sweeping inquiry into bank fees and is looking at buy now, pay later products and how bigtech payment processors are handling consumer data. He has repeatedly spoken out against large companies and initiated two court cases right after singling out “repeat offenders” as the primary focus of his agency.
Consultation on publishing final decisions
Along with the announcement, the consumer watchdog also published a proposed change to the 2013 procedural rule that would enable the agency to publish its determinations in cases involving nonbanks.
Currently, all documents, records or other items are considered confidential supervisory information.
The CFPB argues that, if released publicly, the final decisions and orders could serve as a precedent in future proceedings and could provide more transparency for businesses.
Companies involved in these cases will have the opportunity to provide input to the CFPB on what information is released to the public, the agency said.
Afterpay told VIXIO that it "welcomes efforts to ensure that there are appropriate regulatory protections for consumers in the diverse BNPL industry, and that providers are meeting high standards and delivering positive consumer outcomes while protecting their data".
Meanwhile, Affirm founder and CEO Max Levchin said previously that "regulatory attention is positive so long as it is rooted in understanding of the product".
Similarly, Plaid had previously called on the agency to supervise data aggregators like itself, noting that Plaid and many of its peers have reached a size at which supervision would provide helpful assurances to the financial data ecosystem.
