Federal: Comment Letter on the CFPB’s Proposal to Invoke Dormant Authority to Examine Nonbank Companies

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

Docket No. CFPB-2022-0024‍

Re: Supervisory Authority Over Certain Nonbank Covered Persons Based on Risk Determination; Public Release of Decisions and Orders

I. 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 the amendment to the risk-determination procedures for the Bureau’s exercise of its supervisory authority over covered nonbanks (Rule Amendment) to enable the public release of Bureau decisions and orders (Supervision Determinations). We thank the CFPB for the opportunity to comment on the Rule Amendment.

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, CDFIs, 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 supervision determination process to increase transparency in the regulatory framework and promote the welfare of consumers, particularly underserved populations.

Section 1024 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) gave the CFPB authority to supervise nonbank covered persons that present a risk of harm to consumers. The implementing rule that the CFPB adopted in 2013 (2013 Final Rule) to establish the process for exercising this authority rested in substantial part on preserving the confidentiality of the Bureau’s Supervision Determinations and the documents, records, and other items relating to them, which the 2013 Final Rule and the Rule Amendment recognize constitute confidential supervisory information (CSI). As discussed below, the publication of Supervision Determinations would jeopardize the integrity and effectiveness of the supervision process, cause financial and reputational injury to firms based on incomplete information, and thereby undermine the Bureau’s stated goal of providing transparency and predictability for the industry and the public. The Bureau can protect consumers more effectively by respecting the foundational norms of confidentiality in the supervision process and providing guidance through Supervisory Highlights, advisory opinions, and other well-established tools at the Bureau’s disposal.

AFC strongly supports the Bureau’s implementation of a robust, consistent, and transparent regulatory framework to protect consumers’ rights and promote fair and competitive markets. Instead of publishing Supervision Determinations, we urge the Bureau to publish additional standards concerning its nonbank supervisory determination procedures to establish a transparent and predictable process. The Bureau also can provide transparency, predictability and move the market more broadly through rulemakings (e.g., larger participant rulemakings), thereby promoting compliance for whole classes of financial products and services or conduct, rather than issuing Supervisory Determinations regarding individual firms.

II. The public release of Supervision Determinations would compromise the Bureau’s supervisory process.

The CFPB’s public release of Supervision Determinations, including potential publication of nonpublic company and consumer information gathered by the Bureau, would erode the foundation of the supervision process. A definite assurance of confidentiality is necessary to preserve the frank and open flow of communication and information between firms and regulators; its’ erosion would jeopardize the legitimacy and effectiveness of regulatory supervision. Preservation of the confidentiality of such information has been the bedrock of the regulatory supervision process at the CFPB and other financial regulatory agencies. Indeed, maintaining the confidentiality of such information is so vital to the integrity of regulatory supervision that Congress has made it illegal for bank examiners to disclose confidential supervisory information, and has made its disclosure punishable by fines and potential imprisonment.

The sharing of this information even between regulators is subject to specific inter-agency agreements and protocols that strictly limit it to agency use and does not provide access for private parties. The Bureau recognized in adopting the Rule Amendment, that “[a] central principle of the supervisory process is confidentiality.” Yet the Bureau proposes to add section 1091.115(c)(2) to create an exception and give the Director discretion to publish Supervision Determinations, which potentially could include nonpublic company and consumer information obtained by the Bureau from the relevant nonbank entity and other sources. While we support the Bureau’s stated goal of promoting transparency, this erosion of the definite assurance of confidentiality for Supervision Determinations and other confidential supervisory information necessarily would erode the confidence of the nonbank entity, as well as other supervised entities and sources of nonpublic information, in responding to the Bureau’s requests for information, and in the very legitimacy of the supervision process. The inevitable result is the impairment of the flow of communication, data, and cooperation with the Bureau.

At bottom, this erosion of the bedrock principle of confidentiality would produce a chilling effect and undermine the integrity and efficiency of the Bureau’s regulatory supervision.

