The Consumer Financial Protection Bureau recently announced a proposed rule to include debt collectors and consumer reporting agencies under its nonbank supervision program — marking the first time these consumer financial market participants are subject to federal supervision.

The Dodd-Frank Wall Street Reform and Consumer Protection Act, which created the CFPB, authorizes the CFPB to supervise nonbanks in the specific markets of residential mortgage, payday lending and private education lending.

In addition, for other nonbank markets for consumer financial products or services, officials noted the CFPB has the authority to supervise “larger participants.”

As directed by Dodd-Frank, the Bureau must define such “larger participants” by rule, and an initial such rule must be issued by July 21.

Last summer, the CFPB sought public comment about possible markets to include in the initial rule and available data sources the Bureau could use to define larger participants in nonbank markets.

“Debt collectors and consumer reporting agencies touch millions of American consumers,” stressed bureau officials, who estimated about 30 million Americans have debt under collection with the average amount being $1,400.

CFPB rattled off the three main kinds of debt collection firms that dominate the market:

—Firms that collect debt owned by another company in return for a fee.
—Firms that buy debt and collect the proceeds for themselves.
—Debt collection attorneys and law firms that collect through litigation.

The bureau also pointed out a single company may collect through any or all of these activities.

Under the proposed rule, officials explained debt collectors with more than $10 million in annual receipts from debt collection activities would be subject to supervision.

Based on available data, the CFPB estimated that the proposed rule would cover approximately 175 debt collection firms — or 4 percent of debt collection firms — and that these firms account for 63 percent of annual receipts from the debt collection market.

“The consumer reporting market plays a critical role in the consumer financial services marketplace and in consumers’ financial lives,” officials emphasized.

“It includes the largest credit bureaus selling comprehensive consumer reports, consumer report resellers, and specialty consumer reporting agencies,” they added.

According to the Consumer Data Industry Association, each year there are 36 billion updates to consumer files, and 3 billion reports are issued. The three largest consumer reporting agencies alone maintain information on 200 million American consumers.

CFPB reiterated that lenders use consumer reports, which are commonly called credit reports, when evaluating applications for credit cards, home mortgage loans, automobile loans and other types of credit. Specialty consumer reporting agencies collect and provide information used to make eligibility decisions for a variety of products, such as checking accounts.

Under the proposed rule, the Bureau explained consumer reporting agencies with more than $7 million in annual receipts from consumer reporting activities would be subject to supervision. This would include approximately 7 percent of consumer reporting agencies based on available data.

Officials added the proposed threshold would allow the CFPB to cover about 30 consumer reporting agencies. The CFPB estimated that these 30 companies account for about 94 percent of the annual receipts from consumer reporting.

“This is the CFPB’s first in a series of rulemakings to define larger participants,” officials pointed out. “The CFPB chose annual receipts as the criterion for both debt collection and consumer reporting because it approximates market participation in these two markets. As the CFPB adds new markets, it will choose the best criteria and the appropriate thresholds for each market.”

The CFPB indicated the proposed rule is open for comment for 60 days after the rule is published in the Federal Register. The CFPB is welcoming comment from the public on the proposed rule.

The proposed rule has been published online here.

“Consumer financial products and services have become more complex over the years and they have expanded well beyond traditional banks,” stated CFPB director Richard Cordray.

“Our proposed rule would mean that those debt collectors and credit reporting agencies that qualify as larger participants are subject to the same supervision process that we apply to the banks,” Cordray continued. This oversight would help restore confidence that the federal government is standing beside the American consumer.”

More information about the CFPB’s Nonbank Supervision Program is available here.

CFPB Advice for Small Businesses

In other news from the CFPB, officials insisted they are mindful that new statutory requirements they are implementing can burden as well as benefit small financial services providers.

“We use many methods to reach out to small providers to find out if any of these burdens are unnecessary and, if so, how we may be able to reduce them (within the limits of our statutory authority, of course),” they explained.

The CFPB cited one possible method is the Small Business Review Panel under the Small Business Regulatory Enforcement Fairness Act (SBREFA).

In certain cases, officials indicated this act requires the agency to form and chair a panel alongside representatives of the Small Business Administration (SBA) and the Office of Management and Budget. That panel will meet with a group of representatives of the small providers directly affected by the new requirements.

“We expect the number of representatives will generally be around 15 to 20,” officials projected. “They will provide feedback on the options we’re considering and on alternatives to minimize negative impacts.

“Within 60 days of convening, the panel will complete a report on the issues, including input they receive, their findings on the economic impacts of the proposal and any alternatives that achieve the proposal’s objectives while minimizing unnecessary burdens,” they continued. “The bureau will then consider the panel’s input in preparing the proposed rule.”

Know Before You Owe

Moreover, this week, the CFPB mentioned it is doing the final round of “Know Before You Owe” testing in Austin, Texas.

“As we shift to writing the rules that implement the required disclosures on the forms, we want to gather additional input from small providers that these new rules will affect directly,” officials reiterated.

“We have received a lot of questions about these rules. We are going to share the regulatory proposals that we are considering and hear your feedback,” they stated.

In the upcoming weeks, the review panel will meet with a group of small lenders, brokers and settlement agents that we have selected in consultation with the SBA. The representatives are being asked to provide the panel feedback on the potential economic impacts of complying with the proposals we are considering.

The panel will invite the representatives to suggest alternatives and will issue a report summarizing this feedback and making findings.
Here are the materials that the CFPB is sharing with the small financial services providers:

—A fact sheet summarizing the Small Business Review Panel process.

—An overview of the proposals we are considering and their potential implications for small providers.

—A list of questions and issues on which we will seek small providers’ input at the panel outreach meeting.

Feedback From Consumers and Other Providers

While the review panel takes feedback from small providers, the CFPB noted it wants to hear from consumers, too.

Consumers can send comments via email at TILA-RESPA@cfpb.gov. Here are some examples of what the agency is considering:

—Many lenders and mortgage brokers provide consumers with preliminary estimates of loan terms and settlement costs that are not mandated by TILA or RESPA. The group is considering whether to require that these preliminary estimates carry a disclaimer that tells the consumer that the document is not the integrated Loan Estimate required by TILA and RESPA.

—Under the current rules, when a lender provides a consumer with an estimate of the cost of its own services under RESPA, the actual cost cannot be higher than the estimate unless there is a valid change of circumstances. The Bureau is considering a proposal to apply the same limitation to estimates of services provided by the lender’s affiliates or by companies the lender requires the consumer to use.

—Under the current rules, consumers typically receive a disclosure with some of their final loan terms and costs three business days before closing on the loan. Other costs are finalized on the day of closing. The Bureau is considering a proposal that would generally require delivery of the integrated settlement disclosure stating the consumer’s final loan terms and costs at least three business days before closing, although some flexibility may be provided.

“While you review our materials, we will continue refining the proposals under consideration before we formally propose a rule for comment in July. At that time, you will have another opportunity to weigh in and let us know what you think,” the CFPB concluded.