Trade associations, the U.S. Small Business Administration (SBA) Office of Advocacy and Congress criticized Consumer Financial Protection Bureau (CFPB) overreach during the comment period for two proposals regarding public registry listings for certain nonbanks. In addition to raising several legal concerns about the CFPB’s actions, including potential circumvention of Congress’ previous actions under the Congressional Review Act (CRA), groups also outlined practical concerns about the CFPB’s lack of understanding of the laws and regulations that industries under its jurisdiction are already following. They also highlighted unnecessary costs burdens that would also harm consumers.
Background
The CFPB proposed a rule creating an online registry of nonbank financial firms in order to track, what it labels, “repeat offenders” and a rule that would require nonbanks under its supervisory authority, subject to limited exceptions, to annually register information about their use of “take it or leave it” form contracts. The proposed rules highlight the CFPB’s elevated scrutiny of nonbank entities and potential plans to eventually include financial institutions as well.
Nonbank Registry for “Repeat Offenders”
The repeat offender proposed rule would require certain nonbank financial firms to report to the CFPB if they are subject to court or regulatory enforcement orders. The CFPB plans to publish the orders and company information on an online registry. Larger nonbanks subject to the CFPB’s proposed rule would be required to designate a senior executive to attest on a yearly basis whether the business identified any violations of the relevant court orders. The CFPB estimates that there are roughly 155,043 covered nonbanks, with 1% to 5% of covered nonbanks subject to covered orders, estimating that the rule would affect between 1,550 and 7,752 covered nonbanks. Brownstein has previously highlighted details on the repeat offender proposed rule.
Registry for Consumer Contracts
The form contracts proposed rule would require nonbank financial companies subject to the CFPB’s supervisory jurisdiction to register their use of contract terms that include legal waivers. Details on the contracts would be publicly listed on a CFPB-established nonbank registration system. The proposed rule aims to cover nonbanks subject to the CFPB’s jurisdiction that engage in the offering or provision of consumer financial products or services in markets the CFPB supervises, including, but not limited to, nonbank entities that: (a) offer or provide residential mortgage-related products or services; private educational consumer loans; and consumer payday loans, among other similar products or services, or (b) are larger participants operating in student loan servicing, automatable financing, consumer reporting, consumer debt collection and international remittances, among other similar industries.
Covered terms and conditions of form contracts that would fall under the scope of the proposed rule generally include clauses, terms or conditions that purport to establish a limitation on consumer legal protections applicable to the offering or provision of consumer financial products or services. The proposed rule exempts certain entities from compliance, including nonbanks with less than $1 million in annual receipts resulting from the offering or provision of certain consumer financial products or services that would make the nonbank subject to the CFPB’s supervisory authority. Brownstein has previously highlighted information on the form contracts proposed rule.
The CFPB is pursuing these actions using its authority under Section 1022 and long-dormant Section 1024 of the Consumer Financial Protection Act. The CFPB argues that the registry serves the purpose of providing increased transparency over nonbanks and ensuring accountability to deter bad behavior. Many industry participants have expressed concern that this is a way to “name and shame” market participants.
Industry Concerns
Nonbank Registry for “Repeat Offenders”
Industry groups raised numerous concerns over the repeat offender rule, especially relating to the executive attestation requirement for larger nonbanks. The U.S. Chamber of Commerce (“Chamber”) submitted a public comment letter jointly signed by various trade groups, outlining several concerns including the requirement to submit a written statement regarding the company’s compliance with any outstanding registered orders. The statement would be signed by a “designated senior executive” who would detail the steps taken to review and oversee the company’s activities in the last year. The CFPB claims its supervisory authority under 12 U.S.C. § 5514(b)(7)(A)-(C), allowing the CFPB to require supervised entities to “generate, provide, or retain records for the purposes of facilitating supervision of such persons and assessing and detecting risks to consumers.” Specifically, the Chamber letter took concern with the attestation as a “record.” In addition, the group raised concerns that the attestation requirement could have a chilling effect on the hiring and retention of compliance-focused senior executives at nonbank entities. Covered nonbanks might have enhanced difficulty in filling compliance positions due to added individual liability risk for senior compliance staff.
The SBA Office of Advocacy public comment letter further outlines that the presence of a consent order does not necessarily mean that a company acknowledges fault. The lack of nuance in the registry could impose undue reputational harm on certain nonbanks, as the existence of a consent order without proper context could create and provide misleading information to consumers.
