On May 25, 2012, the Bureau of Consumer Financial Protection ("CFPB") issued a proposed rule ("Proposed Rule") seeking comment on procedural requirements for when the agency may designate a nonbank financial firm to be subject to its ongoing examination and supervision.¹ Pursuant to Title X of the Dodd-Frank Act ("DFA"), the CFPB has ongoing examination and supervisory jurisdiction of very large banks, thrifts, and credit unions, their affiliates,² and certain nonbank "covered persons."³ As discussed below, the scope of the CFPB's nonbank supervision authority comes from several different provisions of Title X. The Proposed Rule seeks to implement one of these provisions, Section 1024(a)(1)(C), which gives the CFPB authority to supervise a nonbank covered person when it has reasonable cause to determine, after notice and an opportunity to respond, that the person is engaging or has engaged in conduct that poses risks to consumers with regard to the offering or provisions of consumer financial products or services.

CFPB Nonbank Supervisory Authority

The CFPB's supervisory authority over nonbank financial firms (i.e., covered persons) varies depending on several factors, including the consumer financial product or service market at issue and the activities being conducted by a nonbank firm. Generally, the agency's nonbank supervisory authority falls into one of the following categories:

• The agency has specific statutory authority to supervise nonbank covered persons that offer or provide to consumers:
• • residential mortgage loans, including origination, brokerage, or servicing services;
  • private education loans; and
  • payday loans.⁴
• In addition, the CFPB has rulemaking authority to define its jurisdiction over so called "larger participants" of markets of "other consumer financial products or services."⁵
• As set forth in the Proposed Rule, the CFPB also has the authority to supervise any nonbank covered person that it has "reasonable cause to determine, by order," following notice and an opportunity to respond, that such 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."⁶
• Finally, the CFPB has jurisdiction of entities that serve as service providers to any of these entities, or to very large banks, thrifts, and credit unions subject to the CFPB's consumer financial jurisdiction, to the same extent the federal banking agencies have jurisdiction of service providers to banks.⁷

In addition to the above categories, the CFPB has jurisdiction of nonbank financial firms that are specifically within the agency's jurisdiction by virtue of being covered by one of the enumerated consumer laws in the DFA, jurisdiction of which was transferred to the agency.⁸

Supervisory Authority of Nonbanks under the Proposed Rule

As noted in the proposal, in exercising its nonbank supervisory authority under DFA § 1024(a)(1)(C), the CFPB will have the ability to supervise nonbank covered persons by requiring the submission of reports and conducting examinations to:

• Assess compliance with federal consumer financial laws;
• Obtain information about a covered person's activities and compliance systems and procedures; and
• Detect and assess risks posed to consumers and to markets arising from consumer financial products and services.⁹

The Proposed Rule is intended to establish procedures for the CFPB to exercise this nonbank supervisory authority and would not impose any new or additional consumer protection requirements on a nonbank financial firm.¹⁰ Interestingly, the proposal notes that "nonbank entities are subject to the [CFPB's] regulatory and enforcement authority and any applicable Federal consumer financial law, regardless of whether they are subject to the [CFPB's] supervisory authority."¹¹

The Proposed Rule - Procedural Requirements

The procedural requirements set forth in the Proposed Rule are intended to provide a form of due process by which a nonbank financial firm may either contest or consent to the CFPB's examination and supervisory jurisdiction. Following are the key procedural elements of the Proposed Rule:

• Notice of Reasonable Cause - Under the proposed process, the CFPB's Deputy Assistant Director for Nonbank Supervision ("Deputy") would commence a proceeding by issuing to a nonbank covered person a Notice of Reasonable Cause¹² ("Notice") stating that the agency may have "reasonable cause" to determine that such 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.
• Reasonable Cause - The CFPB's determination of reasonable cause to issue a Notice can be based on a number of factors, including complaints collected by the CFPB regarding the nonbank covered person or information collected by the CFPB from other sources.¹³
• Opportunity to Respond - A nonbank covered person is then provided a reasonable opportunity to respond to the Notice (20 days under the Proposed Rule),¹⁴ based on the CFPB's description of the basis for the Notice and the nonbank firm's risky consumer-related activities.
• Response - The Proposed Rule would provide respondents with two opportunities to respond to a Notice - first in writing and then, if requested by a respondent, through a supplemental oral response generally to be conducted by telephone.

Written Response - The failure to file a timely written response (within 20 days of receipt of the Notice) would result in a waiver of a respondent's right to respond and would authorize the CFPB to make a determination on the basis of the Notice. The response is required to set forth the basis for the respondent's contention that it should not be subject to the CFPB's nonbank supervision under Section 5514(a)(1)(c). The response is required to include all records, documents, or other items supporting the respondent's claims, along with an affidavit signed by the respondent asserting the truth and accuracy of the response.

Supplemental Oral Response - In the written response, a respondent may also request the opportunity to provide a supplemental oral response, or otherwise waive the opportunity by failing to do so. Within 14 days of receiving a request to provide an oral response, the CFPB Assistant Director would be required to serve the respondent a notice indicating the date, time, and relevant information relating to the conduct of the oral response. No discovery would be permitted in connection with the oral response, and the oral response would not constitute a hearing on the record. In addition, no witnesses would be permitted to be called in connection with an oral response.

