CFPB Invokes Dormant Dodd-Frank Authority to Regulate Nonbank Financial Companies

Could 5, 2022

On April 25, 2022, the Shopper Monetary Safety Bureau announced that it’s going to start relying upon a “largely unused authorized provision” of the Dodd-Frank Act to oversee nonbank monetary corporations that purportedly pose dangers to customers. To facilitate that course of, the CFPB concurrently promulgated a procedural rule that authorizes it to publish its choices about whether or not sure nonbank entities current such a danger. The CFPB has acknowledged that it intends for these choices to offer nonbank entities with steering concerning the circumstances by which they could be topic to regulation. Left unspoken is the truth that the risk to publicly designate an entity as posing dangers to customers will present the CFPB with further leverage over such entities.

The CFPB’s announcement marks a big growth of its supervisory attain. The CFPB stated that it intends to “conduct examinations” of “fintech” corporations and “to carry nonbanks to the identical requirements that banks are held to.” And it’s anticipated that the CFPB will assert the identical authority over crypto corporations. The CFPB’s announcement comes at a time of more and more intense competitors amongst regulators to claim jurisdiction over fintech and digital property corporations. Gibson Dunn represents many consumers on the forefront of crypto and fintech innovation, and has deep expertise difficult over-extension of companies’ regulatory authority, together with by monetary regulators. We stand prepared to assist information business gamers because the CFPB strikes ahead with its bold plans.

I. The CFPB’s Authority to Regulate Nonbank Entities

Traditionally, solely banks and credit score unions had been topic to federal monetary supervision. That modified when Congress enacted the Dodd-Frank Wall Avenue Reform and Shopper Safety Act, Pub. L. No. 111-203, 124 Stat. 1376 (2010).

Beneath Dodd-Frank, the CFPB has supervisory authority over a number of classes of nonbank entities, together with entities that present mortgage, non-public scholar mortgage, or payday mortgage companies. 12 U.S.C. § 5514(a)(1)(A), (D)–(E). As well as, and most related right here, the CFPB could regulate nonbank entities when it “has affordable trigger to find out”—after offering discover and a chance to reply—that the entity “poses dangers to customers” concerning the supply of client monetary services or products. Id. § 5514(a)(1)(C).

The CFPB issued a procedural rule in 2013 delineating the risk-determination course of, however it has by no means earlier than used this authority to oversee a nonbank. Because the CFPB’s April 25, 2022 announcement explains, nevertheless, that’s about to vary. Within the announcement, the CFPB stated that it’s going to start exercising its “dormant authority” beneath Dodd-Frank to oversee nonbank entities—together with “fintech” corporations—that it has decided pose a danger to customers.

The Dodd-Frank Act and the CFPB’s implementing laws element the risk-determination course of and the results of being topic to regulation.

The Threat-Dedication Course of. The CFPB promulgated detailed procedures for the method it makes use of to find out whether or not nonbank entities are a danger to customers, and thus topic to regulation beneath Dodd-Frank. See 12 C.F.R. §§ 1091.100–.115. These procedures give the CFPB discretion to provoke the risk-determination course of via issuing a “Discover of Cheap Trigger,” id. § 1091.102, or via bringing prices in an adjudicatory continuing, id. § 1091.111. Whichever path the CFPB chooses, it should present discover of the premise for the obvious danger and a chance for the nonbank entity to reply. The CFPB has stated that it might base its danger determinations on “complaints collected by the CFPB, or on info from different sources, akin to judicial opinions and administrative choices,” in addition to “whistleblower complaints, state companions, federal companions, or information studies.” After contemplating the accessible proof and any responses from the nonbank entity, the Director will determine whether or not it has “affordable trigger” to discover a danger to customers. The Director’s determination to topic an entity to regulation beneath Dodd-Frank is topic to evaluate beneath the Administrative Process Act.

Regulation beneath Dodd-Frank. If the CFPB determines {that a} nonbank entity is topic to regulation primarily based on a danger willpower, then it faces the identical stage of regulation as banks. Amongst different issues, the CFPB can conduct examinations to make sure compliance with client monetary legal guidelines, 12 U.S.C. § 5514(b)(1), require entities to adjust to recordkeeping necessities, id. § 5514(b)(7), and is usually vested with unique enforcement authority over federal client monetary legal guidelines, id. § 5514(c). However the formal processes for making danger determinations, entities may voluntarily consent to regulation beneath Dodd-Frank. 12 C.F.R. §§ 1091.110(a), 1091.111(a).

Petition for Termination. Within the occasion the CFPB determines after the Issuance of a Discover of Cheap Trigger {that a} nonbank entity poses a danger to customers and is thus topic to regulation beneath Dodd-Frank, that entity could file a petition earlier than the Director to terminate the choice and escape regulation beneath the Act. 12 C.F.R. § 1091.113(a). That petition could also be filed “no ahead of two years after” the choice, and just one petition could also be filed per 12 months. Id. The Director’s determination on a petition qualifies as “closing company motion” which may be topic to evaluate beneath the Administrative Process Act. Id. § 1091.113(e)(3).

II. New Rule Permitting Publication of Threat-Dedication Choices

Accompanying its announcement to start supervising fintech nonbanks, the CFPB issued a procedural rule amending the risk-determinations procedures. Supervisory Authority Over Sure Nonbank Lined Individuals Based mostly on Threat Dedication; Public Launch of Choices and Orders, 87 Fed. Reg. 25397 (proposed Apr. 29, 2022).

