Payments Report: News from Washington, Brought to you by NEACH
VOLUME 2024-4 (JUN 24)
Overview: On June 3, 2024, the Consumer Financial Protection Bureau (“CFPB” or “Bureau”) issued the Nonbank Registration of Orders Final Rule (“Final Rule”), which will become effective on September 16, 2024. This rule mandates that certain nonbank entities register with the CFPB and submit information about their company and certain orders issued against them. The CFPB emphasizes that the new registry for nonbanks is part of the Bureau’s “ongoing focus on holding lawbreaking companies accountable and stopping corporate recidivism.” The registry will assist the CFPB in recognizing repeat offenders and tracking recidivism trends, with registration for some covered nonbanks beginning as early as October 16, 2024.
Background
In 2022, the Bureau created the “Repeat Offender Unit,” which focuses on detecting repeat offenses and developing strategies to stop recidivist behavior. The Repeat Offender Unit was tasked with scrutinizing corporate compliance with enforcement orders “to ensure that requirements are being met and any issues are addressed in a timely manner.” In connection with this initiative, the CFPB initially conceptualized the registry in a December 2022 proposal, maintaining that such a registry would not only help identify and mitigate financial risks to American households but also would facilitate the Bureau’s supervision of nonbank companies to identify and track repeat offenders. Industry groups expressed concerns during the public comment period that the proposed rule was burdensome and redundant given current reporting requirements. In response, the CFPB made some adjustments but largely kept the rule unchanged. The most notable change in the Final Rule will allow nonbank mortgage lenders with existing enforcement actions recorded in a nationwide system to use a simplified filing process for the CFPB system. However, despite objections, the Final Rule retained the requirement for senior executives to submit a compliance statement.
The Final Rule
The Final Rule establishes the registry largely as originally conceived, covering nonbank entities and their “related persons,” such as directors, officers, managerial employees, agents, and controlling shareholders. The rule requires these covered persons to submit copies of final public agency and court orders issued since January 1, 2017. A covered person must report an order to the registry if it relates to any federal consumer financial laws, whether enforced by the CFPB or another agency, and certain state or federal unfair, deceptive, or abusive acts or practices (“UDAAP”) laws. The Final Rule applies to consent orders and stipulated orders, even when they specify that the covered nonbank entity did not admit to any allegations of wrongdoing. Perhaps the most controversial aspect of the Final Rule is that the registry will be available to the public, creating a single-source repository for law enforcement agencies, class action plaintiffs’ attorneys, investors, creditors, and any other interested party to find and review this information about a given business.
Key provisions of the Final Rule include:
- Covered Nonbanks: The rule applies to nonbanks considered “covered persons” under the Dodd-Frank Act involved in offering or providing consumer financial products or services.
- Exclusions: Insured depository institutions and credit unions are excluded, as well as their “related persons” (defined by the Dodd-Frank Act as certain individuals such as directors, officers, managerial employees, controlling shareholders, and agents).
- Covered Orders: The rule pertains to final, written public orders issued by agencies or courts with an effective date on or after January 1, 2017 that meet specific criteria listed below. Importantly, an order issued with an effective date prior to January 1, 2017, but which has not expired or been terminated, is not a covered order under the Final Rule. Covered orders are final public orders, whether or not issued upon consent, that:
- Identify a covered nonbank by name as a party subject to the order.
- Were issued in an action brought by a federal, state, or local agency.
- Impose obligations on the nonbank to act or refrain from acting.
- Impose such obligations based on alleged violations of covered laws (i.e.,federal consumer financial laws, CFPB-enforced laws, and certain unfair, deceptive, or abusive practices laws).
Registration Requirements:
- Covered nonbanks must register and submit a copy of each covered order, including identifying information for the covered nonbank, administrative information, and order-specific information, such as the issuing agency or court and the violated law.
- CFPB-supervised nonbanks must also submit an annual written statement signed by an attesting executive affirming their review and oversight of the entity’s activities under the order. Annual written statements are due on March 31 each year.
Implementation Timing:
- Implementation is tiered, with registration deadlines varying depending on the type of covered nonbank:
- a covered nonbank that is a “larger participant” as defined by Bureau rules must register by January 14, 2025;
- a covered nonbank described under 12 U.S.C. § 5514(a)(1) other than a larger participant must register by April 14, 2025; and
- any other covered nonbank must register by July 14, 2025.
End of Registration Requirements:
- Registration requirements end when the covered order expires, is terminated, or is modified such that it no longer qualifies as a covered order.
- Covered orders without a specified termination date are deemed expired 10 years after their effective date.
- The covered nonbank must notify the CFPB within 90 days of any change to a covered order's status.
Outlook: The registry could have far-reaching implications. In addition to covered banks’ new compliance obligations, the public availability of the orders in a single searchable location could increase a business or individual’s risk exposure. As such, covered businesses and individuals will need to give more careful consideration before agreeing to any public order that would end up in the registry. Some observers have noted the possibility that congressional Republicans may move to revoke the Final Rule under the procedures of the Congressional Review Act (“CRA”), a law passed primarily for the purpose of permiting Congress and the President to invalidate “midnight regulations” issued by a previous Administration, typically at the beginning of a new presidential administration. While it is uncertain whether opponents of the Final Rule will seek – or even have the opportunity – to do so remains to be seen, but it is likely that the new policy will be subject to scrutiny by nonbank financial services providers and their allies, given the administrative burden and the public microscope on compliance the Final Rules imposes.
AUTHOR INFORMATION: