Yesterday, the Consumer Financial Protection Bureau updated its process for designating a nonbank for supervision. Initially issued in 2013, the revised rule specifically establishes the CFPB’s procedures in determining whether a nonbank “poses risk to consumers” and is thus subject to the Bureau’s supervisory authority. The CFPB has had the authority to supervise such nonbanks since its creation. But it was not until 2022 that the CFPB announced that it would begin to use this so-called “dormant authority” to examine nonbanks. Last year, the CFPB initiated several supervisory-designation proceedings against nonbanks under that previously dormant authority, leading to the Bureau’s first-ever order in a contested matter establishing supervision over a nonbank. 

According to the CFPB, the newest amendments to the rule are intended to streamline the supervisory-designation process and codify certain unwritten practices. The changes include imposing word limits on various filings, streamlining the process, and clarifying the confidential nature of consent agreements, among others. Below are explanations of some of these key changes:

  • Confidentiality of proceedings: The new rule leaves intact the process for the CFPB to publish final decisions and orders in contested matters, but it clarifies that consent agreements are not subject to public release. This had been a big open question for parties deciding whether to consent to the Bureau’s authority.
  • Voluntary consent to supervisory authority: The 2013 procedural rule created two separate avenues for entering into consent agreements—one required the initiating official to enclose a proposed consent order with the notice of reasonable cause, and the other simply allowed the consent agreement to be entered into at any time. The new rule maintains these two paths to a consent agreement, but it harmonizes several key differences. For instance, the new rule clarifies that a consent agreement never constitutes an admission, regardless of whether it was entered into at the initial stage or later in the proceeding. Also, under the new rule, the CFPB will evaluate the duration of a consent agreement on a case-by-case basis, regardless of the avenue taken to enter into a consent agreement.
  • Notice of reasonable cause: The new rule changes the general background information included in the notice of reasonable cause and adds several methods for serving the notice. Notably, the new rule now also expressly allows the initiating official to withdraw a notice.
  • Reply by initiating official: Under the new rule, the CFPB may file a written reply to a nonbank’s response to a notice, giving the official a second turn at the bat before the director makes the ultimate decision whether to order supervision.
  • Multiple respondents:  The new rule now expressly allows multiple respondents to be named in a notice. This change intends to allow for the combination of what otherwise would be multiple parallel and related proceedings into a single proceeding.
  • Elimination of pre-decision phase: The new rule also eliminates the associate director’s role. The 2013 rule required that the associate director for the division of Supervision, Enforcement, and Fair Lending (SEFL) make a recommendation to the director in a contested proceeding. The director would then issue the final determination. But a recent Bureau reorganization eliminated the office of SEFL associate director. The new rule thus skips this interim step and vests decisional authority in the director.

Among the technical procedural changes, the new rule thus dangles a carrot for nonbanks to consent to supervision by clarifying that such consent is not an admission of engaging in “conduct that poses risk to consumers” and providing that any consent agreement would remain confidential. A nonbank wishing to challenge a designation, however, risks being publicly singled out for risky conduct. This was the experience of World Acceptance Corporation, which challenged a notice of reasonable cause under the prior version of the rule. In a February 23, 2024 order, the director ruled against World, concluding that it had engaged in conduct that posed risk to consumers. Those who challenge Bureau notices under the new rule are likely to suffer a similar fate, especially given that any notice will now be issued by the Bureau’s head of supervision, a non-career official appointed by the director, who will ultimately rule on the merits of the notice issued by his own appointee.   

The new rule is a signal that the CFPB will continue to flex its supervisory authority over nonbanks, including many fintech firms that have never before been subject to federal supervisory authority. It is set to become effective upon its publication in the Federal Register, after which the Bureau will accept comments on the new rule for 30 days.

McGuireWoods has a team of attorneys who represent companies in government examinations and investigations, including those initiated by the CFPB. For any questions about this alert, please contact its authors.