As a normal matter, supplies submitted in reference to a danger willpower are thought-about confidential. 12 C.F.R. § 1091.115(c). However with this new rule, which took impact on April 29, 2022, the CFPB could within the Director’s discretion publish choices and orders made throughout the risk-determination course of on the CFPB’s web site. According to the CFPB, that is designed to “improve the transparency of the risk-determination course of” and provides nonbank entities steering about how the CFPB will implement the Dodd-Frank Act shifting ahead. In fact, the measure additionally affords the CFPB a chance to make headlines concerning its efforts to carry massive, modern, and/or well-known entities beneath its supervisory management. The rule offers the nonbank entity topic to the order or determination a chance to file a submission with the CFPB concerning publication of the CFPB’s willpower. The Director additionally decides whether or not to publish on the CFPB’s web site the choice about whether or not the danger willpower will likely be publicly launched.

The CFPB has requested public feedback on the rule, which should be acquired by Could 31, 2022. events ought to think about commenting on the proposal to specific any issues, suggest enhancements, and to protect their skill to carry a authorized problem to the rule. For regulated entities, a problem to the rule could also be preferable to elevating objections solely after the CFPB has recognized the entity by title in a printed danger willpower.

III. Implications for Fintech and Crypto Firms

The CFPB’s announcement of its intent to start supervising fintech corporations—which is believed to incorporate crypto corporations as nicely—represents a muscular growth of the company’s regulatory purview. It’s one more aggressive motion within the younger tenure of Director Rohit Chopra—one which has been controversial and customarily perceived as hostile to business. The results for fintech and crypto corporations may very well be important. Though a lot will depend upon the vigor with which the CFPB pursues its rediscovered supervisory authority, the CFPB acknowledged that it intends to “conduct examinations” of fintech corporations and to carry them to “the identical requirements that banks are held to.” Additional, the CFPB’s new procedural rule permits the company to publicize its findings concerning the dangers {that a} fintech or crypto firm poses to customers earlier than the company completes an examination of the corporate, opposite to the confidentiality rules encouraging full and frank communications between an entity and its regulator, which rules lie on the coronary heart of the supervisory course of.

The CFPB’s new assertion of jurisdiction is in line with the surge of curiosity amongst federal regulators within the fintech and crypto industries over the previous 12 months. The SEC, CFTC, FinCEN, Treasury, and different companies have been jockeying for place to manage this fast-growing and modern area. Absent laws from Congress clearly defining regulatory roles throughout the business, that jockeying is prone to proceed. In March 2022, President Biden issued an executive order directing quite a few companies to guage the dangers and advantages of digital property. The studies ensuing from that government order could solely heighten scrutiny of the crypto business and improve the variety of regulators asserting jurisdiction over it.

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Because the CFPB decides which entities it is going to search to manage beneath Dodd-Frank, corporations can take steps now to start assessing their compliance with the legal guidelines administered by the CFPB. Gibson Dunn represents many consumers on the forefront of fintech, crypto, and blockchain innovation and stands prepared to assist information business gamers via this new period of CFPB regulation and the rising patchwork of federal regulation. The Gibson Dunn workforce has the experience to offer steering and develop modern arguments difficult the CFPB’s authority. E.g., PHH Corp. v. CFPB, 839 F.3d 1 (D.C. Cir. 2016) (holding that the CFPB was unconstitutionally structured in violation of Article II and that the CFPB violated the APA), on reh’g en banc, 881 F.3d 75, 83 (D.C. Cir. 2018) (en banc) (vacating a $109 million penalty as a result of the CFPB misinterpreted the statute and violated due course of by retroactively making use of its new interpretation); Bus. Roundtable v. SEC, 647 F.3d 1144 (D.C. Cir. 2011) (defeat of SEC “proxy entry” rule).

Gibson Dunn’s attorneys can be found to help in addressing any questions you might have concerning these developments. In the event you want to talk about any of the issues set out above, please contact Gibson Dunn’s Crypto Taskforce (cryptotaskforce@gibsondunn.com), or any member of its Financial Institutions, Global Financial Regulatory, Privacy, Cybersecurity and Data Innovation, Public Policy, or Administrative Law groups, together with the next authors:

Ryan T. Bergsieker – Associate, Privateness, Cybersecurity & Knowledge Innovation Group, Denver (+1 303-298-5774, rbergsieker@gibsondunn.com)

Ashlie Beringer – Co-Chair, Privateness, Cybersecurity & Knowledge Innovation Group, Palo Alto (+1 650-849-5327, aberinger@gibsondunn.com)

Matthew L. Biben – Co-Chair, Monetary Establishments Group, New York (+1 212-351-6300, mbiben@gibsondunn.com)

Michael D. Bopp – Co-Chair, Public Coverage Group, Washington, D.C. (+1 202-955-8256, mbopp@gibsondunn.com)

Stephanie L. Brooker – Co-Chair, Monetary Establishments Group and White Collar Protection & Investigations Group, Washington, D.C. (+1 202-887-3502, sbrooker@gibsondunn.com)

M. Kendall Day – Co-Chair, Monetary Establishments Group, Washington, D.C. (+1 202-955-8220, kday@gibsondunn.com)

Roscoe Jones, Jr. – Co-Chair, Public Coverage Group, Washington, D.C. (+1 202-887-3530, rjones@gibsondunn.com)

Eugene Scalia – Co-Chair, Administrative Legislation & Regulatory Observe Group, Washington, D.C. (+1 202-955-8543, escalia@gibsondunn.com)

Helgi C. Walker – Co-Chair, Administrative Legislation & Regulatory Observe Group, Washington, D.C. (+1 202-887-3599, hwalker@gibsondunn.com)

Associates Nick Harper and Philip Hammersley additionally contributed to this consumer alert.

Legal professional Promoting: The enclosed supplies have been ready for normal informational functions solely and aren’t meant as authorized recommendation.

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