The Consumer Financial Protection Bureau (CFPB)’s decision to establish supervisory powers over nonbank financial institutions will level the playing field and subject those companies to much-needed scrutiny, credit union trade groups informed the agency Tuesday.
“These business models of nonbank providers often rely on avoiding accountability and prudent regulation,” Alexander Monterrubio, senior director of advocacy and counsel for consumer protection at the Credit Union National Association (CUNA), told the agency. “We agree that there is a benefit to consumers in the bureau supervising these entities and subjecting them to the same standards as traditional financial institutions.”
An official from the National Association of Federally-Insured Credit Unions (NAFCU) agreed.
“The Bureau’s exercise of its supervisory authority over fintechs that pose risks to consumers is a first step toward closing supervisory gaps and establishing a level playing field in the consumer finance market,” James Akin, NAFCU’s regulatory affairs counsel, wrote in a comment letter.
The CFPB announced in April it intended to exercise “dormant authority” to establish supervisory authority over nonbank financial institutions based on a risk determination.
“Given the rapid growth of consumer offerings by nonbanks, the CFPB is now utilizing a dormant authority to hold nonbanks to the same standards that banks are held to,” CFPB Director Rohit Chopra said, in announcing the policy. “This authority gives us critical agility to move as quickly as the market, allowing us to conduct examinations of financial companies posing risks to consumers and stop harm before it spreads.”
The bureau was not required to issue a proposed rule and seek public comment before issuing a final rule; agency officials claimed they were exercising authority they already had.
Response From Credit Union Trade Groups
Monterrubio noted CUNA is particularly concerned about “glossy, heavily marketed, tech-savvy alternatives to traditional banking services.”
He added that credit unions are heavily regulated for safety and soundness as well as compliance with consumer protection laws, while the same cannot be said for nonbank financial services providers.
However, CUNA does not believe the agency should exercise its authority over Credit Union Service Organizations (CUSOs).
Monterrubio said the National Credit Union Administration (NCUA) has “virtually limitless authority” to request information regarding CUSOs from the credit union owners of the organizations.
“While the CFPB theoretically could subject a CUSO to supervision through its risk-based supervisory authority, we strongly recommend the Bureau focus its supervisory resources on influential FinTechs and other entities that are not currently subject to the authority of a federal banking regulator,” he wrote.
Meanwhile, the NCUA has complained that it has no authority over third-party vendors. The House Financial Services Committee recently approved legislation to extend that authority to the agency.
From NAFCU’s standpoint, Akin said that laws and regulations have developed in a piecemeal fashion as financial institutions have adjusted to faster payments, alternative data and machine learning. He added further that the regulatory disparity between banks and credit unions and nonbank institutions “poses serious, systemic risks given the growing market share that these firms represent and could have carry-on effects that impact consumers directly.”
Pushback from Other Trade Groups
While credit unions applauded the CFPB for its plan, some groups are vehemently opposed to it.
The agency should have issued a proposed rule and opened it for comment, Bill Hulse, vice president of the U.S. Chamber of Commerce’s Center for Capital Markets Competitiveness, stated. He claimed companies will be harmed by the public disclosure of risk determinations by the CFPB.
The American Financial Services Association, which represents the nation’s payday lenders, agreed.
“The mere adverse publicity associated with a Bureau declaration that a business is risky would impose unfair adverse reputational consequences upon the business,” wrote Celia Winslow, the organization’s senior vice president. “The public disclosure of the designation creates both an unnecessary confirmation bias and an unfair distrust of certain companies.”