Timing Considerations - An important consideration both with respect to the filing of the written response and a subsequent oral response is that any requests for extensions of time would be strongly disfavored by the CFPB "and may only be granted when a party makes a strong showing that the denial of the request would substantially prejudice the [respondent.]"¹⁵ Coupled with the proposed requirement that failure to timely raise an issue or submit documents would constitute a waiver of the right to raise such issue or provide the additional supporting documents, respondents could be placed under fairly significant timing constraints in preparing a substantive written or subsequent oral response to a Notice.

• Determination - After receiving a response to a Notice, the Deputy would provide to the CFPB Director a recommended determination, which the Director has discretion to accept, reject, or modify. The result would be either an order subjecting a respondent to the CFPB's supervisory authority, or a notice stating that a respondent is not subject to such authority. Such determination must be made within 45 days of a timely-filed response, or within 45 days of the Notice if no response is provided.
• Consent - The Proposed Rule also provides two ways in which a respondent could consent to the CFPB's supervisory authority. First, the respondent could execute the consent agreement form attached to a Notice and file it with the Assistant Director in lieu of a response. Second, at any time during a proceeding, a respondent could voluntarily consent to supervision under such terms as the parties may agree.
• Supervision Timeframe - Under the Proposed Rule, an initial determination resulting in an order subjecting a respondent to the CFPB's supervisory authority would be applicable for two years; however, the respondent could petition to terminate such order sooner. However, parties who consented to supervision would not be permitted to petition for termination during the period specified in the consent agreement.

The Proposed Rule also provides that if the CFPB issues a notice of charges against a person in connection with an adjudicatory proceeding under DFA § 1053,¹⁶ the CFPB would have the sole discretion on whether to provide notice and an opportunity to respond under the Proposed Rule and DFA § 1024(a)(1)(C). In such circumstances, the procedures set forth in the Proposed Rule would not apply.

Conclusion

This Proposed Rule represents an important step in the CFPB's efforts to assert and implement the agency's supervisory jurisdiction over nonbank covered persons. While touted as a procedural rule to implement the CFPB's nonbank supervisory jurisdiction, the Proposed Rule highlights the breadth and, in certain contexts, the limitations that the agency may face going forward in implementing its nonbank supervisory authority. More importantly, the Proposed Rule serves as notice to nonbank financial firms that are not otherwise directly captured by the CFPB's other nonbank statutory authorities (including explicit jurisdiction over mortgage-related activities, private student lenders and payday lenders, as well as its "larger participant" authority) that adverse or excessive scrutiny of their consumer financial activities could lead to a new, challenging, and potentially long-term supervisory relationship with the CFPB.

Footnotes

1 77 Fed. Reg. 31226 (May 25, 2012).

2 See 12 USC § 5515(a). The CFPB also has certain supervisory authority over other banks, thrifts, and credit unions. See 12 USC § 5516(c)(1) and (e).

3 "Nonbank covered person" means, except for the persons described in 12 USC §§ 5515(a) and 5516(a):

1. Any person that engages in offering or providing a consumer financial product or service; and
2. Any affiliate of a person described in subparagraph (1) of this paragraph if such affiliate acts as a service provider to such person.

"Person" means an individual, partnership, company, corporation, association (incorporated or unincorporated), trust, estate, cooperative organization, or other entity.

4 12 USC § 5514(a)(1)(A), (D), and (E).

5 12 USC §§ 5514(a)(1)(B) and (a)(2).

6 12 USC § 5514(a)(1)(C). The CFPB also has the authority to supervise any "larger participant" of a market for consumer financial products or services. 12 USC §§ 5514(a)(1)(B) and (a)(2). A proposed rule regarding larger participants is required to be issued by July 21, 2012.

7 12 USC §§ 5514(e) and 5515(d).

8 12 USC § 5481(12). For example, pursuant to Section 5481(12)(a), the CFPB has jurisdiction of "housing creditors," including nonbank housing creditors, which are covered by the provisions of the Alternative Mortgage Transaction Parity Act of 1982.

9 77 Fed. Reg. 31227.

10 Id.

11 Id.

12 As set forth in the Proposed Rule, a Notice would not constitute a notice of charges for any alleged violation of federal consumer financial or other law. The proceedings would be informal and would not constitute an adjudicatory proceeding under section 554 of the Administrative Procedure Act.

13 12 USC § 5514(a)(1)(C).

14 The CFPB has noted that its proposed procedures are designed to provide a recipient of a Notice with greater opportunity to respond than what is required by statute. For example, to satisfy the statutory requirement that the CFPB provide a reasonable opportunity to respond, respondents need not be given the opportunity to participate in a supplemental oral response. The Proposed Rule, however, would provide such opportunity. See Supplemental Information to the Proposed Rule.

15 77 Fed. Reg. 31231.

16 See 12 CFR § 1081.200 (setting forth the procedures for the commencement of an adjudicative proceeding by the CFPB under DFA § 1053, 12 USC § 5563).

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