CFPB Updates Risk-Based Nonbank Supervision Designation Process

On April 16, 2024, the Consumer Financial Protection Bureau (CFPB or Bureau) issued a procedural rule streamlining the designation proceedings for nonbank supervision based on a particular entity posing “risks to consumers.” As discussed in "Troutman's Take" below, the changes are designed to encourage nonbanks to volunteer to be supervised, while making it easier for the CFPB to impose supervisory oversight when companies do not consent.

In 2013, the CFPB issued procedures to govern nonbank supervisory designation proceedings, but did not actually utilize those procedures, at least not that were highlighted publicly. In 2022, the CFPB announced that it would begin to make active use of this “dormant authority,” discussed here. The CFPB initiated its first public round of supervisory designation proceedings, discussed here, in 2023 and in 2024 issued its first supervisory designation order in a contested matter, discussed here.

The CFPB states that it is issuing the rule pursuant to its authority under the Consumer Financial Protection Act of 2010 to monitor markets for consumer financial products and services that pose risks to consumers and to conduct a risk-based nonbank supervision program for the purpose of assessing compliance with federal consumer financial laws.

Key Changes in the Rule

The new rule includes several key changes:

• Voluntary Consent to Supervisory Authority: The rule clarifies that a consent agreement does not constitute an admission and allows for case-by-case determination of the duration of supervision. Under the 2013 rule, all consent agreements were for two years. While the CFPB anticipates that will continue to be the typical duration, the new rule provides flexibility if a longer or shorter period is warranted.
  
  
• Notice of Reasonable Cause: The 2013 rule included methods of service patterned on how a notice of charges is served under the Rules of Practice for Adjudication Proceedings. To provide additional flexibility, the new rule also permits other methods that are “reasonably calculated to give notice.” The new rule also codifies that the initiating official may withdraw a Notice, whereas the 2013 rule did not expressly address this subject.
  
  
• Reply by Initiating Official: The new rule provides the initiating official with the option of filing a written reply to the response. Under the 2013 rule, there was no reply.
  
  
• Supplemental Oral Response: The rule gives the Director more flexibility regarding whether a supplemental oral response is in person at the Bureau’s headquarters, by telephone, or by video conference.
  
  
• Determination by the Director: The new rule merges the adjudicative roles of the Associate Director and Director in these proceedings, streamlining the Bureau’s internal decision-making process.
  
  
• Methods of Filing and Serving Documents: The rule clarifies the method of filing and serving documents, which will generally be by e-mail. The service of the Notice at the start of a proceeding, when a respondent’s e-mail address may not be known, is governed by a specific rule.
  
  
• Time Limits: The rule simplifies the former method for calculating time limits, which varied by delivery channel to allow additional time for mail or delivery services to arrive. This change aims to reduce confusion as e-mail is generally instantaneous.
  
  
• Word Limits: The rule introduces a word limit for the Notice, response, and certain other key filings, based on Federal Rule of Appellate Procedure.
  
  
• Confidentiality of Proceedings: The rule maintains the 2022 rule’s approach to the public release of final decisions and orders but clarifies that consent agreements entered into by the initiating official and respondent are not subject to the public release process (which, we understand, has been the Bureau’s practice since the 2022 announcement).
  
  
• Multiple Respondents: The rule clarifies that multiple respondents might be named in a Notice, as well as clarifying the process for adding an additional respondent or respondents to a pending proceeding.
  
  
• Issue Exhaustion: The new rule includes an express issue exhaustion provision that parallels the Rules of Practice for Adjudication Proceedings. This provision requires parties to give the agency an opportunity to address an issue before seeking judicial review of that question.

The rule is effective upon publication in the Federal Register. It applies to proceedings initiated on or after the effective date. It also applies to proceedings that are pending on the effective date, except to the extent the Director determines that is not just or practicable.

Troutman's Take

Although the changes are procedural, they build upon the Bureau’s ongoing efforts to expand its supervision of nonbanks, especially fintechs. This procedural rule signals that the CFPB will increasingly encourage, and perhaps pressure, nonbanks to consent to be supervised, while simultaneously simplifying the process for the CFPB to impose its risk-based supervisory authority if companies do not consent. The CFPB’s risk-based designation process for nonbank is no longer “dormant.”