Piecemeal protections such as potential application of Exemptions 4 and 6 of the Freedom of Information Act. provide only a partial and ineffective cure. Exemption 4 applies to “trade secrets and commercial or financial information obtained from a person [that is] privileged or confidential.” Exemption 6 applies to information about individuals in “personnel and medical files and similar files” when the disclosure of that information “would constitute a clearly unwarranted invasion of personal privacy.” These exemptions are limited in scope, and some question whether they cover certain sensitive data. e.g., company algorithms. Moreover, because these exemptions are subject to uncertain interpretation and extensive litigation, they cannot provide the necessary assurance of confidentiality to protect the integrity of regulatory supervision. We urge the Bureau to commit to adherence with the standard regulatory practice of not releasing CSI and other sensitive data that may fall outside of trade secrets and confidential trade or financial information, and private personnel or medical information.

The Rule Amendment is a major departure from the 2013 Final Rule that established the process for the Bureau’s exercise of its supervisory authority over nonbank covered persons based on risk determinations. This process rests on the bedrock supervisory principle that the nonpublic communications, materials, and other information flowing between covered persons and the Bureau, and the Bureau’s risk-based supervisory determinations in the associated proceedings, would be preserved from disclosure. We believe the Bureau should maintain the 2013 framework, which properly recognized the necessity of preserving the confidentiality of nonpublic information gathered by the CFPB and the exchanges between the affected firm and the Bureau.

The Bureau states that “if a decision or order is publicly released, it would be available as a precedent in future proceedings.” This precedent would have limited utility, as it would necessarily be based on individual firm characteristics, activities, and practices, but would have outsized potential for harm, both in the form of financial and reputational injury to that entity as well as by creating uncertainty and disruption for other market participants. Public release could trigger litigation, from class actions to shareholder and securities litigation, which the entity may be compelled to settle to mitigate its liability and costs – even where the Bureau may determine after a full development of the record that the entity has committed no legal violation. The Bureau would cause significant and present harm to the entity based on incomplete information and process, even while the whole reason for placing the nonbank entity under supervision is to enable the Bureau to monitor and understand the entity and its activities. The Supervision Determination would be based on consumer complaints and “information from other sources” (for example, “news reports” according to the Bureau) that could run the gamut in reliability.

There is substantial potential that the Bureau would determine, after having placed the entity under supervision and conducted further investigation, that the entity has not engaged in the cited Unfair, Deceptive, or Abusive Acts or Practices (UDAAP) or other statutory or regulatory violations. However, the harm suffered by the entity during the pendency of the Bureau’s review cannot be undone. Moreover, the harm would extend to other firms believed to be engaged in similar conduct and thus threatened with the “precedent” from the Bureau’s UDAAP and other Supervision Determinations.

The harm from public release of Supervision Determinations is particularly acute because (1) the possibility that the public release could include the nonbank entity’s nonpublic information and communications would prevent that entity from providing a full refutation of the allegations, and (2) the Bureau’s risk determinations, particularly those involving UDAAPs would be fact-specific yet (a) be based on an incomplete and unsubstantiated factual record, and (b) be read as “precedent” that applies to a diverse range of other market participants. Accordingly, rather than providing clarity to the industry and benefiting consumers, the public release of Supervision Determinations would increase market confusion, raise costs, and lead to a decrease in the availability of financial products, services, and innovations to consumers – in addition to undermining the legitimacy of the supervision process itself.‍

III. The Bureau should promote transparency and predictability through publication of additional standards for its risk-based non-bank supervision process, Supervisory Highlights, rulemakings, and other means. The Bureau should also utilize these more established tools at its disposal as a first resort to pursue potential misconduct.‍

Instead of publishing Supervision Determinations, we urge the Bureau to provide public guidance through Supervisory Highlights, publish additional standards concerning its nonbank supervisory determination procedures, and use other tools such as advisory opinions and rulemaking (e.g., larger participants rules) to promote transparency, predictability, and compliance.