Similarly, the Chamber letter notes that the CFPB may underestimate the costs of the public registry requirement on covered nonbanks. The CFPB states that the written-statement attestation will cost an estimated $1,200 per firm, citing that satisfying the written-statement requirement would take 20 hours of employees’ time at a rate of $60 per hour. Covered nonbanks are likely to spend more on compliance than the estimated amount, particularly given that reputational costs are not factored in for covered nonbanks. A public comment letter written by ACA International notes that the repeat offender rule proposes a coverage period of 10 years. The prolonged length of time may punish businesses for compliance deficiencies incurred many years ago that they may have fully corrected, placing additional undue harm on businesses.
In January, House Financial Services Chairman Patrick McHenry stated, “This is another attempt by Director Chopra to unilaterally expand the CFPB’s authority beyond Congress’ intent and to mandate what Democrats were unable to legislate.” He adds, “This proposed registry of terms and conditions will facilitate the naming and shaming of firms to empower progressive activists. Requiring nonbank financial firms to register publicly with the Bureau is unprecedented—no other industry is required to make public such detailed contract information. The days of Congress giving Director Chopra a free pass for his reckless actions have come to an end. Committee Republicans will finally ensure Director Chopra and the CFPB are held accountable.”
Registry for Consumer Contracts
Industry also voiced a number of concerns about the form contracts proposal. The CFPB requires a registry of terms and conditions used in form contracts by covered nonbanks, including arbitration clauses, among other provisions in routine contracts. The CFPB’s actions are widely viewed as an attempt to create a chilling effect on private sector utilization of arbitration agreements by “naming and shaming” covered nonbanks. The proposed rule notes, “Depending on the competitive environment that firms face, they may choose to adjust their use of such terms and conditions, weighing the cost associated with a risk of losing trust with their customers or potential customers against the value they believe those terms and conditions to provide.”
The ACA International public comment letter on the form contracts rule notes that Congress and the Supreme Court have long found in favor of the use of arbitration agreements, leading to questions over the CFPB’s use of regulatory power to force entities to drastically change business practices. In 2017, Congress struck down the CFPB’s rule limiting the use of arbitration agreements in a CRA challenge. Once a rule is struck down by the CRA, the CFPB is prohibited from creating a substantially similar rule unless Congress specifically authorizes the new rule. The ACA International public comment letter mentions that the provisions of the form contracts proposed rule are substantially the same as the rule disapproved in 2017, as both rules include CFPB-required public registries.
In both letters the SBA Office of Advocacy takes issue with the CFPB’s analysis that small businesses are not substantially impacted.
As detailed in the SBA’s Office of Advocacy public comment letter, the requirements of Section 605 of the Regulatory Flexibility Act (RFA) cannot be met by “confusing, bald assertions without any support. If CFPB cannot state with more certainty the basis of the conclusion that the number of small entities that will absorb a significant economic impact will not be substantial, then they may not certify under Section 605.” And, they further add, “If the threshold analysis indicates that the rulemaking will have a significant economic impact on a substantial number of small entities, then the CFPB will need to convene a small business review panel under Section 609 of the RFA prior to preparing an initial regulatory flexibility analysis.”
Next Steps and Brownstein’s Take:
The public comment period for the repeat offender rule ended on March 31 and the public comment period for the form contracts rule concluded on April 3. Trade associations and industry representing both nonbanks and financial institutions weighed in with a variety of comments and concerns about the CFPB’s actions. The end of the comment period for the two rules comes amid calls from industry for the CFPB to pause its rulemaking efforts until its legal uncertainty is resolved.
On Feb. 27, the U.S. Supreme Court announced that it has agreed to review the Fifth Circuit’s decision in Consumer Financial Protection Bureau v. Community Financial Services Association of America. The decision comes after the Fifth Circuit ruled unanimously in November 2022 that the CFPB’s funding structure violates the Appropriations Clause of the Constitution. On March 23, the Second Circuit ruled unanimously that the CFPB’s funding structure is constitutional, creating a circuit split. Brownstein has written extensively on the issue.
THIS DOCUMENT IS INTENDED TO PROVIDE YOU WITH GENERAL INFORMATION REGARDING PROPOSED CFPB RULES ADDRESSING NON BANK REGISTRIES. THE CONTENTS OF THIS DOCUMENT ARE NOT INTENDED TO PROVIDE SPECIFIC LEGAL ADVICE. IF YOU HAVE ANY QUESTIONS ABOUT THE CONTENTS OF THIS DOCUMENT OR IF YOU NEED LEGAL ADVICE AS TO AN ISSUE, PLEASE CONTACT THE ATTORNEYS LISTED OR YOUR REGULAR BROWNSTEIN HYATT FARBER SCHRECK, LLP ATTORNEY. THIS COMMUNICATION MAY BE CONSIDERED ADVERTISING IN SOME JURISDICTIONS.