CFPB Uses Authority to Designate Entity Posing Alleged Consumer Risk for Supervision

For the first time, the CFPB used its authority to designate an entity for supervision based on the entity allegedly engaging in conduct that poses risks to consumers with respect to consumer financial products and services.

The Consumer Financial Protection Act specifies various types of non-depository entities which are automatically subject to supervision by the CFPB (e.g., mortgage lenders, brokers, and servicers; private student loan companies; payday lenders). Additionally, the CFPB may designate other non-depository financial services providers for supervision if the agency has reasonable cause to determine that the entity is engaging in, or has engaged in, conduct that poses risks to consumers regarding the offering or provision of consumer financial products or services.

The CFPB exercised the latter authority for the first time in the agency’s history to designate one of the nation’s largest small-dollar consumer lenders as subject to CFPB supervision.  The CFPB determined that the requirements that it must have “reasonable cause to believe” that the entity poses risks to consumers is a very low threshold, and that “risk” only requires the possibility of loss or injury to consumers.  Among other things, the CFPB found that the lender warranted supervision because it allegedly:

• Often failed to adequately explain to consumers that an add-on credit insurance product sold in connection with loans was optional, which deceived or misled consumers into purchasing coverage they did not want or need;

• Engaged in excessive, harassing, and coercive collection practices—including contacting borrowers at their places of employment or contacting their employers—which jeopardized borrowers’ employment and caused significant emotional distress;

• Furnished inaccurate information to consumer reporting agencies or failed to adequately respond to consumer disputes regarding the accuracy of information furnished, which may have negatively impacted consumers’ credit scores and their ability to access credit; and

• Used a business model that relied on borrowers serially refinancing their loans, which allegedly suggested that the company was making loans which borrowers could not afford to repay, and which resulted in borrowers paying fees and interest far beyond what they originally expected.

The lender opposed the CFPB’s designation as an entity which poses risks to consumers and which requires supervision, but the CFPB rejected its arguments.  Among other things, the CFPB found that: 1) the alleged risks were identified based on a large volume of consumer complaints against the lender; 2) the allege risks which warranted supervision did not need to be unique to this lender (i.e., they could apply to other lenders in the marketplace); and, 3) the fact that the CFPB has other tools to investigate the lender (e.g., civil investigative demands), and the fact that the lender may be subject to supervision by state regulators, is not a bar to the CFPB’s designation.