CFPB Defines "Larger Participant" Standard for Debt Collectors and Consumer Credit Reporting Agencies
The Consumer Financial Protection Bureau ("CFPB") recently issued a proposed rule setting forth the criteria to identify those consumer debt collectors and consumer credit reporting agencies that qualify as "larger participants" subject to the CFPB's nonbank supervision program. The CFPB's "larger participant" supervisory program marks the first time that companies in these industries will be subject to examination by a federal regulator. The proposed rule utilizes an "annual receipts" test to determine whether a company is a "larger participant" in these markets: $10 million for debt collection activities and $7 million for consumer reporting activities. Companies that expect to qualify as "larger participants" should review their policies and procedures for federal law compliance, including an analysis of whether any practices may be "unfair, deceptive or abusive," prior to the start of examinations later this year. Members of Jones Day's Consumer Financial Products & Services team are currently assisting nonbank clients to prepare for CFPB examinations.
As outlined in the July 2011 Jones Day Commentary, "CFPB's Nonbank Supervision Authority: Is Your Company a 'Larger Participant'?" Dodd-Frank granted the CFPB supervisory authority over nonbanks in the residential mortgage, private education lending, and payday lending markets. In addition, the CFPB also has supervisory authority over "larger participants" in certain consumer financial markets including: (1) debt collection; (2) consumer reporting; (3) consumer credit and related activities; (4) money transmitting, check cashing, and related activities; (5) prepaid cards; and (6) debt relief services. As discussed below, the proposed rule does not give an indication of how "larger participants" will be defined for other markets and leaves open issues related to affiliates of consumer debt collectors and consumer credit reporting agencies. Comments on the proposal are due by April 17, 2012.
"Larger Participant" Defined
In the proposed rule, the CFPB noted a lack of information in the debt collection and consumer reporting markets to assist it in understanding key criteria to use when defining "larger participants." It ultimately relied on an "annual receipts" test aimed to include not only the largest participants but also participants that would have a substantial impact on the consumer financial services market. The resulting thresholds, $10 million for debt collection activities and $7 million for consumer reporting activities, capture 175 debt collection firms (or 63 percent of the market's annual receipts) and 30 consumer reporting agencies (94 percent). Although the CFPB cautioned that it has not determined whether the "annual receipts" test is appropriate in other markets, the lack of information regarding "larger participants" could lead to a similar rule.
The "annual receipts" calculation is based solely on the covered activity. In the case of "multi-line companies," the proposed rule provides "that the only annual receipts to be considered are those 'resulting from' activities related to the covered market." For example, if a company collects both consumer and commercial debts, only those receipts related to consumer debt would apply. Further, once an entity surpasses the threshold, it remains a "larger participant," regardless of annual receipts, for two years.
The proposed rule sets forth a mechanism to challenge the "larger participant" designation. A company identified as a "larger participant" has 30 days to challenge the determination. If challenged, the entity may send information supporting its position (e.g., affidavits and records) to the Assistant Director for Nonbank Supervision, who will make the final determination on "larger participant" status.
Questions on the "Larger Participant" Rule Remain
For purposes of determining which entities are "larger participants," Dodd-Frank aggregates the activity level of all entities that are affiliated with one another. While Dodd-Frank broadly defined "affiliate" to include any company that controls, is controlled by, or is under common control with another, it did not define "affiliate company." In its proposed rule, the CFPB uses the Dodd-Frank definition of "affiliate" to define "affiliate company." Further, the CFPB defines "control" to mean: (1) the direct or indirect control of more than 25 percent of a company's voting securities or similar ownership interest; (2) control, in any manner, of the election of a majority of the directors, trustees, members, or general partners of another person; or (3) "the person directly or indirectly exercises a controlling influence over the management policies of the other person, as determined by the Bureau" (emphasis added).
As noted in the proposed rule, the Bank Holding Company Act (12 U.C.C. § 1841) ("BHC") guided the CFPB's definition of "control." The proposed rule tracks the first two quantifiable standards almost verbatim from the BHC. However, the third standard is, procedurally, quite different. Under the BHC, the Federal Reserve Board of Governors (the "Board") can determine that a company has control over another after "notice and opportunity for hearing." The CFPB's proposed rule, however, rests the determination solely within its own discretion without an opportunity for hearing, and the CFPB allows for a challenge of that determination after it is made. Further, under the BHC, ownership of less than 5 percent of voting stock of an affiliate creates a presumption against control; the CFPB's proposed rule does not utilize a similar presumption. Also, while the Board has provided some guidance on what constitutes "influence" over another (e.g., when an affiliate uses/pays for services furnished by the controlling entity), the CFPB has not set forth any standards it may use to make its determination.
"Larger Participants" Are Subject to the CFPB's Examination Procedures
In the fall of 2011, the CFPB released its Supervision and Examination Manual (the "Manual"). The first edition of the Manual generally describes the CFPB's supervision and examination process, which will apply to debt collectors and credit reporting agencies. While the CFPB expects to add procedures "organized by product and line of business," the Manual currently provides general guidance on supervision of compliance with the Fair Debt Collection Practices Act and Fair Credit Reporting Act, two legislations directly related to the affected markets of the proposed rule. Additionally, the Manual outlines supervision and examination procedures related to unfair, deceptive, and abusive trade practices. Companies that expect to be supervised should work with experienced counsel to analyze their policies and procedures for federal law and Unfair and Deceptive Acts and Practices compliance in light of the supervisory manual and any future industry-specific manuals.
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