CFPB Releases Proposed Rule for Supervision of Non-Bank Persons Based on ​“Reasonable Cause”

On May 25, 2012, the CFPB released a proposed rule outlining its process for determining whether a covered person has engaged, or is engaging in, conduct that poses risks to consumers related to the offering or provision of consumer financial products or services. The proposed rule sets out the procedures under which the CFPB may subject a nonbank covered person to the CFPB’s supervisory authority, including requiring reports from and conducting examinations of the subject entity. In addition to the CFPB’s specific grant of authority to supervise certain nonbank covered persons, such as those engaged in activity related to residential mortgage loans, the Bureau has the authority to supervise any nonbank covered person that it ​“has reasonable cause to determine, by order, after notice and a reasonable opportunity to respond” that the person is engaged in conduct posing a risk to consumers based on reasonable cause from complaints or information collected from other sources.

The proposed rule states that the CFPB will provide a nonbank covered person with a notice and reasonable opportunity to respond. The notice will include a description of the basis for the CFPB’s belief that the respondent is a nonbank covered person engaging in conduct posing risks to consumers and will provide a respondent with two opportunities to respond - first in writing and second, if requested by the respondent, through a supplemental oral response generally conducted by phone. The written response, if submitted, should include any records, documents, or other items that the respondent would like the CFPB to consider while the supplemental oral response will be an opportunity to present arguments to the CFPB.

The proceedings outlined by the proposed rule would be informal and not an adjudicatory proceeding under Section 554 of the Administrative Procedures Act. Thus, discovery would not be permitted, a supplemental oral response would not constitute a hearing on the record, and witnesses would not be called as part of the supplemental oral response. After the proceedings have concluded, the CFPB’s Assistant Director for NonBank Supervision will provide a recommended determination to the CFPB’s Director, who will then make a final determination subjecting the respondent to the CFPB’s supervisory authority or stating that the respondent is not subject to the CFPB’s supervisory authority. The proposed rule also outlines how a respondent could consent to the CFPB’s supervisory authority, the means for a respondent to petition for the termination of an order two years after its issuance, and notice procedures and an opportunity to respond if the CFPB issues a notice of charges.

The CFPB has described the proposed rule as offering a more robust process than required under the Dodd-Frank statute by providing the opportunity to participate in a supplemental oral response. While largely a procedural rule, the proposed rule moves the CFPB forward in setting up the mechanisms to further exercise its supervisory powers. Comments are due on July 24, 2012.