Federal: Comment Letter to Consumer Financial Protection Bureau on Proposed Rulemaking on Developing a Registry of Nonbank Covered Persons Subject to Certain Agency and Court Orders

Comment Intake
Legal Division Docket Manager
Consumer Financial Protection Bureau
1700 G Street NW
Washington, DC 20552‍

Re: Comment - Nonbank Registration of Certain Agency and Court Orders, Docket No. CFPB-2022-0080‍

Introduction‍

The American Fintech Council (AFC) submits this comment letter in response to the request for comment by the Consumer Financial Protection Bureau (CFPB or Bureau) regarding its proposal (Proposed Rule) to require certain nonbanks that are under certain final federal, state, or local agency orders (Orders) connected to an offered consumer financial product or service to report the existence of such Orders to a Bureau registry (Bureau Registry). We thank the CFPB for the opportunity to comment on the Proposed Rule.

AFC’s mission is to promote an innovative, transparent, inclusive, and customer-centric financial system by supporting the responsible growth of lending, fostering innovation in financial technology (Fintech), and encouraging sound public policy. We believe that the provision of well-regulated, responsible services and products by technology-driven financial services providers is critically important for the financial health of consumers, small businesses, and the banking system as a whole. AFC believes that the goal of sustainable access to credit should be present in all lending and servicing components, and that innovation can be a driver of fair and responsible access to credit. Innovative fintech platforms can expand access for communities and small businesses that have been traditionally underserved, creating a more inclusive and resilient financial system. AFC supports a fair financial services system where products are designed in compliance with regulation and where predatory conduct has no place.

We welcome the CFPB’s focus on fostering robust competition, responsible practice, and fair lending in consumer financial markets. AFC members are at the forefront of fostering competition in consumer finance and pioneering ways to better serve underserved consumer segments and geographies. For instance, AFC has publicly supported 36 percent rate caps at state and federal levels, which is a key component of addressing responsible lending. Fintech is also lowering the cost of financial transactions – marketing, underwriting, debt subordination, payments - allowing providers to meet the demand for high-quality, affordable products. For example, through a variety of business models, AFC members are refinancing higher interest rate credit cards, higher cost student debt, and higher annual percentage rate (APR) auto loans. As demonstrated in recent studies by the Federal Reserve Bank of Philadelphia, Federal Reserve Bank of St. Louis, the Federal Reserve Bank of San Francisco, and small business focused studies by New York University, and the US Government Accountability Office, Fintechs play an essential role in serving borrowers that would have otherwise been unfairly excluded, both before and during the current global pandemic. The structural exclusion of too many Americans, including communities of color, from traditional banking services make it essential that other providers responsibly fill those gaps, including Fintechs, Community Development Financial Institutions (CDFIs), Minority Depository Institutions (MDIs), credit unions, and small banks. In many cases it is partnerships between small banks and Fintechs that enable this expanded access and innovation.

AFC supports transparent regulatory frameworks that foster responsible innovation in the banking industry, while avoiding unintentional stifling of the efficiencies and advancements that nonbank fintech platforms are able to provide. AFC respectfully submits the following comments and welcomes the opportunity to assist the CFPB in refining the risk-based determination process to increase transparency in the regulatory framework and promote the welfare of consumers, particularly underserved populations. With this noted, AFC has the following concerns regarding this rulemaking: 1) the parameters of when and what a company reports to the Bureau Registry, 2) how this could impact future rulemaking that could provide greater clarity for Fintechs and nonbanks, and 3) compliance logistics and duplicative efforts.‍

I. AFC urges the Bureau to consider establishing a more robust framework of parameters in determining which nonbanks must report to the Bureau Registry to better distinguish the predatory actors from others.‍

AFC members are focused on products that are fair, safe and sound, and want to work in partnership with federal and state regulators to scale responsible options in the marketplace. Our members support distinguishing predatory repeat offenders from companies who may have fallen out of compliance but are actively working with appropriate state and federal authorities to stay on the right track. We are concerned that even one consent order from several years in the past would trigger a nonbank having to report the Order to the Bureau Registry. We believe that nonbanks with only few consent orders should not be included with actors with a clear record of consistent consumer or other abuse. To this end, AFC urges the Bureau to consider reducing the time period of reporting Orders from 2017 to a later date of 2019 or further.

