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[Federal Register Volume 76, Number 125 (Wednesday, June 29, 2011)]
[Proposed Rules]
[Pages 38059-38062]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-15984]

========================================================================
Proposed Rules
                                                Federal Register
________________________________________________________________________

This section of the FEDERAL REGISTER contains notices to the public of 
the proposed issuance of rules and regulations. The purpose of these 
notices is to give interested persons an opportunity to participate in 
the rule making prior to the adoption of the final rules.

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Federal Register / Vol. 76, No. 125 / Wednesday, June 29, 2011 / 
Proposed Rules

[[Page 38059]]

BUREAU OF CONSUMER FINANCIAL PROTECTION

12 CFR Chapter X

[Docket No. CFPB-HQ-2011-2]

Defining Larger Participants in Certain Consumer Financial 
Products and Services Markets

AGENCY: Bureau of Consumer Financial Protection.

ACTION: Notice and Request for Comment.

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SUMMARY: The Bureau of Consumer Financial Protection (``CFPB''), 
created by the Consumer Financial Protection Act of 2010 (``Act''), is 
required to implement a program to supervise certain nondepository 
covered persons for compliance with Federal consumer financial laws. 
The scope of supervision coverage varies for different product markets. 
Section 1024 of the Act provides that the CFPB may supervise covered 
persons in the residential mortgage, private education lending, and 
payday lending markets. For other markets for consumer financial 
products or services, the supervision program generally will apply only 
to a ``larger participant'' of these markets, as defined by rule. The 
CFPB is required to issue an initial ``larger participant'' rule not 
later than July 21, 2012, one year after the designated transfer date.
    This notice and request for comment (``Notice'') seeks public 
comment on the development of such a rule. After considering any 
comments on this Notice and other relevant information, the CFPB will 
draft and publish a proposed rule for public comment.

DATES: Comments must be received by August 15, 2011.

ADDRESSES: Interested parties are invited to submit written comments 
electronically or in paper form. Because paper mail in the Washington, 
DC area and at the CFPB is subject to delay, commenters are encouraged 
to submit comments electronically. Comments should refer to ``CFPB 
Docket No. CFPB-HQ-2011-2.'' Comments should be submitted to:
     Web site: http://www.regulations.gov.
     Mail: Nondepository Supervision, Consumer Financial 
Protection Bureau, 1801 L Street, NW., Room 513-H, Washington, DC 
20036.
     Hand Delivery/Courier in Lieu of Mail: Department of the 
Treasury, 1500 Pennsylvania Avenue, NW., Consumer Financial Protection 
Bureau, Washington, DC 20220.
    You may view copies of this Notice and any comments we receive at 
http://www.regulations.gov within CFPB Docket No. CFPB-HQ-2011-2. The 
CFPB will make such comments available for public inspection and 
copying in Department of the Treasury's Library, Room 1428, Main 
Treasury Building, 1500 Pennsylvania Avenue, NW., Washington, DC 20220, 
on official business days between the hours of 10 a.m. and 5 p.m. 
Eastern Time. You can make an appointment to inspect comments by 
telephoning (202) 622-0990.
    All comments, including attachments and other supporting materials, 
will become part of the public record and subject to public disclosure. 
You should submit only information that you wish to make available 
publicly. Do not include sensitive personal information, such as 
account numbers or social security numbers. Your comments will not be 
edited to remove any identifying or contact information.

FOR FURTHER INFORMATION CONTACT: Nicholas Krafft, Research Analyst, 
(202) 435-7252, Nondepository Supervision, Consumer Financial 
Protection Bureau, 1801 L Street, NW., Room 513-H, Washington, DC 
20036.

SUPPLEMENTARY INFORMATION: 

I. Background: The CFPB's Nondepository Supervision Program

    On July 21, 2010, the Consumer Financial Protection Act of 2010 
(``Act'') \1\ established the Bureau of Consumer Financial Protection 
(``CFPB''). One of the CFPB's specific objectives under the Act is to 
ensure that Federal consumer financial law \2\ is ``enforced 
consistently, without regard to the status of a person as a depository 
institution, in order to promote fair competition.'' \3\ One of the 
ways the Act accomplishes this objective is by giving the CFPB 
authority to supervise not only certain banks, thrifts, and credit 
unions (``depository institutions''), and their affiliates, but also 
certain other entities that provide consumer financial products or 
services (``nondepository covered persons'').\4\
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    \1\ The Act is Title X of the Dodd-Frank Wall Street Reform and 
Consumer Protection Act of 2010.
    \2\ See Act Sec.  1002(14) (defining ``Federal consumer 
financial law'').
    \3\ Id. Sec.  1021(b)(4).
    \4\ See id. Sec.  1002(6) (a ``covered person'' means ``(A) any 
person that engages in offering or providing a consumer financial 
product or service; and (B) any affiliate of a person described [in 
(A)] if such affiliate acts as a service provider to such 
person.''). A ``service provider'' is a person that provides a 
material service to a covered person in connection with the offering 
or provision of a consumer financial product or service. Id. Sec.  
1002(26). Service providers also may be subject to CFPB supervision. 
See, e.g., id. Sec.  1024(e). Under the Act, ``person'' means ``an 
individual, partnership, company, corporation, association 
(incorporated or unincorporated), trust, estate, cooperative 
organization, or other entity.'' Id. Sec.  1002(19).
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    The CFPB is required under Section 1024 of the Act to implement a 
risk-based supervision program for certain nondepository covered 
persons. The purposes of this supervision program are to: (1) Assess 
nondepository covered persons for compliance with Federal consumer 
financial law; (2) obtain information about such persons' activities 
and compliance systems or procedures; and (3) detect and assess risks 
to consumers and to the consumer financial markets.\5\ In implementing 
this supervision program, the CFPB may, among other things, require 
submission of reports and conduct onsite examinations of a covered 
person to assess the covered person's compliance with Federal consumer 
financial law and achieve the other purposes described above. The CFPB 
also has the authority to require, by rule, registration of certain 
covered persons. Such registration could help support the 
implementation of the supervision program.\6\
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    \5\ Id.Sec.  1024(b)(1).
    \6\ Id. Sec. Sec.  1022(c)(7) and 1024(b)(7).
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    The scope of coverage of this supervision program under Section 
1024 varies by consumer financial product or service market. Section 
1024 specifically grants the CFPB authority to supervise, regardless of 
size, covered persons that offer or provide to consumers the following 
enumerated consumer financial products or services: (1) Origination, 
brokerage, or servicing of residential mortgage loans secured by

