CFPB Flexes Nonbank Supervisory Authority—State AG Targets Should Take Note
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CFPB Flexes Nonbank Supervisory Authority—State AG Targets Should Take Note

Brownstein Client Alert, May 3, 2024

For the first time in its history, the Consumer Financial Protection Bureau recently invoked supervisory authority over a nonbank lender, World Acceptance Corp., one of the largest small-dollar installment lenders in the country. Given the close and ever-increasing connection between the CFPB and state attorneys general when it comes to financial services-related enforcement investigations, the industry should take note of this and understand what it means for its strategies in dealing with both state and federal enforcement actions.

The World Acceptance Case

On Feb. 23 of this year, the CFPB announced its decision to impose supervisory authority over World Acceptance Corp., the first use of the agency’s risk-based regulatory oversight in a contested case.

In a 22-page order establishing the company as subject to examination, the CFPB cites concerns related to the company's add-on insurance, collections, credit reporting and refinancing practices. The Nov. 30 order, signed by CFPB Director Rohit Chopra, clarified that it is “not a finding” of wrongdoing on the part of the company but cited “reasonable cause” that World Acceptance posed a risk to consumers and warranted supervision. The lender's designation for supervision came after consumer complaints were filed with the CFPB claiming World Acceptance had, among other things, inadequate loan term explanations, attempted to sell unwanted insurance products, engaged in aggressive debt collection practices and caused inaccuracies in credit reporting.

As a result of the investigation, the CFPB cited four risks that triggered enough reasonable cause for supervision, each of which “alone is a sufficient basis to exercise the CFPB’s supervision authority”:

  • World Acceptance may not “adequately explain to its customers that the insurance coverage [it] offers is optional, which may cause consumers to be deceived or misled into purchasing coverage they do not want or need.”
  • World Acceptance may engage in “excessive, harassing, and coerceive collection practices that, in some cases, may jeopardize consumers’ employment or cause significant emotional distress.”
  • World Acceptance may “furnish inaccurate information to consumer reporting agencies” or fail to “adequately respond to consumer disputes regarding the accuracy of information it has furnished, which may negatively impact consumers’ credit scores and thereby restrict their access to credit.”
  • World Acceptance’s business model may rely on “serially refinancing its loans, a practice that may harm consumers in a variety of ways.”

CFPB Supervisory Authority

While the CFPB has long regulated large banks and many financial institutions, it wasn’t until

2022 when the agency announced its plans to invoke its “dormant” supervisory authority over nonbank entities that pose risk to consumers, including:

  • all nonbank entities in the mortgage, private student loan and payday loan industries, regardless of size;
  • “larger participants” in other nonbank markets for consumer financial products and services in the markets of consumer reporting, debt collection, student loan servicing, international remittances and auto loan servicing; and
  • nonbanks whose activities the CFPB has reasonable cause to determine pose risks to consumers.

The last category—the so-called risk-based authority—is not limited to any specific consumer financial product or service.

State AG/CFPB Tangle

The CFPB’s connection to, and use of, state attorneys general has only grown since itss creation in 2011. The bureau has memoranda of understanding to promote collaboration with over 20 state attorney general offices as well as regulators in all 50 states, the District of Columbia and Puerto Rico.

And there are plenty of state prosecutors who openly endorse the agency’s expansion of its authority to supplement their own investigations, particularly in states with Democratic attorneys general. A group of 19 state attorneys general, led by New Jersey’s Matt Platkin, signed onto a comment letter earlier this year in support of the CFPB’s proposed rule expanding its supervisory authority over nonbank fintech entities offering digital payment services. All signatories were Democrats. Republican lawmakers and state attorneys general have largely opposed the CFPB’s authority, or at least the expansion of it.

The CFPB has also made material efforts to bolster collaboration among states and other federal agencies. The bureau issued an interpretive rule in 2022 clarifying the states’ ability to enforce federal consumer protection laws. The CFPB followed up with another interpretive rule about a month later encouraging states to pass their own fair credit reporting laws on top of using the federal Fair Credit Reporting Act to police markets. Both of these interpretations of the CFPB’s own and states’ authority were questioned by lawmakers. At the same time, these developments clearly show a willingness and desire from the bureau to see states bolstering their own enforcement efforts in consumer financial oversight, as we’ve previously written.

But now, with the first invocation of the CFPB’s supervisory authority over nonbank lenders in a contested case, that relationship could grow even tighter—one might even say that when it comes to nonbank lenders, the CFPB and state attorneys general are now becoming fully intertwined.

As such, when faced with regulatory investigations or enforcement actions from either the CFPB or state attorneys general, regulated entities need to carefully consider the impact of one on the other. For example, a company should ask if an ongoing multistate investigation by attorneys general is likely to trigger a CFPB investigation and the potential use of its supervisory authority. If so, how should a company factor that into any settlement or litigation strategy? And vice-versa, if the CFPB is conducting an investigation and threatening use of its supervisory authority, should the company now expect a state investigation, and if so, should it affirmatively reach out to particular state offices and their consumer protection staff?

The stakes have certainly increased for both state and federal investigations. Financial services companies and their legal counsel, and those in related industries, would be well-served to review their risk strategies using the CFPB’s framework for assessing reasonable cause to impose supervision under federal law, and should pay attention to the types of risks cited in the World Acceptance case, especially where they overlap with the issues most vigorously prosecuted by state’s attorney general office.

This document is intended to provide you with general information regarding the CFPB's use of its supervisory authority over nonbanks. The contents of this document are not intended to provide specific legal advice. If you have any questions about the contents of this document or if you need legal advice as to an issue, please contact the attorneys listed or your regular Brownstein Hyatt Farber Schreck, LLP attorney. This communication may be considered advertising in some jurisdictions. The information in this article is accurate as of the publication date. Because the law in this area is changing rapidly, and insights are not automatically updated, continued accuracy cannot be guaranteed.

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