Federal Agency to Oversee Nonbanks for the First Time
WASHINGTON, D.C.—The Consumer Financial Protection Bureau (CFPB) today launched the nation’s first federal nonbank supervision program, one of the central new responsibilities the agency acquired with a director. This will be an extension of the CFPB’s bank supervision program that began last July and will ensure that banks and nonbanks follow federal consumer financial laws.
“This is an important step forward for protecting consumers,” said Richard Cordray, Director of the CFPB. “Holding both banks and nonbanks accountable to consumer financial laws will help create a fairer, more transparent market for consumers. It will create a better environment for the honest businesses that serve them. And it will help the overall economic stability of our country.”
Scope of the Nonbank Supervision Program
A “nonbank” – or non-depository business – is a company that offers or provides consumer financial products or services but does not have a bank, thrift, or credit union charter. Nonbanks include companies such as mortgage lenders, mortgage servicers, payday lenders, consumer reporting agencies, debt collectors, and money services companies.
There are thousands of nonbanks, with products that form a significant portion of the consumer financial marketplace and affect millions of Americans each year. The size and scope of nonbanks vary based on products. For example, according to studies and industry sources, nearly 20 million consumers use payday loans, roughly 200 million Americans rely on credit reporting agencies to report their credit histories accurately, 14 percent of consumers have one or more debts in collections, and nonbank lenders originated almost 2 million new mortgages in 2010.
Prior to passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the law that created the CFPB, there was no federal program to supervise nonbanks. Other federal regulators examined banks, credit unions, and thrifts to make sure they were complying with the law, but generally the primary tool used to address issues with nonbanks was “after-the-fact” law enforcement.
Under the law, the CFPB now has the authority to oversee nonbanks, regardless of size, in certain specific markets: mortgage companies (originators, brokers, and servicers including loan modification or foreclosure relief services); payday lenders; and private education lenders.
For other markets, the CFPB can also supervise the larger players, or “larger participants.” Last summer, the CFPB sought public comment to develop an initial rule, identifying six possible markets for consideration—debt collection, consumer reporting, prepaid cards, debt relief services, consumer credit and related activities, and money transmitting, check cashing and related activities. The CFPB will soon propose its initial rule on this issue.
The CFPB also has authority to supervise any nonbank that it determines is posing a risk to consumers.
Like the bank supervision program, the CFPB’s nonbank supervision program is designed to ensure that nonbanks comply with federal consumer financial laws and it is designed to assess risk to consumers arising from these businesses. The nonbank supervision program will include conducting individual examinations and may also include requiring reports from businesses to determine what businesses need greater focus. How often and to what degree the examinations are performed will depend on CFPB’s analysis of risks posed to consumers based on factors such as the nonbank’s volume of business, types of products or services, and the extent of state oversight.
The CFPB’s approach to nonbank examination will be the same as its approach to bank examination. The CFPB Examination Manual, released in October, is the field guide that examiners will use for both. It is available on the CFPB website at: https://www.consumerfinance.gov/guidance/supervision/manual/.
Before examiners go into a business, they will review information that is available publically or from other state or federal regulators. Examiners will be looking at the business’s consumer financial products and services with a focus on risk to consumers.
Examiners will review the business’s compliance with federal consumer financial laws for the entire life cycle of the product or service, including how a product is developed, marketed, sold, and managed. Examiners will conduct interviews with personnel and observe the business’s operations. One important component that examiners will be looking for is the nonbank’s internal ability to detect, prevent, and remedy violations that may harm consumers.
The nonbank business generally will be told of an upcoming examination and will receive status updates throughout the process. If a company is in violation of federal consumer financial laws, the CFPB will seek corrective actions, including strengthening the company’s programs and processes to ensure that violations do not recur and, where appropriate, that remedies are instituted. When necessary, examiners will coordinate and work closely with CFPB’s enforcement staff to bring appropriate legal actions to address harm to consumers.
Staffing and Training
The CFPB has assembled a diverse and highly-qualified group of examiners. The team includes examiners from a variety of backgrounds including from the Federal Deposit Insurance Corporation, the Federal Reserve System, the Office of the Comptroller of the Currency, the Office of Thrift Supervision, state banking regulatory bodies, and industry.
The examiners will be trained in both bank and nonbank supervision. Training examiners to work in both sectors will increase the CFPB’s flexibility in allocating resources and it will help to ensure consistent oversight across both sectors. Examiners will cover the country and report to field offices in New York, Chicago, San Francisco, and Washington, D.C. By having examiners based throughout the U.S., the CFPB is helping to ensure that supervision staff members understand the business practices and dynamics in different regional and local markets.
The CFPB’s nonbank supervision program will be coordinated with state regulators, when applicable. The CFPB has already begun to work with the states by developing, in cooperation with the Conference of State Bank Supervisors, a Memorandum of Understanding (MOU) to share information between the CFPB, state regulators, and state regulatory associations. To date, regulators in 42 states and Puerto Rico, representing 45 regulatory agencies, have joined the MOU. Five state regulatory associations have also signed the MOU including the American Association of Residential Mortgage Regulators and the National Association of Consumer Credit Administrators.
In moving forward to implement its nonbank supervision program, the CFPB will:
- Expand its ongoing supervision of mortgage servicers to nonbank mortgage servicers;
- Publish additional examination procedures tailored to the types of consumer financial products and services offered by nonbanks;
- Propose an initial rule to begin defining who meets the test for “larger participants” in certain nonbank markets;
- Publish rules to establish procedures to supervise a nonbank company where the CFPB has reasonable cause to believe it poses risks to consumers;
- Continue ongoing communications with state and federal regulators with a more specific focus on examination planning; and
- Continue to obtain feedback on its supervision program from nonbank financial services companies, banks, thrifts, and credit unions, federal and state agencies, consumer and community groups, and the public.
The Consumer Financial Protection Bureau is a 21st century agency that implements and enforces Federal consumer financial law and ensures that markets for consumer financial products are fair, transparent, and competitive. For more information, visit www.consumerfinance.gov.