Banking groups weigh in on ‘larger participants’

Go ahead, regulate the competition – that’s the message banking trade groups sent loud and clear to the Consumer Financial Protection Bureau.

Go ahead, regulate the competition – that’s the message banking trade groups sent loud and clear to the Consumer Financial Protection Bureau.

The Bureau is authorized by law to supervise “certain nondepository covered persons for compliance with Federal consumer financial laws.” Those covered persons include those who work in residential lending, private education lending, and the payday lending markets. For other markets, the CFPB must define the “larger participants” that it will regulate.

The CFPB put out its notice and request for comment on June 21, seeking input on how to define larger participants in six categories: debt collection; consumer reporting; consumer credit and related activities; money transmitting, check cashing and related activities; prepaid cards; and debt relief services.

“The ‘larger participant’ rule will not impose new substantive consumer protection requirements on any nondepository entity, but rather will provide to the CFPB the authority to supervise larger participants in certain markets — including by requiring reports and conducting examinations — to ensure, among other things, that they are complying with existing Federal consumer financial law,” the CFPB noted. The Bureau must promulgate an initial rule by July 21, 2012.

In early July 2011, CFPB staff met with nearly 100 organizations to get input on larger participants. “These groups represent a wide range of interests: consumers, nonbank financial services providers, depository institutions, and others,” wrote Peggy Twohig, the Bureau’s head of nonbank supervision, on the CFPB blog.

Comment letters were due Aug. 15. In its letter, the American Bankers Association suggested further breaking down the six categories. The “consumer credit” category, for one, should be further divided into automotive and recreational vehicle financing; unsecured consumer installment lending; and “other” secured consumer lending (pawn shops, auto title loan companies), ABA wrote. Likewise, the association said, money transmitters and check cashers should be considered two separate categories.

Additionally, the CFPB should create another category for nondepositories that offer “competitive payment services” such as nonbank online and mobile payment providers.

In determining the criteria to define “larger” participants, the CFPB should measure and compare market share, ABA suggests.

The Independent Community Bankers of America also addressed the difficulty of assigning any particular criteria to the definition of a large participant, writing:

While one participant impacts the market because of its relative loan portfolio volume, another participant may impact the market because of the large volume of low-dollar transactions or geographic area it covers. In each case, a participant should be defined as a large participant because of the impact it has on the market, rather than a single criteria.

The Consumer Bankers Association took issue with the categories of nonbank participants, writing, “The categories of nonbanks as outlined in the notice are not sufficient to cover all possible nonbank entities and should be expanded to include, for example, large retailers that provide retail banking services and those that provide mobile or alternative payment services.” CBA has reportedly asked that retailers such as Wal-Mart be included under the CFPB’s regulatory umbrella.

CBA also proposed eliminating the categories entirely “if the criteria and threshold for determining ‘larger participants’ is the same for all types of service providers.”

The bureau cannot officially begin supervising nonbank entities until a confirmed director is in place. A Senate hearing for nominee Rich Cordray is scheduled for Sept. 6.

However, Andrew Kahr, a principle at Credit Builders LLC, cautions bankers against rallying for a CFPB director in place to begin regulating nonbanks. “Recent articles assert that banks will benefit if a director is confirmed for the Consumer Financial Protection Bureau. That’s wrong,” he wrote for American Banker’s BankThink.

“Even with the CFPB now pursuing only banks, using existing regulatory powers, we will still retain most of our advantages over nonbanks,” Kahr wrote. “However, once a director is confirmed banks will suffer severely. The CFPB will then have the power, under Dodd-Frank, to prohibit ‘unfair’ practices by banks. (Until the CFPB has a director, no regulator has that power.)”

Fredrikson & Byron Law