Nonbanks

A Beginning

Today marks an important step forward for the CFPB as we work to protect consumers. Going forward, the CFPB will expand its bank supervision program (which began last July) to nonbanks, ensuring that banks and nonbanks play by the same rules.

Before we get ahead of ourselves, it makes sense to remember what a nonbank actually is. (more…)

Today and tomorrow, we will be meeting with nearly 100 organizations from across the country to hear their views about an important building block for our nonbank supervision program. These groups represent a wide range of interests: consumers, nonbank financial services providers, depository institutions, and others. From the very start, we have made it a priority to receive input from stakeholders and the public, so we will be listening to these organizations carefully. We are also reaching out to the public at large – including you – to gather as much input as we can.

Why are we asking these organizations and the public for their thoughts? Their feedback is vital in defining who is a “larger participant” in certain markets for consumer financial products or services – a key step in building our supervision program.

Some background might help explain why we need to define a “larger participant.” The Dodd-Frank Act, signed into law last year, gives the CFPB the job of supervising large banks and their affiliates and some other types of financial companies – mainly to make sure they follow federal consumer financial laws. Banks, thrifts, and credit unions have been subject to examinations by various federal regulators in the past. Other types of companies providing consumer financial products and services have not. One goal of the law is to protect consumers better by expanding bank-like supervision to nonbank companies, so this is a crucial piece of the CFPB’s work. Many of these nonbank financial companies will be subject to this type of federal oversight for the first time.

Under Dodd-Frank, our nonbank supervision program will be able to look at companies of all sizes in the mortgage, payday lending, and private student lending markets. But for all other markets – such as consumer installment loans, money transmitting, and debt collection – the CFPB generally can supervise nonbanks only if they are larger participants in these markets. Before we begin to supervise them, we need to write a rule within the next year to define who is a “larger participant.”

This is not as simple as flipping through a dictionary, so we want your input on how we should define a “larger participant” in this rule. To take input, we have published a Notice and Request for Comment.

The Notice discusses several issues that arise when attempting to define a “larger participant.” For example, how should we set thresholds and criteria for defining larger participants? What markets should we include in the initial rule? The Notice includes some tough questions on these issues and others, and the public comments we receive will help us write the rule that defines “larger participant.” An open discussion will help us to develop the best rule we can – and help the CFPB make the best use of its resources to protect American consumers.

We appreciate the time that these organizations – and many others – are investing to help us with this key step in establishing our nonbank supervision program. We would like your help, too. Please see the Notice for more information and submit your comments.

Dear CFPB,

I noticed you posted a request for public comments on “larger participants” for your “nonbank supervision” program. I don’t understand what this is about. I know what a bank is – I walk past one every day on my way to work – but what is a nonbank? And larger than what, anyway?

Sincerely,
Consumer

Dear Consumer,

Those are great questions. You’re not the first person to read the phrase “nonbank” and lapse into a state of confusion. “What is a nonbank?” you ask yourself. Worry no more! The CFPB Web Team is on the case, with help from our Nonbank Supervision team. Here’s the lowdown:

The Dodd-Frank Act – the law that created the CFPB – gave us the job of supervising large banks, thrifts, and credit unions, and other financial institutions. Supervision, as we’ve explained previously, involves observing financial institutions — for example, by asking for information about their practices or conducting examinations. In our case, we do this mainly to make sure they comply with federal laws that protect consumers.

Bank supervision isn’t new. What is new is that, for the first time, under the Dodd-Frank Act, many nonbank financial companies will also be subject to federal supervision.

So what IS a nonbank? For our purposes, a nonbank is a company that offers consumer financial products or services, but does not have a bank, thrift, or credit union charter and does not take deposits.

Huh? Today, there are thousands of companies that offer financial products that are not banks, and consumers interact with them on a regular basis. If you’ve taken out a payday loan, received a call from a debt collector, or accessed your credit report, you probably have interacted with one, too. Other kinds of nonbanks include finance companies or companies that wire or send money for you.

Products from nonbanks form a significant chunk of the overall consumer financial marketplace. The number of nonbank companies that provide consumer financial products and services has grown over the last few decades. Under Dodd-Frank, many of these nonbanks will be subject to a federal supervision program for the first time.

What’s a “larger participant”? Our nonbank supervision program may look at all sizes of nonbank mortgage companies, payday lenders, and private student lenders. But Dodd-Frank says that in other markets, the Bureau’s supervision program generally covers only institutions that are “larger participant[s] of a market for other consumer financial products or services.”

“Larger”? Larger than what? Well, that’s what the CFPB has to figure out. Congress did not set the thresholds for inclusion in this supervision program for these other markets. Congress required that we define what these size thresholds should be, so we can lay the foundation to start this part of our nonbank supervision program. In other words, it’s our job to figure out exactly how large “larger” really is.

How do you do that? We start by asking the public for input. We’ve posted a Notice and Request for Comment on some important questions that need answers, like how to set thresholds and criteria for defining larger participants, and what markets we should cover in our initial rule. We’ll also conduct our own analysis to determine what threshold works best, but since this decision affects millions of consumers – including you – we are asking for input from everyone who wants to give it.

Can you end this blog post with a clever segue? We can! Now that you know what a nonbank is and why they matter, please take a moment to look at the Notice and file comments as indicated there. We want your input.