The Consumer Financial Protection Bureau could soon announce its determinations to examine nonbanks for risky behavior — a move that is garnering both concern and support.
In late April, the CFPB said it will use its dormant legal authority under the Dodd-Frank Act to look at the actions of nonbank financial companies, such as fintechs, that may pose risks to consumers. The number of financial companies that do not resemble traditional banks is rising rapidly, as technology transforms the financial industry.
As part of that broader announcement, the agency said it potentially could publicly release its decisions to examine specific companies based on risk, in a proposed procedural rule.
Attorneys who specialize in CFPB issues said in interviews that the process is rife with uncertainty. The public releases, a departure from the bureau's past practice, could hurt companies outed by the regulator, they added.
Reputational damage
Many companies fear publicity from the releases could cause reputational damage, said Michael Gordon, partner at Ballard Spahr and a former senior official at the CFPB.
"The CFPB could identify a company as engaged in risky practices based only on unsubstantiated complaints, and before any exam, much less a finding of violations," he said in an interview.
Eric Goldberg, a partner in the Consumer Financial Services, Data and Technology group at law firm Akerman LLP, said one of the most significant questions — which may remain unanswered until the CFPB makes specific determinations — is how the regulator will decide what it means by risk.
In the proposed rule, CFPB said confidentiality would remain a central principle of the supervisory process. However, the agency said that in certain cases, there is a public interest in transparency when the CFPB director has decided to do an examination based on risk.
The proposed rule would not trigger public release of decisions and orders, but "simply establishes a procedure to cover that issue," the regulator said.
Consumer advocacy group shows support
Consumer advocates said it is good for the public to understand whether financial companies' activities may not be in their best interest.
"Transparency as to how these decisions are being made is helpful," said David Silberman, a senior fellow at the Center for Responsible Lending. "There's a lot of lending going on that poses real risks."
Some companies fear, though, that companies could face a broader loss of confidential supervision if the CFPB continues down this road, one former agency official said.
"The broader concern is whether this is a first step in a broader erosion of confidential supervision, which could, over time, make the supervision process a more public, more formal engagement akin to litigation," John Coleman, a former CFPB deputy general counsel who is now a partner at law firm Buckley LLP, said in an interview.
The CFPB said it is not working to create a formal, codified standard to say when it will publicly release its decisions. The regulator added, however, that it anticipates applying Exemptions 4 and 6 under the Freedom of Information Act, which provide for trade secrets, privileged or confidential financial information and personnel or medical files, among other sensitive information, to remain shielded from public requests.
CFPB cites agility
As a whole, the use of the dormant authority will give the CFPB a chance to determine quickly whether to examine nonbanks, CFPB Director Rohit Chopra said on April 25 when he released the agency's plans.
"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," Chopra said. He later provided more depth on the decision at a congressional hearing the next day.
"Congress has established three categories that are subject to bank-like supervisory examinations," Chopra told the U.S. House Financial Services Committee. "This is the third category that has rarely been used. We have gotten feedback particularly on what are banks and what are nonbanks."
Chopra did not specify how the CFPB would define nonbanks, but said a company would have to be a "covered person" under the agency's general authority in order to be supervised.
The decision could apply to a wide range of institutions, including smaller nonbanks and partnerships between financial technology firms and nonbanks, according to Akerman's Goldberg.
The bureau could initially focus on larger firms, which Chopra began scrutinizing shortly after he was confirmed as director, according to Chris Willis, co-leader of the Consumer Financial Services Regulatory Practice at Troutman Pepper.
Whatever the scale of the CFPB’s efforts, the agency is likely to focus on fintech companies, including consumer lenders, that provide financial services directly to consumers in competition with banks, Sullivan & Cromwell partner Andrew Gerlach said.
Yet, Gerlach added, "It remains to be seen how the CFPB will apply this authority in practice, and which sectors of the nonbank financial services world it will focus on."