The Consumer Bankers Association (CBA), a trade group of retail financial institutions, recently sent a letter to the director of the Consumer Financial Protection Bureau (CFPB), calling for increased scrutiny of financial technology (fintech) companies. On October 3, just three days after Rohit Chopra was confirmed as the next CFPB director, the ABC urged him to consider extending the agency’s largest participant rule.
The CFPB has the authority to supervise certain “covered persons”, defined in 12 USC §5481 (6) to include “any person who engages in the offering or provision of a consumer financial product or service” and any subsidiary of that person who acts as a service provider to that person. Fintechs are therefore non-depository covered persons, but do not fall under the express legal supervisory authority of the CFPB. Under 12 USC § 5514, the CFPB has express supervisory authority over those covered in the residential mortgage, private student loan, and consumer payday loan markets. The agency also has supervisory authority over any covered person who “is a larger participant in a market for other consumer financial products or services”, as defined by specific regulation.
Under the latter provision, the CFPB could, through additional regulation, oversee fintechs that operate in a covered market and meet a relevant criterion to be considered a larger participant. 12 CFR 1090 currently provides for CFPB oversight of the consumer reporting, consumer debt collection, student loan servicing, international money transfer and auto finance markets, and for each of these markets it prescribes a test or threshold to determine a person’s status as a larger participant. For example, the threshold for determining whether a non-bank covered person is a larger participant in the auto finance market is 10,000 cumulative annual arrangements.
In its letter, the BCA specifically advocated adding the unsecured consumer loan market to the list of defined markets overseen by the CFPB under its broader participant authority as a mechanism to place fintechs under. supervision of the CFPB. The CBA made a two-pronged argument. First, he stressed the need for competitive markets and a level playing field, citing statistics suggesting that unsupervised fintechs have a customer base that “rivals some of the largest supervised banks in the country.” Second, he argued that a lack of oversight puts consumers at risk. As examples, the ABC highlighted recent lawsuits and consent orders against fintechs and statistics on the high rate of suspicious PPP loans from fintech lenders as opposed to traditional lenders.
The approach suggested by the ABC can have unintended consequences. The implications of a broader participation rule for the unsecured consumer loan market would likely extend beyond online non-bank consumer lenders, as such a rule could cover non-fintech companies as well. Additionally, since the fintech industry is larger than unsecured consumer loans, it would not provide oversight to all types of fintechs.
This will be a problem to watch out for in Rohit Chopra’s time at CFPB. The new regulation regarding the largest participant rule was previously designated as “inactive”, so an initial indicator will be whether the CFPB will revert this regulation to active status.