We also believe the Bureau should establish a threshold for how many legal Orders would trigger a requirement to register. Companies who have made mistakes and have since addressed the error should be distinguished from “repeat offenders.” As suggested by the Proposed Rule, consent orders or determinations that are concluded or timed out should not be covered Orders to report to the Bureau Registry. To truly identify repeat offenders, the Bureau should establish a minimum threshold of five (5) non-expired covered Orders to trigger a requirement to register. We further suggest that if the Bureau establishes a threshold of Orders that would trigger reporting coverage, that companies have an opportunity to provide information to the CFPB on up-to-date compliance with issues addressed by a previous Order. Importantly, these proposals avoid consumer confusion by not having a nonbank with a one-off instance of noncompliance on the same Bureau Registry as a nonbank that may have five or ten non-expired consent orders.

The Bureau should amend proposed § 1092.202(e) to set the expiration period of a covered Order to the later of 5 years or the express termination period of the covered Order. With respect to proposed § 1092.202(e), it provides that a covered Order will expire at the later of “(1) Ten years after its effective date; or (2) If the covered Order expressly provides for a termination date more than ten years after its effective date, the expressly provided termination date.” Given that § 1092.202(e)(2) adds ten years to the termination date of an expired order and the rule sets the expiration of the later of subsections (1) or (2), subsection (2) effectively swallows the applicability of subsection (1). Indeed, there will be few instances in which a consent order does not contain an expiration date, thereby making the timing set out in subsection (1) almost entirely irrelevant. The fairer approach would be to set the expiration of a covered Order to the later of (1) five years after its effective date; or (2) If the covered Order expressly provides for a termination date, the expressly provided termination date. As for adjusting subsection (2), the Bureau should follow the expiration date determined by the regulator who issued the consent order rather than imposing an extended window for the covered Order to stay on the Bureau Registry.

Further, although the Proposed Rule states that Orders reported to the Bureau Registry would be those in connection to a financial services consumer product, we urge the Bureau to further clarify that the Orders to be reported directly address consumer harm, rather than more technical issues of noncompliance. Some Orders are based upon clerical filing or other administrative errors that, while absolutely should be avoided, are not indicative of predatory company behavior. We are concerned that companies with Orders addressing other matters not related to consumer products, data, or market harm could still inadvertently be included with companies that have an actual track record of consumer harm. This could potentially cause undue and unfair harm to the reputations and subsequent viability in the market for companies that have not harmed consumers. This threatens the legitimacy of the Bureau Registry and its purpose to address the actual bad actors to further protect consumers and the market. To this end, AFC suggests that the CFPB in its final rulemaking further clarify which types of Orders that would trigger a reporting requirement to the Bureau Registry. For instance, the Bureau can better distinguish relevant orders by clarifying that the Order or Orders must be directly related to violations of consumer protection laws and regulations, such as, the Consumer Financial Protection Act of 2010 (CFPA), the Truth in Lending Act (TILA) and other state and federal laws/regulations that relate directly to unfair, deceptive, or abusive acts and practices.

In addition, Consent Orders are often a mutual agreement between a regulator and an entity conducting business in that regulator’s state to resolve differences of opinion on whether a particular act or practice is a violation of law or regulation. They are an effort to resolve disagreements amicably rather than the parties bearing the cost of fully litigating those differences. Having such consent orders as part of the Bureau Registry penalizes companies that have agreed to settle disputes/differences of opinion instead of litigating disputes rather than targeting the bad actors that are truly harming consumers with their business practices.

Finally, startups and smaller Fintechs and nonbanks engage in an incredibly competitive market. The reporting required in the Proposed Rule should provide observers of the full report with a clear and comprehensive picture of complaints and resolutions. However, the Bureau Registry can be and will be easily used by competitors, without the resolution context. Our members are mission-driven and compete with other similarly mission-driven Fintechs and banks. A public registry including companies with any Orders from 2017 onwards may create an unfair competitive disadvantage to covered entities who are complying with laws/regulations and resolving complaints without incident. As we cover below, a better method to address repeat offenses would be via rulemaking. The Bureau Registry should be focused on companies that are repeatedly non-compliant with the regulations, have repeatedly caused actual harm to consumers due to their activities, or that receive a large number of complaints compared to their number of customers.