First, rather than sending piecemeal and confusing signals through the publication of Supervision Determinations that could cause severe financial and reputational harm to firms, we urge the Bureau to use proven channels such as its Supervisory Highlights and advisory opinions to identify risky and illegal conduct. The CFPB can provide more transparency and predictability by using these familiar platforms to identify the bases for placing firms under supervision, without identifying individual firms as having engaged in particular conduct that the CFPB would or might deem likely UDAAPs or other legal violations. Through Supervisory Highlights, the Bureau could explain more fully, e.g., by reference to its experience studying multiple firms and scenarios, what conduct would present a particular risk or legal violation. The Bureau also would be able to provide a more informed analysis based on a full record developed after supervision of the relevant conduct and entity.

Second, we believe the Bureau should further outline the nonbank Supervision Determination process and establish standards and guardrails through additional rulemaking and detailed guidance to provide more transparency in the Bureau’s procedures, reduce confusion, and promote proactive compliance by nonbanks. For example, the Bureau has stated that it would use the consumer complaint database, judicial or administrative findings, news reports, whistleblowers, and state and federal partnerships as sources of information to signal risky consumer lending. We strongly urge the Bureau to clarify how it will use the consumer complaint database and other sources, particularly with respect to review, verification, and confirmation of information or allegations from those sources, to come to a reasonable determination that a covered nonbank or its products are causing harm to consumers.

If the Bureau proceeds with its proposed process, including potential publication of Supervision Determinations which may include confidential company and consumer information, the Bureau should allow affected institutions at least 14 calendar days to appeal before a final decision is made on what is released publicly. Given the negative implications of publication of confidential company and consumer information, as well as the reputational and financial harm from a Supervision Determination that may include findings of predatory or risky conduct, institutions should have more than 7 calendar days to work with the Bureau before it issues such public releases. The Bureau states that the impact of the Rule Amendment is limited to “incidental costs” for a limited number of nonbank covered persons if they choose to prepare submissions on the issue of public release. In actuality, the extensive, heightened harms discussed above from the Bureau’s public release of Supervision Determinations, which may include confidential company and consumer information, create another layer of sensitivity and severity that requires substantially more than 7 days for a company to process, respond, and resolve with the CFPB. It is important to reiterate that while we request this additional time as an alternative, fundamentally we believe that Supervision Determinations should not be publicly disclosed due to the potential harm to that company, other entities believed to be engaged in similar conduct, and the supervision process itself.

The Bureau can provide transparency, predictability, and move the market more broadly through rulemakings to promote compliance for whole classes of financial products and services or conduct, rather than through Supervisory Determinations regarding individual firms. This nonbank supervisory authority should be used as a last resort after other more predictable and traditionally used means are exhausted. The CFPB has a wide range of tools, from rulemaking, guidance, UDAAP authority, and enforcement actions to address supervisory concerns. We note that the Government Accountability Office (GAO) recommended that the Bureau “implement a systematic process for prioritizing risks to consumers and considering how to use its available policy tools—such as rulemaking, supervision, enforcement, and consumer education—to address these risks.” We believe that these other tools are more established, are more transparent in terms of process, will result in less confusion and, most importantly, promote clarity and encourage desired behavior by market participants. Larger participant rulemaking, for example, has the benefit of setting strong and understandable standards and expectations in the industry and is therefore more effective as a tool that to create clarity in market standards and help consumers. This is more impactful on a larger scale than is the nonbank supervisory process.

IV. Conclusion

AFC strongly supports transparent, consistent, and methodologically sound supervisory frameworks for all participants in the financial services ecosystem. As discussed above, the publication of Supervision Determinations would jeopardize the integrity and effectiveness of the supervision process, cause financial and reputational injury to firms based on incomplete information, and undermine the Bureau’s stated goal of providing transparency and predictability for the industry and the public. The Bureau can protect consumers more effectively by respecting the foundational norms of confidentiality in the supervision process and providing guidance through Supervisory Highlights, advisory opinions, and the Bureau’s other proven regulatory tools. We thank the Bureau for this opportunity to assist the CFPB in refining the risk-based supervision determination process to increase transparency in the regulatory framework and promote the welfare of consumers. The AFC shares the CFPB’s commitment to an innovative, transparent, inclusive, and customer-centric financial system.