On February 16, 2012, the Consumer Financial Protection Bureau ("CFPB") proposed a new rule which defines the contours of CFPB's authority to supervise certain debt collectors and consumer reporting agencies to ensure their compliance with federal consumer financial laws ("Proposed Rule").1 Until now, the affected entities/persons were principally supervised at the state level, and generally were not subject to federal oversight. The Proposed Rule thus represents a new shift in consumer protection, and sets the tone for the CFPB for the future.
The Proposed Rule — Why Now?
The Dodd-Frank Wall Street Reform and Consumer Protection Act created the CFPB on July 21, 2010, and tasked it with supervising large banks, thrifts, credit unions, and other members of the financial industry. In addition, the CFPB is authorized to supervise "larger participants" in nonbank markets for consumer financial products or services. The CFPB is required to define which entities constitute "larger participants" by a rule to be issued no later than July 21, 2012. The Proposed Rule seeks to do just that.
The Proposed Rule is now in a 60-day comment period, which will end in mid-April, 2012. The CFPB aims to complete the rule by July, which marks the two-year anniversary of the creation of the CFPB.
The Specifics — Who Are "Larger Participants"
In order to be classified as a "larger participant," and thus subject to CFPB oversight under the Proposed Rule, an entity/person must meet a certain threshold of "annual receipts," and fall into one of two markets for consumer financial products/services: (1) consumer debt collection; or (2) consumer reporting. Each such requirement is discussed in more detail below. However, it is important to note that due to the high level of annual receipts required, it is likely that many of the entities/persons in these markets will not qualify as "larger participants," and thus will not be subject to CFPB supervision.
Consumer debt collection encompasses the collection, or attempted collection, of debt related to a consumer financial product or service. Such activities can include collection of debt related to consumer credit, certain consumer leases, and a variety of other consumer debts. The market for consumer debt collection is broadly defined to ensure that it captures a range of debt collection activities and participants, including those activities undertaken by third-party collectors, law firms, collections attorneys, and debt buyers.
Consumer reporting encompasses collecting, analyzing, maintaining, or providing consumer report information or other account information, which is used or expected to be used in any decision by another person regarding the offering or provision of a consumer financial product or service. This market would include the largest consumer reporting agencies selling consumer reports, consumer report resellers, and specialty consumer reporting agencies.
In order to qualify as a "larger participant" in either of these markets, an entity must meet a certain threshold of annual receipts — more than $10 million in annual receipts for the consumer debt collection market, and more than $7 million in annual receipts for the consumer reporting market. Under the Proposed Rule, the term "receipts" means "total income" (or in the case of a sole proprietorship, "gross income") plus "costs of goods sold," as those terms are defined by IRS forms. Annual receipts will be measured as the average of the entity/person's most recently completed three fiscal years. Furthermore, there is an aggregation requirement, which operates to add an entity/person's annual receipts to the annual receipts of each of its affiliated companies.
Additionally, once an entity is deemed to be a "larger participant," it will not cease to be a "larger participant" until two (2) years from the first day of the tax year in which the person met the test to be a larger participant. This allows the CFPB sufficient time to supervise and administer its authority — and prevents the CFPB from having to make frequent determinations of an entity's status each year.
The Future
It is unclear at this point how the Proposed Rule will fare over the next several months — although its successes (or failures) are likely to set the tone for the next steps in CFPB's evolution. Notably, the Proposed Rule states that the CFPB intends this rule to be only the first in a series of rules to define "larger participants" in specific markets, for the purpose of establishing the scope of coverage of the CFPB's nonbank supervision program. As a result, it is clear that the CFPB is not done yet.
Footnote
1. The text of the Proposed Rule can be found at http://www.gpo.gov/fdsys/pkg/FR-2012-02-17/pdf/2012-3775.pdf.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
We operate a free-to-view policy, asking only that you register in order to read all of our content. Please login or register to view the rest of this article.