Seeking to “enhance market monitoring and risk-based supervision efforts,” the Consumer Financial Protection Bureau (“CFPB” or “Bureau”) has proposed a new, online registry of nonbank financial firms in order to track, what it labels, “repeat offenders.” The proposed rule requires certain nonbank financial firms to report to the CFPB if they are subject to court or regulatory enforcement orders. In promulgating this rule, the Bureau is acting under a little-used provision of the Consumer Financial Protection Act (“CFPA”). As a critical step in this rule’s finalization and approval, it will be open for public comment for 60 days following its publication in the Federal Register.
The CFPB is undertaking these actions under its authority under sections 1022 and 1024 of the CFPA. Last week’s announcement laid out the CFPB’s proposed rule requiring that certain nonbank covered entities (excluding insured depository institutions, insured credit unions, related persons, states, certain other entities, and natural persons) that are under certain final public orders obtained or issued by federal, state or local agencies in connection with the entities’ offering or provision of consumer financial products or services, report the existence of such orders to the CFPB. Specifically, covered entities would have to report all court orders and judgments, including consent and stipulated orders, brought under federal consumer protection law or state laws governing unfair, deceptive or abusive acts or practices. The CFPB plans to then publish the orders and company information on an online registry.
The proposed order goes on to provide an additional requirement for larger nonbanks falling directly under the CFPB’s supervision. Those entities would have to name an executive to annually certify the firm’s compliance with each applicable order on the registry. While as proposed the rule does not apply to banks, the CFPB noted that it might later seek to expand the scope of the registry to include insured banks and credit unions.
The CFPB has said that the proposed rule is in line with Director Rohit Chopra’s call for increased use of restrictions on business activity, growth caps, forced divestures and other “structural remedies” aimed at targeting recurring misconduct, as some posit that fines are often incorporated into the cost of doing business. Many industry participants have expressed concern that this is a way to “name and shame” market participants. Additionally, they are concerned about attempts to publicly hold executives accountable for conduct they may have no way to influence if it is several layers below their reporting level.
This is not the first public registry proposed by the CFPB. The Bureau maintains a complaint database that seems to serve a similar industry-monitoring function. However, financial services market participants have argued that this repository taints firms’ reputations as its complaints are not independently verified and often are mere inquiries not complaints. Given that the orders covered by the current proposed rule are often entered on a no-admit basis, there are worries that these same considerations could plague this proposed registry.
It also remains unclear how this proposed registry would differ from the Nationwide Multistate Licensing System, which currently serves as the system of record for nonbank financial institutions and allows consumers to verify that an entity is authorized to conduct business in their state. Also operating in this space is the FTC’s Consumer Sentinel Network, an online investigative tool that provides federal, state and local law enforcement agencies access to FTC reports.
But as of now, the CFPB has indicated that the compilation of this information could factor into future CFPB determinations regarding which entities pose a risk to consumers significant enough to warrant a period of supervisory examination, impact decisions on enforcement investigations and provide guidance on areas in need of rulemaking.
As noted above, the proposal will be open for a 60-day public comment period following its publication in the Federal Register. And much can change in the lead up to the ultimate launch of the final product, which the Bureau anticipates would happen no earlier than January 2024.
Brownstein’s Take
Nonbank financial companies should take a close look at this proposal and consider its impact. Not only would this rule, as proposed, create potential public relations concerns for companies, but it also could chill the ability to self-report and negotiate with state, local and federal regulators. Additionally, many previous CFPB orders include complex compliance requirements that may not be something that is in a direct line of reporting to a top executive. This change to require a written statement attesting to the steps taken to oversee the activities subject to the order and whether the executive knows of any violations of, or other instances of noncompliance with, the covered order potentially introduces the need for additional protocols in compliance programs and considerations for reputational risk.
Last week, the CFPB director testified for the Bureau’s Semi-Annual Report to Congress in the U.S. House of Representatives (“House”) Financial Services Committee (“HFSC”) and the Senate Banking, Housing, and Urban Affairs Committee. During Director Chopra’s testimony, some members of Congress pressed him for answers about many recent actions of the Bureau. HFSC Ranking Member Patrick McHenry (R-NC) also sent a letter to the CFPB last week signed by all Republicans on the committee questioning other recent actions related to nonbank financial companies. Ranking Member McHenry has been vocal that CFPB oversight will be a priority when he takes the gavel next year, when Republicans are in the majority in the House.
As noted above, the proposed rule will be open for public notice and comment for 60 days following its publication in the Federal Register.
The Brownstein team works to educate the CFPB, states and Congress about any negative unintended consequences for clients from policy actions, such as those that may result from the latest proposed development of a public registry.
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