The Consumer Financial Protection Bureau has issued a proposal under which it would supervise nonbank providers of consumer reporting and consumer debt collection services considered to be “larger participants” in the markets for those services.
The proposal defines as “larger participants” companies with more than $7 million in annual receipts from consumer reporting and companies with more than $10 million in annual receipts from debt collection. Comments on the proposal are due by April 17, 2012.
Companies likely to qualify as larger participants should promptly review their practices and procedures for federal law compliance with experienced counsel in anticipation of CFPB examinations, which are expected to begin this summer. Lawyers in Ballard Spahr’s Consumer Financial Services Group are currently assisting clients in preparing for the expected CFPB examinations.
The CFPB’s larger participant supervision program will represent the first time that nonbank companies engaged in consumer reporting or debt collection are subject to examination for federal law compliance by a federal regulator. In addition to examining their compliance with federal laws such as the Fair Credit Reporting Act, the Fair Debt Collection Practices Act, and the Electronic Fund Transfer Act, such companies should expect the CFPB to scrutinize their practices under “unfair, deceptive or abusive” standards.
Under the Dodd-Frank Wall Street Reform and Consumer Protection Act, the CFPB has authority to supervise, regardless of size, nonbank providers of residential mortgage loans and certain related services, payday loans, and private education loans. The Dodd-Frank Act also gave the CFPB supervisory authority over nonbank providers considered to be “a larger participant of a market for other consumer financial products or services.”
Highlights of the proposal, published on February 17, 2012, include:
- The definition of “consumer debt collection” is intended to include collection activities of third-party collectors, law firms, attorneys, and debt buyers. The CFPB rejected recommendations from consumer groups that it define third-party collectors, collection law firms, and debt buyers as separate markets. According to the CFPB, that decision was based, in part, on a lack of available data for it to use to devise separate tests.
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In the background discussion, the CFPB notes that the proposal does not apply to depository institutions or credit unions but that such entities could “see changes in the quality and pricing” of debt collection services. We expect collection documentation and affidavit execution to be a major CFPB focus when examining larger participants involved in debt collection. Any CFPB rulemaking or guidance that results from that focus could significantly affect the ability of depository institutions and credit unions to collect consumer debts. (Ballard Spahr has created the Collection Documentation Task Force to assist clients with the rapidly developing spread of documentation-related challenges, from mortgage foreclosure processes to the collection of credit card, student loan, and other types of consumer debts.)
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A company engaged only in the collection of commercial debts would not be involved in “consumer debt collection.” In addition, the annual receipts used to determine whether a company that engages in the collection of both consumer and commercial debts is a larger participant would not include receipts from the collection of commercial debts.
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Providers of “consumer reporting” include any company engaged in “collecting, analyzing, maintaining, or providing consumer report information or other account information used or expected to be used in any decision by another person regarding the offering or provision of any consumer financial product or service.” The definition is intended to reach “specialty consumer reporting agencies, such as those specializing in consumer check verification and payday lending transactions.” Most significantly, the CFPB’s definition does not appear to be limited to companies that qualify as a “consumer reporting agency” under the Fair Credit Reporting Act.
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A provider of “consumer reporting” would not include a company that only provides consumer reports for use in decisions involving employment, government licensing, or residential leases. In addition, the annual receipts used to determine whether a company that provides consumer reports for such purposes and purposes covered by the CFPB’s “consumer reporting” definition is a larger participant would not include receipts from reports used for non-covered purposes.
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The “annual receipts” used to determine whether a company is a larger participant means “total income” for income tax purposes and does not include investment income. The calculation of a company’s annual receipts includes the annual receipts of its affiliates from debt collection or consumer reporting activities.
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The CFPB estimates in the background discussion of the proposal that its larger participant thresholds would bring under its supervision approximately 175 entities engaged in debt collection and fewer than 30 credit bureaus. It is unclear how reliable those estimates are.
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The Dodd-Frank Act authorizes the CFPB to establish a registration system for nonbank “covered persons” and, in the background discussion, the CFPB indicates that “it is contemplating a future rulemaking to establish a nonbank registration program, which could be used to gather data to support subsequent larger participant rulemakings and their implementation.” Since the CFPB has not yet begun that rulemaking, we do not expect a registration system to be in place before the CFPB begins examining larger participants.
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According to the background discussion, the CFPB initially expects to use “various data sources, including publicly available data,” to identify larger participants. Under the proposal, the CFPB can require a company to submit “such records, documents, and information as the [CFPB] may deem appropriate to determine whether a person is a larger participant.” A company would be able to dispute the CFPB’s determination that it is a larger participant by following the procedures outlined in the proposal.
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Once a nonbank company qualifies as a larger participant, it would be considered a larger participant for not less than two years from the first day of the tax year in which the company last met the applicable threshold.
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In the background discussion, the CFPB notes that a nonbank company engaged in consumer reporting or debt collection activities that did not qualify as a larger participant would still be subject to the CFPB’s regulatory and enforcement authority and could be subject to its supervision authority if the CFPB found that the company was engaging in or had engaged in conduct that presents risks to consumers. The CFPB further notes that it also has supervision authority over service providers to larger participants, such as “data aggregators, law firms, account maintenance services, call centers, data and record suppliers, and software providers.” Such service providers would be subject to the CFPB’s supervision authority regardless of their size.
According to the background discussion, the CFPB anticipates further rulemaking to define larger participants in other markets. In its notice published in June 2011 soliciting comments for developing the proposal, the CFPB had identified six potential markets in which “larger participants” would be subject to CFPB supervision. In addition to debt collection and consumer reporting, those markets are (1) consumer credit and related activities, (2) money transmitting, check cashing, and related activities, (3) prepaid cards, and (4) debt relief services. The CFPB has not indicated when further rulemaking to define larger participants in other markets is likely to occur. The CFPB has until July 21, 2012, to issue an initial final rule defining larger participants.
Ballard Spahr’s Consumer Financial Services Group is nationally recognized for its guidance in structuring and documenting new consumer financial services products, its experience with the full range of federal and state consumer credit laws throughout the country, and its skill in litigation defense and avoidance (including pioneering work in pre-dispute arbitration programs).
The group also produces the CFPB Monitor, a blog that focuses exclusively on important CFPB developments. To subscribe, use the link provided to the right.
For more information, please contact Practice Leader Alan S. Kaplinsky, 215.864.8544 or kaplinsky@ballardspahr.com; Practice Leader Jeremy T. Rosenblum, 215.864.8505 or rosenblum@ballardspahr.com; John L. Culhane, Jr., 215.864.8535 or culhane@ballardspahr.com; Christopher J. Willis, 678.420.9436 or willisc@ballardspahr.com; Barbara S. Mishkin, 215.864.8528 or mishkinb@ballardspahr.com; or Mark J. Furletti, 215.864.8138 or furlettim@ballardspahr.com.
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