June 28, 2022

Volume XII, Number 179

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June 28, 2022

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June 27, 2022

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Nonbank Financial Companies Now Covered By Consumer Laws

The Consumer Financial Protection Bureau (CFPB) recently welcomed nonbank fintech companies to the world of CFPB regulation. It did so by announcing its intent to use its long-dormant authority to hold nonbank financial companies to the same standards as traditional banking institutions when it comes to consumer financial products and services.

The CFPB will now have the authority to supervise certain nonbanks “whose activities the CFPB has reasonable cause to determine pose risks to consumers” under federal consumer protection laws.

New Nonbank Territory

The CFPB has not in recent years targeted nonbanks, nonbank covered persons, services, and products for examination and oversight. Given the breath of services covered in the proposed rule, this anticipated oversight may implicate financial technology and fintech market participants and service providers. Significant care must be taken to assess services and products offered to consumers and address any possible repercussions.

Reaching deep into the vault of regulatory obsolescence, the CFPB’s intent to begin examining certain consumer products and services offered by nonbank financial institutions and affiliates is in line with a 2013 CFPB final rule, which defined the CFPB process for supervising “nonbank covered persons.”

In its new foray into nonbank regulation, the CFPB also invoked “dormant authority” provisions of the Dodd-Frank Act, to increase the agility and oversight with which it supervises entities in markets outside of existing nonbank supervision programs, products and services. The announcement brings numerous financial technology providers – implicating money transmitters, custodians, payment product providers, and data processors – under potential CFPB examination and supervision.

While the 2013 final rule did not establish consumer protection requirements or particular consumer financial products or services to be regulated, it does define a series of risk indicators that may indicate that consumer harm is possible and trigger CFPB examination and supervision.

The following products and services offered by nonbanks may be subject to supervision and examination:

  • Extending credit

  • Lending activities

  • Real estate services

  • Taking deposits

  • Acting as a custodian of funds or financial instruments

  • Transmitting and exchanging funds

  • Issuing stored value and payment instruments

  • Providing payment and financial data processing

  • Financial advisory services and consumer reporting

  • Other financial products and services as may be defined by the CFPB

The 2013 rule does not define “risk to consumers,” but does note that potentially unfair, deceptive, or abusive acts or practices, or other acts or practices that potentially violate federal consumer financial law, would pose a risk to consumers.

The CFPB may base reasonable cause determinations for examination and supervision on complaints or on information from other sources, such as judicial opinions and administrative decisions. This includes whistleblower complaints, as well as those from state and federal CFPB partners and news reports.

The announcement was accompanied by a proposed procedural rule that relates to certain notice, confidentiality, and reporting terms. The proposed rule defines a public reporting framework for final decisions and orders relating to the supervision of “nonbank covered persons” and industry participation relating to information appropriate for release.

© 2022 BARNES & THORNBURG LLPNational Law Review, Volume XII, Number 129
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About this Author

Jahan Sharifi Partner Barnes & Thornburg LLP
Partner

As co-chair of the Investment Funds and Asset Management practice, Jahan provides counsel on investment and financing transactions of virtually all kinds, including private equity transactions, venture capital and growth equity investments, mezzanine capital, mergers and acquisitions, direct lending transactions, convertible instruments, recapitalizations, post-reorganization equity, private investments in public equity (PIPEs), special purpose acquisition companies (SPACs), joint ventures and other specialized investment structures.

He has...

646-746-2010
 Vincent P. Trace Schmeltz III, Barnes Thornburg Law Firm, Chicago and Washington DC, Corporate and Litigation Law Attorney
Partner

Trace Schmeltz is a partner in the Chicago office of Barnes & Thornburg LLP, where he is the co-chair of the firm’s Financial, Corporate Governance, and M&A Litigation Group and a member of the White Collar Crime Defense Practice Group. A trial attorney with experience in numerous forums including the Delaware Court of Chancery, he concentrates his practice on securities, commodities, mergers and acquisitions and white collar criminal litigation. In addition, he has pursued and defended claims on behalf of auditors, investment banks, corporate boards and corporations....

312-214-4830
Mark Kindelin, Barnes Thornburg Law Firm, Chicago, Corporate and Finance Law Attorney
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Mark T. Kindelin is a partner in the Chicago office of Barnes & Thornburg LLP, where he is a member of the firm’s Corporate Department and chair of the Financial Institutions Practice Group.

Mr. Kindelin has counseled financial institutions for more than 27 years on a wide variety of regulatory, transactional and corporate matters. He advises banks on capital raising transactions, mergers and acquisitions, operational issues and general corporate matters. In addition, he has a unique specialty advising on treasury management issues,...

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Michael A. Cavallaro Financial Attorney Barnes and Thornburg
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Michael Cavallaro advises banking and financial services companies on national and regional regulatory and legal compliance issues related to consumer and commercial bankruptcy and restructuring, collections, vendor management, foreclosure, loss mitigation and default servicing. Mike is a client-centered, creative problem-solver who focuses on providing efficient and effective representation.

A consummate team player, Mike is personally dedicated to navigating his clients through the challenges associated with an industry where laws and regulations are constantly evolving. Mike’s...

612-367-8767
Katerina Katie Mills Finance Attorney Barnes and Thornburg Los Angeles
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Katerina (Katie) Mills assists with a range of financial services and digital asset regulatory matters, transactions, compliance, and licensure. Knowledgeable and driven, Katie works collaboratively with her colleagues and clients to find flexible and comprehensive solutions to meet clients’ needs.

She advises on day-to-day compliance issues, anti-money laundering and financial institution regulatory matters, payment products and cryptocurrency regulations, and issues involving financial technology products. She also as a deep understanding of...

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