The Consumer Financial Protection Bureau announced April 25 that it will conduct supervisory examinations of nonbank financial companies that pose risks to consumers, using an obscure legal provision.
According to the CFPB, such customer risks include “potentially unfair, deceptive, or abusive acts or practices, or other acts or practices that potentially violate federal consumer financial law.” The CFPB noted that such determinations can be made based on complaints it collects, or from information on judicial opinions and administrative decisions.
“The CFPB believes that utilizing this dormant authority will help protect consumers and level the playing field between banks and nonbanks,” the agency stated. “The CFPB is also seeking public comments on a procedural rule to make this process more transparent.”
CFPB Director Rohit Chopra said the decision is necessary because of the massive growth of the nonbank industry. U.S.-based nonbank mortgage lenders issued 68.1 percent of all mortgages originated in 2020, a 10-percent increase from the previous year and the highest market share on record, according to the Wall Street Journal.
Though not specifically cited as a reason, the CFPB’s decision comes after Paycheck Protection Program loans made by fintechs were categorized as “highly suspicious” at nearly five times the rate of loans from traditional lenders, and included billions of dollars in fraudulent loans, according to a University of Texas report last summer. The developers of the study, Department of Finance professors John M. Griffin, Samuel Kruger and Patrick Mahajan, found that fintechs made more than 1.8 million questionable loans, representing $76 billion in capital or nearly 10 percent of the total $780 billion program. According to the report, 13 out of 20 fintech leaders had above-average rates of suspicious loans.
“This authority gives us critical agility to move as quickly as the market, allowing us to conduct examinations of financial companies posing risks to consumers and stop harm before it spreads,” Chopra added.
Consumer Bankers Association President and CEO Richard Hunt commended the CFPB decision. “As regulators look to mitigate the growing risk of consumer harm in the under-regulated and quickly growing non-bank marketplace, CBA will continue to urge the bureau to issue a larger participant rule to ensure the highest level of consumer protections are upheld,” he said.