One of the exciting aspects of the Consumer Financial Protection Bureau (CFPB), which opened its doors on July 21, is that we finally have a federal regulator for non-bank financial institutions, like independent mortgage lenders and payday lenders. But the CFPB will not have the authority the regulate other non-bank financial institutions, like consumer finance companies, debt settlement companies or prepaid card providers unless it finds that they are larger participants in the market. It’s heartening to see that one of the CFPB’s first orders of business is to define the scope of non-bank financial institutions it will regulate so it can get to work protecting consumers regardless of where they conduct their financial business.
The CFPB recently issued a request for comments on the definition of a “larger participant” in the non-depository financial market. Why does the size of the institution matter? In the Dodd-Frank financial reform act, the CFPB was given the power to write rules for all non-bank financial institutions, but it is only able to supervise larger non-bank financial institutions; the rest of the market would continue to be supervised by its pre-Dodd-Frank regulator, though the CFPB’s rules would still apply. It’s important that institutions who pose significant risks to consumers be regulated similarly.
For example, the CFPB was given clear authority to supervise, regulate, and write rules for payday lenders of all sizes, while they are only able to supervise, regulate, and write rules for larger consumer credit providers. The statute does not provide a clear definition of the terms and conditions that establish a specific transaction as a payday loan rather than a consumer credit loan, however. Our experience creating a consumer credit regulatory structure in Illinois has demonstrated that, in many cases, the term payday loan and consumer installment loan are used interchangeably. In some states, payday loans are very short-term loans of about two weeks, carry extremely high rates, are structured as balloon payments, and have payment or collection features that involve post-dated checks or automatic checking account debit. In Illinois, this type of payday loan is extremely rare, and due to increased regulatory oversight of that specific product model, most lenders have chosen to move to the consumer finance company model which allows for longer-term, very high interest rate loans with potentially problematic features, such as junk fees or incentives to excessively refinance.
We recommend that the CFPB take into account not only the size of a participant’s market share but also its impact on consumers through a lack of internal controls or business models incompatible with effective consumer protection. Businesses who are regularly cited for consumer protection violations or rely extensively on the courts to collect on loans have systemic problems that pose significant risk to consumers; they should be supervised by the CFPB. You can learn more about the specifics of our recommendations and the costs of consumer credit in Illinois by reading our comment letter to the CFPB.
The CFPB also requested comment on defining larger participants in other non-bank financial services, such as debt settlement, credit reporting, and prepaid cards. These industries contain a diverse range of participants and the CFPB should consider their differences carefully when drafting their rules. You can read our specific recommendations for those markets in the second half of our comment letter.
The comment period for this topic is closed, but the CFPB will continue to solicit comment on rules regarding non-bank financial institutions. You can read them here and sign up for email updates.