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CFPB Digs Deep to Protect Fintech Consumers with 'Dormant Authority' Decision

A U.S. financial regulatory agency is reaching to the bottom of its proverbial handbag to combat problematic nonbank lenders–at least that is what it is saying in light of a recent change in its oversight agenda.

CFPBAccording to a recent announcement from the Consumer Financial Protection Bureau (CFPB), the agency will invoke a “largely unused legal provision” granted under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 to address unchartered fintech lenders it deems particularly risky to consumers.

“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,” said CFPB Director Rohit Chopra, in a statement. “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 timing of the announcement is hardly surprising to those following lending data and trends. As such, Business Insider Intelligence reports demand and trust for nonbank lenders are strong. Data from more than 5,200 consumers in 13 countries indicates more than 40% of customers report thinking nonbanks can better help them with investment and money management needs than traditional banks.

Prior to the passage of the Dodd-Frank Act, regulation was confined to credit unions and banks, according to the announcement. However, the 2008 financial crisis, in which “nonbank companies played a pivotal role,” sparked congressional action to authorize the CFPB to examine certain nonbanks “fintechs,” depository institutions holding more than $10 billion worth of assets and relevant service providers.

“Under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, the CFPB has authority to use traditional law enforcement to stop companies from engaging in conduct that pose risk to consumers; this can involve adversarial litigation,” notes the regulatory agency.

Financial resource Investopedia notes the CFPB was tasked with protecting borrowers from predatory mortgage practices after “widespread sentiment that the subprime mortgage market was the underlying cause of the 2007–2008 catastrophe.” Their work, states the financial information site, helps deter brokers from earning unnaturally high commissions from inappropriate loans, among other important protections.

From Twitter

Evan Weinberger @reporterev

"Rohit Chopra remembered the CFPB had the authority to put bureau examiners inside any company that it thinks poses a risk to consumers just lying around in the closet and wasn't using it."

According to the CFPB, it will use its congressional authorization specifically for the nonbank mortgage, private student loan and “payday” loan industries irrespective of their size. It also engaged in rulemaking behavior with respect to debt collection, consumer reporting, international remittances and the auto loan industry.

“The CFPB believes that utilizing this dormant authority will help protect consumers and level the playing field between banks and nonbanks ... [it will] allow the CFPB to be agile and supervise entities that may be fast-growing or are in markets outside the existing nonbank supervision program.”

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