Protested CFPB Supervisory Order Reveals Process, Priorities
Editor's note: Authored by Joshua Kotin and Michelle Rogers, this article was originally published in Law360.
On Feb. 23, the Consumer Financial Protection Bureau made public an order that established supervisory authority over installment lender World Acceptance Corp. after an eight-month proceeding over the contested designation.[1]
The order serves as a clear warning to nonbanks outside the CFPB's automatic supervisory jurisdiction, such as various fintechs, providers of alternative financial products and even digital comparison websites,[2] that it is monitoring the broader financial services market.
The order also provides insight into the procedural nuances of the CFPB's risk determination process and the standards it might use to assess whether an institution poses risk to consumers, and therefore warrants ongoing supervision.
Importantly, the order is also helpful reading for institutions already subject to supervision, as it sheds some light on the bureau's view of certain products and practices, including the risks tied to complaint management practices that could be viewed as weak by the regulator.
The CFPB's authorizing statute provides expansive supervisory authority over nonbank financial institutions.
Congress sought to create some parity between federal bank and nonbank supervision when it created the CFPB, but there were clear practical limitations to supervising the thousands of nonbank financial institutions operating throughout the country. Congress therefore gave the CFPB authority to conduct regulatory examinations over only certain nonbanks.
First and foremost, Congress gave the CFPB automatic authority to examine mortgage lenders and servicers, private student lenders, and short-term small-dollar lenders.
Congress also permitted the CFPB to identify via rulemaking large participants operating in certain financial markets deserving of supervision. As a result, the CFPB can today examine large participants in consumer reporting, debt collection, student loan servicing, international remittance, auto finance and, in the near future, digital consumer payment application providers.[3]
On April 25, 2022, the CFPB announced it would invoke its long-standing, but never before utilized, authority to supervise a new set of nonbanks: those it has reasonable cause to believe poses risks to consumers in the provision of consumer financial products or services.[4]
Importantly, when the CFPB updated the procedural rule in connection with its announcement, it noted it would authorize the release of certain information about any final determinations it made. The CFPB touted its release of details of these determinations as providing guidance to the marketplace, but industry members remained concerned that such disclosure would also have a potentially chilling effect on a nonbank's will to fight the initial determination.
A little more than one year after its initial announcement, the CFPB quietly noted in its summer 2023 "Supervisory Highlights" publication that it had issued several notices of reasonable cause to commence risk-based supervision, and that several entities voluntarily consented to the CFPB's supervisory authority.[5]
Consumer complaints and product offerings drove the CFPB's supervisory determination.
The CFPB's determination that World Acceptance poses risks to consumers was purportedly based on a mixture of consumer complaints and the nature of the lender's products, services and operations. Specifically, the CFPB said it has reasonable cause for concern based on:
- The manner in which the lender describes optional insurance products to consumers and incorporates them into loans;
- Debt collection practices, including claims of harassment and coercion that jeopardize consumer employment or cause stress;
- Accuracy in furnishing information to consumer reporting agencies, as reflected by the 210 consumer disputes and complaints on the subject over a three-year period; and
- The percentage of existing small-dollar loans that are refinanced with new small-dollar loans through so-called serial refinancing.
The CFPB's determination appears to rely heavily upon the content of consumer complaints. This was despite pushback from the target company during the determination proceeding, where it argued that those unverified complaints may be inaccurate, contradicted by other evidence or not credible.
Interestingly, the CFPB sought to rebut this point by suggesting supervision is necessary because it allows the CFPB to learn more about the company's practices and resolve any factual uncertainty between reality and the conduct alleged in the complaints.
Thematic of recent CFPB focus on complaints, the agency also used the order to criticize the company's complaint response process, saying the institution's responses inappropriately disregard the substance of the complaint, offer a conclusory denial of wrongdoing or describe the relevant facts differently than those presented by the consumer without substantiating evidence.
The designation process took approximately eight months and required at least three submissions.
The order makes clear that a contested designation process will require significant institutional resources — though, of course, so does an exam.
The CFPB issued its official notice of intent to supervise World Acceptance on March 10, 2023. The lender submitted a written response to the notice on April 12, 2023, then made an oral presentation to the CFPB on May 17, 2023.
The CFPB reviewed the file and the lender's briefings, collected additional information — including what appeared to be an in-depth review of consumer complaints — and permitted the lender to file a supplemental briefing on Oct. 16, 2023.
CFPB Director Rohit Chopra determined the CFPB would subject the lender to supervision on Nov. 30, 2023, although the order, which was lightly redacted, was made public three months after it was issued.
Looking Ahead
This order serves as a reminder to nonbank institutions that the CFPB is always looking across the broader financial services marketplace for areas of risk to consumers.
Under the CFPB's procedural rule, nonbanks that receive a notice of reasonable cause to commence risk-based supervision have only 30 days to file a written response and challenge the CFPB's initial decision, if they choose to do so. This requires speedy consideration of not just the potential substantive issues raised, but analysis of the effort that might go into challenging the CFPB's notice, and the attendant consequences of challenging or not challenging the CFPB.
The order also contains important lessons for institutions already subject to supervision. For example, the significance of a well-functioning complaint management program within a compliance management system cannot be emphasized enough, given the bureau's reliance on not just the substance of complaints, but the alleged inadequacy of the company's responses.
Much like the CFPB's other supervisory statements, such as its periodic "Supervisory Highlights" publications, the order points to other bigger-picture risk discussions as well.
Among other things, the CFPB's order reveals its thinking on several significant industry issues, and even explores potential legal theories were these to be factual and legal findings. In the case of the serial refinancing claims, the CFPB explains how such conduct — if true — could be the subject of an abusiveness claim under the Consumer Financial Protection Act's prohibition on unfair, deceptive and abusive acts and practices.
In the case of allegedly harmful collection practices, the CFPB lays out allegations from complaints that describe the very types of purported coercive and harassing practices it would explore in the supervision process, including the frequency of calls and sharing of damaging information with third parties.
While the CFPB goes to great lengths to say in the order it has made no factual conclusions or findings that the potential practices violated the law, it also is clear to say it need not get that far to make its supervisory decision.
This, in the greater context of the order, is an important reminder that the determination to supervise is not the end, but rather the beginning, of a target entity's long journey to address the issues cited, as well as other issues examiners might identify during the supervisory process.
[1] The supervisory designation decision and order can be found at https://files.consumerfinance.gov/f/documents/cfpb_world-acceptance_decision-and-order_2023-11.pdf.
[2] On Feb. 29, 2024, the CFPB issued Circular 2024-01, warning operators of digital comparison-shopping tools and lead generators that they may be engaging in abusive acts or practices. https://www.consumerfinance.gov/compliance/circulars/consumer-financial-protection-circular-2024-01-preferencing-and-steering-practices-by-digital-intermediaries-for-consumer-financial-products-or-services/.
[3] The CFPB's proposal to regulate larger participants in the market for general-use digital consumer payment applications was published in the Federal Register on Nov. 17, 2023, at 88 Fed. Reg. 80,197.
[5] https://files.consumerfinance.gov/f/documents/cfpb_supervisory-highlights_issue-30_2023-07.pdf.
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