'Nonbanks' Face New Federal Scrutiny

Lenders making payday loans, private student loans and mortgages generally operate with less oversight than banks, a factor in some of the more disastrous economic meltdowns that have plagued consumers in recent decades.

That’s about to end. The Consumer Financial Protection Bureau (CFPB) announced today that it is invoking a largely unused legal provision to examine nonbank financial companies that pose risks to consumers.

Using this dormant authority will help protect consumers and level the playing field between banks and nonbanks, the agency said.

“Given the rapid growth of consumer offerings by nonbanks, the CFPB is now utilizing a dormant authority to hold nonbanks to the same standards that banks are held to,” said CFPB Director Rohit Chopra. “This 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.”

Under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, the CFPB has authority to use traditional law enforcement, including litigation, to stop companies from engaging in conduct that poses a risk to consumers.

The law also gives the CFPB authority to conduct supervisory examinations to review the books and records of regulated entities. Such examinations typically help businesses identify problems and take correction action.

Tighter supervision for nonbanks

For decades before the Dodd-Frank Act, only banks and credit unions were subject to federal supervision. But after the 2008 financial crisis in which nonbank companies played a pivotal role, Congress tasked the CFPB with supervising certain nonbanks, in addition to large depository institutions with more than $10 billion in assets, and their service providers.

Nonbanks don’t have a bank, thrift, or credit union charter; many today operate nationally and brand themselves as “fintechs.”

Congress spelled out several categories of businesses subject to more oversight, including the mortgage, private student loan, and payday loan industries, regardless of size. Another category of supervised entities includes what the law calls “larger participants” in other nonbank markets for consumer financial products and services, including companies engaged in consumer reporting, debt collection, student loan servicing, international remittances, and auto loan servicing.

Besides those categories, the CFPB can also tighten supervision of any nonbanks “whose activities the CFPB has reasonable cause to determine pose risks to consumers,” the agency said.

Such risky conduct may involve potentially unfair, deceptive, or abusive acts or practices, or other actions that potentially violate federal consumer financial law.