II. Rulemaking and federal guidance are better mechanisms to establish a safer nation-wide market for consumers than a Bureau Registry.

AFC members are concerned that the Bureau Registry federalizes the laws and regulations of 50 states plus territories in place of creating more standard sets of federal regulations and guidance for companies to follow. We urge the Bureau to continue to provide public guidance through Supervisory Highlights, publish additional standards, and use other tools such as advisory opinions and rulemaking (e.g., larger participants rules) to promote transparency, predictability, and compliance. The CFPB can provide more transparency and predictability by using these familiar platforms to identify the bases for its Bureau Registry. Clear and congruent rules and/or guidance from regulators will help augment existing frameworks for how consumers can be better protected against unfair or predatory practices. This will also allow for industries to be compliant with one set of federal standards that will allow them to follow the law and better serve their customers rather than a very large net be placed on nonbanks who may have 1 or few Orders from the past that they have since addressed. We believe that in an environment of limited resources, setting firm federal standards would be an optimal use of Bureau resources, time, and effort to create a safer lending environment in the financial services industry.

III. AFC urges the Bureau to consider the impact of compliance and costs on covered entitles, especially smaller companies.

Onerous requirements reduce efficiency and slow response time, raise costs for all consumers, and likely will not enhance consumer protection. For entities that have established policies and procedures to comply with the law and other Orders, the Proposed Rule is both overbroad in its reach and is too prescriptive, creating undue burdens. We are concerned about the portion of the Proposed Rule that requires that certain executive level staff or “attesting executive” to also be named in the Bureau Registry. While we support accountability at all levels, this approach is excessive. We urge the Bureau to reconsider this portion, or at least to clarify that the attesting executive would only be named if they were an executive at the company with multiple Orders at the time period of offenses that the Order or Orders are covering. Staffing shifts from time to time, and staff should not be listed for an Order for an offense they were not in a leadership position or present at the company when the Order or Orders were issued. Our members also firmly believe that the cost estimates of these processes may not apply the same way to every business. The Bureau provided an estimate of $1,200 as a compliance cost once implemented – we believe those costs are underestimated. In addition, the ongoing costs associated with the requirements of this Proposed Rule would be substantial.

While AFC recognizes the Bureau’s intent to create a registry that could serve as a “single, consolidated reference tool for use in monitoring for risks to consumers”, the Bureau should recognize that the proposed registry operates in much the same way as the existing Nationwide Multistate Licensing System (NMLS) and Registry. These largely duplicative activities and Bureau resources required to operate this registry stand in contrast to efforts to decrease the number of federal initiatives for the benefit of taxpayer dollars. Thus, AFC recommends CFPB carefully consider the costs and benefits of creating a repeat offenders registry given the existing resources available to consumers.

Finally, companies that will be required to register will need an effective compliance date with sufficient time to adjust processes. The effective date of the Proposed Rule, if adopted, was not contained in the proposal outside of it being no earlier than January 2024. Given the scope of the Proposed Rule, it will take considerable time to establish the suggested processes, procedures, and reports in addition to adding additional staff to support the process. While our members proudly work within the guidelines of state and federal laws, we would like to respectfully request at least a year from the date the regulation is promulgated for it to be effective.‍

Conclusion‍

The American Fintech Council supports regulation that will create a fairer and more transparent financial services ecosystem for all actors. AFC members continue to support sustainable access to credit and fostering responsible practice, and fair lending in consumer financial markets, which enriches a competitive environment that can benefit consumers. As the CFPB proceeds with a final rule implementing the Bureau Registry, we strongly urge the Bureau to establish a more vigorous framework that will better distinguish actual repeat predatory offenders from other companies who are not a risk to consumers or the market. We also urge the Bureau to continue to direct resources to establishing federal standards that can serve as a stronger baseline for compliance at the national level.

Sincerely,

Phil Goldfeder
CEO, American Fintech Council