Today's Trends in Credit Regulation

CFPB Proposes “Larger Participants” Rules
By Crystal L. Gray

On February 16, 2012, the Consumer Financial Protection Bureau announced the first in an anticipated series of proposed rules intended to define “larger participants” who will be subject to the CFPB’s supervisory power over “nonbank covered persons.” The CFPB limited the initial proposed rule to participants in the consumer debt collection and consumer reporting markets, marking the first federal supervision and examination power over debt collection companies. Most debt collection companies are regulated at the state level, while the Federal Trade Commission and others carry out only an enforcement role with respect to applicable laws.

The proposed rule is issued pursuant to section 1024 of the Dodd-Frank Wall Street Reform and Consumer Financial Protection Act of 2010. Section 1024 of Dodd-Frank granted the CFPB the authority to supervise nonbanks of all sizes in the residential mortgage, private education lending, and payday lending markets, as well as, nonbank “larger participants” in markets for other consumer financial products or services. The CFPB sought input from the public through a Notice and Request for Comment in June 2011, to determine which markets to include in the initial larger participant rule. The CFPB settled on the consumer debt collection and consumer reporting industries, but stated that similar rules will follow that encompass other markets. Those markets identified for future action include prepaid card issuers, money transmitting, check cashing and related activities, and debt relief companies. The CFPB is tasked with defining regulated “larger participants” by July 21, 2012.

The CFPB’s proposed rule limits “larger participants” by a threshold amount of “annual receipts,” in an effort to address regulation by a measure of market participation. “Annual receipts” is a term adapted from the Small Business Administration. For purposes of the regulatory threshold of the CFPB, “annual receipts” as proposed will include only activities regulated by Dodd-Frank. For purposes of regulating debt collectors, only receipts from consumer credit debts will apply toward the threshold. Collection agencies who work with collection of medical debts and other invoice-type (non-credit) receivables can exclude those debts from the annual receipts calculation. While the CFPB determined that the annual receipts of both the consumer debt collection and the consumer credit reporting industries were accurate criterion for determining market participation, the CFPB did not rule out other criterion for subsequent rulemakings covering additional markets. Under the proposed rule, the CFPB would supervise debt collectors with more than $10 million in annual receipts. The proposed threshold would encompass 63 percent of annual receipts and cover about 175 debt collection companies. Under the proposed rule, the CFPB would supervise consumer reporting agencies with more than $7 million in annual receipts. The proposed threshold would encompass 94 percent of annual receipts and cover about 30 consumer reporting agencies. The CFPB’s proposed rule provides that once a person qualifies as a “larger participant” the designation remains in place for two years after the first day of the tax year in which the person last met the annual receipt threshold.

The proposal also includes a procedure for disputing or appealing the designation as a larger participant. Through this mechanism, a company whose annual receipts exceed the $10 million threshold can apply to the CFPB and explain why it should not be subject to the CFPB’s regulation. It is not clear that the CFPB performed the required task of defining the market through this rulemaking by creating a general class of regulated entities so broadly. Rather, all the “close work” of figuring out whether the company comes within the “larger participant” pool of regulated entities appears to fall squarely on the shoulders of the companies through the appeal process.

Once a participant is determined to meet the criteria as a “larger participant”, the CFPB will decide which participants to examine and in what order. The proposal sets forth factors for determining the order in which covered persons eligible for examination are evaluated. These factors include: (1) risks posed to consumers in the relevant product markets and geographic markets; and (2) as applicable, (a) the asset size of the covered person; (b) the volume of transactions involving consumer financial products or services in which the covered person engages; (c) the risks to consumers created by the provision of such consumer financial products or services; (d) the extent to which such institutions are subject to oversight by state authorities for consumer protection; and (e) any other factors that the Bureau determines to be relevant to a class of covered persons.

The proposed rule provides definitions for various new terms introduced in the rule and borrows language from existing laws for some terms. One area that the CFPB could clarify for the benefit of finance companies and servicers who are probably not the intended subjects of this regulation is the definition of “consumer debt collection.” The CFPB has defined “consumer debt collection” as:

“collecting, or attempting to collect, directly or indirectly, any debt owed or due or asserted to be owed or due to another and related to any consumer financial product or service. A person offers or provides consumer debt collection where the relevant debt is either: (1) Collected on behalf of another person; or (2) Collected on the person’s own behalf, if the person purchased or otherwise obtained the debt while the debt was in default under the terms of the contract or other instrument governing the debt.”

The proposal appears to want to cover third party debt collectors and debt buyers and the CFPB provides a footnote in its proposal explaining that the Fair Debt Collection Practices Act defines “debt collection” to include similar language. In making the reference, the CFPB makes a statutory reference to the definition of “debt collector” in the FDCPA (which does not define “debt collection”). One issue that arises from this apparent mistake is that the CFPB’s proposal does not include the various exclusions to the term “debt collector” that the FDCPA includes. One of those exclusions under the FDCPA is the servicer exclusion for persons who service debts not in default at the time when they acquire servicing rights. The failure to include those exclusions could lead to servicers or others in the debt collection industry who are excluded from regulation under the FDCPA, being regulated by the CFPB’s proposed “larger participants” rule. While this does not appear to be the intent of the CFPB, there is concern that unless the definition of “debt collection” is revised in the final rule to fully exclude those excluded under the FDCPA, debt servicers may come under CFPB supervision.

The CFPB’s proposed rule, if implemented as proposed, will impart a significant change to the regulation of the debt collection and credit reporting industries, and may unintentionally include servicers who do not do third-party debt collection under the FDCPA.

One other area where the proposed rule appears to overstep is in the apparent intention to regulate law firms. The proposed rule indicates that the CFPB will cast its net over companies who provide services to regulated nonbank larger participants, including law firms. The CFPB hopes and expects to investigate and have access to law firm records as they may apply to work for a larger participant. The problem, of course, for lawyers and the lawyers’ clients is the apparent disregard for the attorney-client privilege that protects attorney-client communications from discovery. The rules of professional conduct in each state require licensed attorneys to hold the privilege close and protect privileged communications from discovery. This issue has been raised by lawyers already, and will hopefully be addressed in the final rule.

Crystal L. Gray is an associate in the Washington, D.C. office of Hudson Cook, LLP. Crystal can be reached at 202-327-9702 or by email at

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