The CFPB recently released a proposed rule outlining its procedures for supervising nonbanks engaging in “conduct posing risks to consumers.” The CFPB is authorized to require reports from and conduct examinations of nonbanks subject to its supervision.

Under the Dodd-Frank Act, the CFPB has the authority to supervise several categories of nonbanks:

(1) nonbanks in specific markets (mortgage companies, payday lenders and private education lenders);

(2) nonbanks that are larger participants in other financial products and services markets; and

(3) nonbanks that it may have reasonable cause to determine are posing risks to consumers based on complaints or other information received.

This proposal is pursuant to the third category of such supervisory authority, although the CFPB notes that the Dodd-Frank Act does not require it to issue this rulemaking. Rather, it is doing so to be “transparent in its authorities and procedures.” Under the proposal, the CFPB will have significant  powers to supervise entities that otherwise would not be subject to CFPB examination, based primarily on complaints received under the CFPB’s mandate to collect and track consumer complaints regarding consumer financial products or services. This makes it all the more important that all companies offering or otherwise providing financial products and services to consumers deal promptly with and take steps to resolve consumer complaints, especially recurring complaints from numerous consumers focusing on the same issue.

Based on consumer complaints or other information it receives, the CFPB will identify nonbanks for which it may have reasonable cause to determine they are engaging in, or have engaged in, conduct that poses risks to consumers with regard to offering or providing consumer financial products or services. The Bureau will issue a Notice of Reasonable Cause to these nonbanks. 

The recipient of a notice (referred to as a respondent) will have 20 days to provide a written response to the CFPB that (a) sets forth the basis for the respondent’s contention that it is not a nonbank covered person that is engaging, or has engaged, in conduct posing risks to consumers with regard to the offering or provision of consumer financial products or services and (b) includes all documents, records or other evidence the respondent wishes to use to support the arguments or assertions set forth in the response. A respondent also has the option of providing a supplemental response by telephone. Alternately, a respondent may simply consent to the CFPB’s supervisory authority.

Within 45 days of the respondent’s response, the CFPB’s Deputy Assistant Director for Nonbank Supervision will make a recommendation to the Director of the Bureau regarding whether the respondent should be supervised. The Director has another 45 days to determine whether to adopt, modify or reject the Assistant Director’s recommendation.

The proposal also provides a mechanism for covered nonbanks to petition for termination of the CFPB’s supervisory authority after two years.

The proposal states that a Notice of Reasonable Cause would not constitute a notice of charges for any violations of law. These procedures are considered informal and are not adjudicatory proceedings under the Administrative Procedures Act. Therefore, there is no process for discovery and no witnesses will be called.

Comments on the proposal are due by July 24, 2012. The proposal is available here; the CFPB’s related press release can be viewed at here.