Today's Trends in Credit Regulation

CFPB Urged to Focus on Internet- and Telemarketing-Based Nondepository Financial Services Companies
By Elizabeth C. Yen

The Conference of State Bank Supervisors and the American Association of Residential Mortgage Regulators have suggested in an August 15, 2011 comment letter to the Consumer Financial Protection Bureau that the CFPB focus on larger Internet- and telemarketing-based nondepository institutions offering financial products to consumers because these companies often operate beyond the jurisdiction of state regulators. In many cases, their computer servers and telemarketers might be located abroad, although the companies may affirmatively market their products to U.S. consumers. This is an interesting suggestion: Instead of overlapping with states’ existing regulatory and enforcement efforts, why not use this brand-new federal agency to target non-brick and mortar companies that typically operate beyond state jurisdiction? Brick and mortar companies operating within the borders of the U.S. are easier to monitor and regulate, both at the federal and state levels. They are also easier to sue in U.S. courts. If the CFPB focused more attention on non-U.S.-based companies that rely on the Internet and telemarketing to transact business in the U.S., it might be able to significantly impact the number of entities that presently rely on interstate commerce principles to avoid state regulation.

This strategy could potentially include a number of foreign-based collection agencies. For example, the Connecticut Department of Banking listed 971 consumer collection agency licensees on its website as of September 13, 2011. (In some cases, multiple licenses have been issued to the same entity because a separate license is issued to each branch office engaged in attempting to collect consumer debts from Connecticut residents.) Of these, 98 appear to have non-U.S. addresses. Licensed office addresses exist in countries such as Canada, Guatemala, India, Jamaica, Panama, and the Philippines. One wonders how many non-U.S.-based consumer debt collectors might be trying to collect debts from U.S. residents without having first obtained appropriate state-required licenses.

Non-U.S.-based lenders making small unsecured high-cost consumer loans could also be targeted under this suggested approach. Even though a state might clearly require such lenders to obtain lending licenses and comply with state usury laws, there are inherent practical difficulties and hurdles associated with trying to enforce a state’s legal requirements against a non-U.S.-based lender. A June 26, 2006 letter from the Massachusetts Division of Banks to a Delaware-based small loan lender doing business in Massachusetts through the Internet noted California and Pennsylvania court cases finding that states have jurisdiction over companies that use the Internet to transact business within state borders, and also noted recent state attorney general enforcement actions “against various payday lenders operating over the Internet for violations of state usury and other laws. See, e.g., New York, North Carolina, Kansas, and Colorado.” Having a federal agency that focuses on these Internet- or telemarketing-based companies could facilitate states’ efforts to have such companies comply with applicable state requirements.

Having the CFPB focus on Internet- and telemarketing-based companies operating from outside the U.S. also creates potential domestic economic benefits – it wouldn’t increase the regulatory burden on domestic businesses, would help level the playing field for domestic businesses that compete against largely unregulated non-U.S.-based companies, and might even increase states’ licensing, registration, tax, and related revenues.

The CSBS and the AARMR also have suggested that the CFPB require certain nondepository financial services companies to register with the Nationwide Mortgage Licensing System & Registry. Such a registration requirement could facilitate analyzing where a registrant is doing business and whether a registrant is sufficiently “large” to be regulated by the CFPB. Federal and state regulators would have ready access to the NMLS registry information. (And, although not specifically noted in the August 15 letter to the CFPB, expanding the number of businesses required to register with the NMLS would increase the fees paid to the NMLS, helping to offset the costs of developing and maintaining the NMLS.) The NMLS is already working with state regulators to expand its license and registry capabilities to accommodate debt collection, money transmitter, small loan, and similar lines of business, so a multistate regulatory approach to these nondepository financial services companies will likely soon emerge, with or without the added cooperation of federal agencies such as the CFPB.

Elizabeth C. Yen is a partner in the Connecticut office of Hudson Cook, LLP. She can be reached at 203-776-1911 or by email at

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