The Consumer Financial Protection Bureau ("CFPB") on
February 16, 2012 announced the first in a series of anticipated
proposed rulemakings that will identify and define various nonbank
"larger participants" in markets for consumer financial
products or services that will be subject to the supervisory
authority of the CFPB. This initial rulemaking proposes to bring
two markets under the CFPB's supervision: consumer reporting
and consumer debt collection.
Specifically, the CFPB has proposed to extend its supervisory
authority over nonbanks offering consumer reporting whose annual
receipts from consumer reporting exceed $7 million, and nonbanks
providing consumer debt collection whose annual receipts from such
consumer debt collection exceed $10 million.
Comments on the rulemaking are due by April 17, 2012. By statute,
the final rule must be issued by July 21, 2012, and the CFPB has
proposed to implement the final rule 30 days after it is published
(although the agency is requesting comment on this timeframe).
Statutory Authority to Supervise Larger Participants
Under section 1024 of the Consumer Financial Protection Act of
2010, the CFPB was granted authority to supervise nonbanks of any
size participating in the markets of residential mortgages, private
education lending and payday lending. The same provision also gave
the CFPB authority to supervise any "larger participants"
of markets for consumer financial products or services that it
defines by rule. This is the first attempt by the CFPB to exercise
this authority in a formal proposed rulemaking.
Who Is Covered
As proposed, the rule would capture (1) consumer reporting
agencies whose annual receipts resulting from consumer reporting
are more than $7 million, and (2) debt collectors whose annual
receipts resulting from consumer debt collection are more than $10
million.
- Consumer Reporting: Nonbanks providing "consumer reporting" would be defined to include those covered persons collecting, analyzing, maintaining or providing consumer report information or other account information used or expected to be used in any decision by another person regarding the offering or provision of any consumer financial product or service. Such activities, however, would exclude furnishing information to an affiliated person, furnishing information to a consumer reporting entity, and providing information that will only be used in a decision regarding employment, government licensing, or residential leasing or tenancy.
- Consumer Debt Collection: Nonbanks providing "consumer debt collection" would be defined to include those covered persons collecting or attempting to collect, directly or indirectly, any debt owed or due or asserted to be owed or due to another and related to any consumer financial product or service. A person would be deemed to offer or provide consumer debt collection where the relevant debt is either: (i) collected on behalf of another person; or (ii) collected on the person's own behalf, if the person purchased or otherwise obtained the debt while the debt was in default under the terms of the contract or other instrument governing the debt.
For the consumer reporting market, the CFPB has stated that the
rule would capture: (1) the largest credit bureaus selling
comprehensive consumer reports; (2) consumer report resellers; and
(3) specialty consumer reporting agencies. The debt collection
firms covered by the rule, according to the CFPB, would include:
(1) firms that collect debt owed by another company for a fee; (2)
firms that buy debt and collect the proceeds for themselves; and
(3) debt collection attorneys and law firms that collect through
litigation. The CFPB has explained that although it considered
identifying these different business models as separate markets, it
ultimately chose to define them as a single consumer reporting
market and consumer debt collection market based on current
available data.
The proposed definitions of "consumer reporting" and
"consumer debt collection" notably differ from those
found in the Fair Debt Collection Practices Act ("FDCPA")
and the Fair Credit Reporting Act ("FCRA"). For instance,
the term "debt collector" found in section 803(6) of the
FDCPA includes a number of exceptions such that many companies
often take the position that they fall outside the scope of the
law. In its proposal, the CFPB has stated that one of its goals
with supervising consumer debt collectors and consumer reporting
agencies would be to increase compliance with the FDCPA and FCRA.
While imposing a supervisory regime on such entities would not
automatically require them to comply with the substantive
provisions of the FDCPA and FCRA, the distinction between those
entities covered raises a question as to what the supervisory
examinations would be aimed at determining.
Criteria for Larger Participants
While the CFPB has wide discretion to identify criteria to
define larger participants, it has proposed relying on "annual
receipts" resulting from activities related to the market in
question both for consumer reporting and debt collection. The term
"receipts" is defined to mean "total income"
(or in the case of a sole proprietorship, "gross income")
plus the "cost of goods sold" as those terms are defined
and reported on Internal Revenue Service tax return forms.
"Receipts" would not include net capital gains or
losses.
As proposed, when determining whether annual receipts reach the $7
million (for consumer reporting) or $10 million (for consumer debt
collection) threshold, the rule provides that as part of a
statutory aggregation requirement, the annual receipts of
affiliates must be included in the calculation. The rule clarifies
that all such receipts would constitute only those resulting from
consumer reporting or consumer debt collection activities and not
those derived from other activities in which the entities may be
engaged.
The CFPB has estimated that the rule would capture 7 percent of
consumer reporting agencies (about 30 consumer reporting agencies
accounting for about 94 percent of annual receipts from consumer
reporting) and 4 percent of debt collection firms (about 175
companies accounting for 63 percent of annual receipts from the
debt collection market). Such figures exceed those anticipated by
industry.
Time Period Subject to Supervision
The proposal provides that a person determined to be a
"larger participant" would remain a larger participant
until two years from the first day of the tax year in which the
person last met the test to qualify as a larger participant. The
CFPB has explained that this arrangement would provide the CFPB
with sufficient time to undertake and complete supervisory
activities.
The proposal provides that a person determined to be a "larger
participant" would remain a larger participant until two years
from the first day of the tax year in which the person last met the
test to qualify as a larger participant. The CFPB has explained
that this arrangement would provide the CFPB with sufficient time
to undertake and complete supervisory activities.
Determinations of and Challenges to Status as Larger Participant
The CFPB has proposed providing nonbanks with written notice that the CFPB is initiating a supervisory activity. Under the proposal, the nonbanks would have 30 days to dispute their status as a "larger participant" subject to the agency's supervisory authority. Such nonbanks would be given the opportunity to provide an affidavit and supporting documentation to state their case. Any entity that failed to respond to the agency's initial written communication would be deemed to have acknowledged that it is a larger participant.
Implications for Future Rulemakings
The CFPB has signaled that it will identify additional
"larger participants" in future rulemakings, which, based
on last year's Advance Notice, could capture such industries as
prepaid cards, debt relief services, money transmitting and check
cashing, and consumer credit and related activities. Although in
this rulemaking the CFPB stated that it considers the consumer
reporting and consumer debt collection markets as "single
markets" and chose to use "annual receipts" as the
criteria for determining which entities qualified as "larger
participants," the CFPB noted that it may use different
criteria and thresholds when defining larger participants in other
markets.
Nonbanks are already subject to the CFPB's regulatory and
enforcement authority, but if they wish to challenge whether they
should also be subject to the agency's supervisory authority as
a "larger participant," now is the time to raise those
concerns while the comment period remains open. If you wish to
submit comments for this or future rulemakings, the Venable
CFPB Task Force team is ready to assist you. And, even if you
are not in a market covered by this rulemaking, Venable attorneys
can assist you with examining the factors that the agency may
consider when it undertakes efforts to define larger participants
in your market.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
