Insights

Who are they? That’s the $64,000 question (or more, if you want to take into account the actual compliance costs associated with another layer of regulatory examination). The Consumer Financial Protection Bureau has started down the road of answering the question with its recent release of a Notice and Request for Comment seeking public input on a key element of the agency’s non-bank supervision program — the Dodd-Frank Act’s statutory requirement that the CFPB define by rule “larger participants” in certain consumer financial markets.

The Dodd-Frank Act charged the CFPB with ensuring that both banks and non-banks comply with federal consumer financial laws. The Dodd-Frank Act authorizes the CFPB to examine all sizes of non-bank mortgage companies, payday lenders, and private education lenders. However, it is limited in its ability to formally supervise other non-bank providers in other markets, i.e., it may only exert its supervisory authority over the “larger participants” in those markets. But before it can do that, it must first define by rule who is “a larger participant of a market for other consumer financial products or services.” The CFPB must issue an initial “larger participant” rule no later than July 21, 2012, one year after the designated transfer date.

In its Notice and Request for Comment, the CFPB identified six markets for potential inclusion in an initial rule: 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 substantive consumer protection requirements; rather, it will enable the CFPB to begin a formalized supervision program for larger participants in certain markets.

The general issues for which the CFPB seeks input include:

• The criteria it should use to measure a market participant;
• Where it should set the thresholds for inclusion as a larger participant;
• Whether it should adopt a single test to define larger participants in all markets (measure the same criteria and use the same thresholds) or instead use tests tailored for specific markets;
• Identifying any data available to be used for these purposes;
• The time period it should use to measure the size of a market participant;
• How long a participant should remain subject to supervision after initially meeting the larger participant threshold, even if subsequently falling below the threshold; and
• What consumer financial markets to include in the initial rule.

Public comments were due on August 15, 2011, and they hopefully will assist the CFPB in developing a proposed initial rule defining larger participants.

There is much in the Notice for auto finance providers to think about, not the least of which is how the CFPB should define the covered market in the first instance. Lumping auto finance into a broader “consumer credit” market strikes me as both unfair and unworkable. It is simply not the same as other retail finance, e.g., furniture, jewelry, electronics, small consumer loans, etc., and even the financial markets make distinctions by asset and product classifications. A thoughtful and reasoned approach is required in order to treat the many varieties of consumer credit providers fairly and consistently. Therefore, before the CFPB can define who the larger participants are, it must first define the markets in a manner that treats like companies alike and all companies fairly.

Once the market is defined (and let’s just assume that the CFPB will treat indirect auto finance as a distinct market), the CFPB will have to determine how to identify the larger participants. In doing so, it must define what a larger participant is – by limiting its authority in this area, Congress has clearly expressed its intent that the CFPB not treat everyone as a larger participant.

There are a number of ways to get to a dividing line, be it through annual number of transactions, annual revenues, average outstanding balances, etc. Alternatively, the standard can be determined by looking at auto finance company metrics in a relative manner, i.e., relative to each other. Whatever the metric and standard are, they cannot be arbitrary and capricious. For the CFPB to retain credibility in this process, it will have to come up with a measuring system that by definition and operation excludes the smaller participants from its formal supervisory reach.

That doesn’t mean to say that smaller participants are off the hook. The Dodd-Frank Act gives the CFPB the authority to supervise smaller individual companies to the extent it determines that the company is engaged in behavior risky to consumers. That’s a healthy way to back up state regulators who already supervise these companies, and, in my view, the better way to accomplish the goals of Dodd-Frank.

Michael A. Benoit is a partner in the Washington, D.C., office of Hudson Cook LLP. He can be reached at 202-327-9705 or by email at mbenoit@hudco.com.