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Fintechs and Nonbanks Beware: CFPB to Utilize “Dormant Authority” to Examine Fintechs and Other Non-bank Financial Services Companies

On Monday, the CFPB issued a press release announcing that it will start using its authority to examine non-bank financial services institutions that the CFPB has “reasonable cause to determine pose risks to consumers.” In addition, the CFPB has released a procedural rule designed to “increase transparency of the risk-determination process” by subjecting the results of CFPB supervision of non-bank entities to public release. This release constitutes yet another signal that the Bureau intends to take an increasingly aggressive enforcement posture over a broader slice of the financial services industry.

The CFPB currently has both supervisory and examination authority. In addition to its authority to supervise certain depository institutions based on the type and size of the institution, as expanded by categories of “covered persons,” the CFPB has statutory authority to supervise non-depository covered persons who “the Bureau has reasonable cause to determine, by order, after notice to the covered person and a reasonable opportunity for such covered person to respond, based on complaints . . . or information from other sources, 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[.]”

Although this supervisory authority appears to be extremely broad, the CFPB has rarely used it to examine non-depository institutions. Rather, the CFPB has acted on its examination authority in the past through the use of civil investigative demands or other actions to go after alleged harms. This newest press release indicates that the Bureau will start aggressively utilizing its supervisory authority and the ability to broadly categorize certain acts and practices as “risky” such that a supervisory exam is merited. According to CFPB Director Rohit Chopra, “[t]his 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.” In particular, the press release paints a target on fintechs, citing their “rapid growth” and seeking to “level the playing field between banks and nonbanks.”

The CFPB also announced a new procedural rule designed to “increase the transparency of the risk-determination process.” Specifically, the rule amends a 2013 procedural rule related to the Bureau’s supervision of non-banks, which previously deemed documents, records, and other items connected to an exam to be confidential. Under the new rule, there will be an exception regarding final decisions and orders by the CFPB director that will allow some decisions to become public after a notice and response by the supervised entity.

Takeaways

It should come as no surprise that the current CFPB is seeking to expand its authority to supervise players in the financial services space. Be it through new interpretations of UDAAP and Fair Lending, or its recent statements regarding third-party service providers, Director Chopra and the Bureau have taken a predictably expansionist approach. However, the recent letter should be of special concern to fintechs and non-bank service providers in the financial services space. The Bureau is now taking the position that it can deem all manner of activity “risky,” and can therefore exercise its supervisory authority. Entities that may have believed – quite reasonably – that they were outside the reach of the CFPB should reconsider and should take steps to reduce risk in anticipation of a potential exam.

Beryl Newchurch Billings contributed to this article

© 2022 Bradley Arant Boult Cummings LLPNational Law Review, Volume XII, Number 116
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About this Author

Christopher Friedman Nashville Lawyer Bradley Arant Boult Cummings Law Firm
Associate

Chris Friedman is a regulatory compliance attorney and litigator who focuses on helping consumer finance companies and small business lenders, as well as banks, fintech companies, and other participants in the financial services industry, address the challenges of operating in a highly regulated sector. Chris focuses on both small business lenders and alternative business finance products and has helped non-bank small business lenders, banks who make small business loans, commercial credit counselors, lead generators, and others in the industry. He helps clients launch new products,...

615-252-3504
Andrew J. Narod Financial Lawyer Bradley Arant Boult Cummings LLP
Partner

Andrew Narod is an experienced litigator who represents bank and non-bank financial services institutions and other types of businesses in class-action litigation, complex commercial litigation, and other high-profile litigation disputes nationwide. His clients entrust him to navigate some of their most sensitive litigation matters in some of the most difficult venues in the country.

A considerable amount of Andrew’s practice is devoted to representing bank and non-bank financial services entities in class-action litigation and other consumer litigation matters. His clients include...

202-719-8271
Alex McFall Finance Litigation Attorney Bradley Arant Boult Cummings LLP
Associate

Alex McFall primarily represents banks, servicers and other financial institutions in civil litigation, with an emphasis in residential and commercial lending. Alex has defended financial institutions against claims for breach of contract, fraud, alleged violations of the Truth in Lending Act (TILA), Fair Debt Collection Practices Act (FDCPA), Real Estate Settlement Procedures Act (RESPA), Fair Credit Reporting Act (FCRA), Telephone Consumer Protection Act (TCPA), and Fair Housing Act (FHA). She has substantial experience defending financial institutions in HOA super-...

615-252-4629
Shelby D. Lomax Finance Attorney Bradley Arant Boult Cummings Nashville
Associate

Shelby Lomax is an associate in Bradley’s Banking and Financial Services Practice Group, focusing on litigation and regulatory compliance issues. She has experience advising clients on regulatory risks relating to small business lending, alternative finance, and merchant cash advance transactions.

When assisting clients involved in regulatory and compliance matters, Shelby draws on her extensive experience as a banker. Prior to becoming an attorney, Shelby had a successful career as a banker, working both with consumer and commercial clients....

615-252-3591
Caroline Waters Associate Nashville Bradley Arant Boult Cummings LLP
Associate

Caroline Waters is an associate in the Banking and Financial Services Practice Group.

Caroline graduated (summa cum laude) from the University of Tennessee College of Law and was named to the Order of the Coif. While in law school, she was the acquisitions editor for the Tennessee Law Review, where she received the Silver Pen Award for her student note and the editing award for her contributions to the law review. Caroline also served as a judicial extern for the Hon. Thomas A. Varlan of the United States District Court for the...

615-252-3538
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