[[Page 38060]]

real estate, and related mortgage loan modification or foreclosure 
relief services; (2) private education loans; and (3) payday loans.\7\ 
By contrast, for all other markets, the CFPB's nondepository 
supervisory authority generally applies only to any covered person that 
is ``a larger participant of a market for other consumer financial 
products or services,'' as defined by rule by the CFPB.\8\ The CFPB's 
initial larger participant rule must be issued not later than one year 
after the designated transfer date.\9\
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    \7\ Id. Sec.  1024(a)(1)(A), (D), and (E).
    \8\ Id. Sec. Sec.  1024(a)(1)(B) and 1024(a)(2). The CFPB also 
has the authority to supervise any covered person that it ``has 
reasonable cause to determine, by order, after notice and a 
reasonable opportunity * * * to respond'' that such covered person 
``is engaging, or has engaged, in conduct that poses risks to 
consumers with regard to the offering or provision of consumer 
financial products or services.'' Id. Sec.  1024(a)(1)(C).
    \9\ Id. Sec.  1024(a)(2). The CFPB must consult with the Federal 
Trade Commission prior to issuing a rule.
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    Once it has the requisite authority, the CFPB may immediately begin 
its nondepository supervision program in the mortgage, payday lending, 
and private education lending markets,\10\ including through 
examinations of covered persons in these markets, based on the CFPB's 
assessment of relevant risks. The CFPB will also propose a rule to 
define a ``larger participant'' of other markets for consumer financial 
products or services. The ``larger participant'' rule will not impose 
new substantive consumer protection requirements on any nondepository 
entity, but rather will provide to the CFPB the authority to supervise 
larger participants in certain markets--including by requiring reports 
and conducting examinations--to ensure, among other things, that they 
are complying with existing Federal consumer financial law. However, a 
covered person will remain subject to any Federal consumer financial 
law applicable to its activities regardless of whether such covered 
person is subject to the CFPB's supervisory authority.
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    \10\ Id. Sec.  1024(a)(1)(A), (D), and (E).
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    Once the scope of the nondepository supervision program is 
established, the Act requires that the operation of the program be 
based on an assessment by the CFPB of the ``risks posed to consumers in 
the relevant product markets and geographic markets.'' \11\ The factors 
to be considered in making this assessment include asset size, volume 
of transactions involving consumer financial products or services,\12\ 
risks to consumers, the extent to which institutions are subject to 
state supervision, and any other factor that the CFPB determines to be 
relevant.\13\
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    \11\ Id.Sec.  1024(b)(2).
    \12\ See id. Sec.  1002(5) (defining ``consumer financial 
product or service'') and Sec.  1002(15) (defining ``financial 
product or service'').
    \13\ Id. Sec.  1024(b)(2).
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    Through this notice and request for comment (``Notice''), the CFPB 
seeks public comment on the issues presented in drafting that proposed 
rule.\14\ While this Notice presents a number of particular questions 
for comment, the CFPB invites public comment on all issues relevant to 
the development of this proposal.
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    \14\ Section 1066 of the Act grants the Secretary of the 
Treasury interim authority to perform certain functions of the CFPB. 
Pursuant to that authority, Treasury publishes this Notice on behalf 
of the CFPB.
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II. Issues in Developing a Larger Participant Rule

    There are a number of issues that arise in connection with 
determining how to identify a larger participant in a market, including 
both broad issues that cut across markets and specific issues relating 
to particular markets that may be covered by an initial rule. The CFPB 
is also considering which markets to include in an initial rule. 
Markets identified in this Notice for possible inclusion are: debt 
collection, consumer reporting, consumer credit and related activities, 
money transmitting, check cashing and related activities, prepaid 
cards, and debt relief services.
    These issues and related questions are discussed below.

A. Criteria and Thresholds To Define a Larger Participant

    In considering how to define which nondepository covered persons 
are larger participants in a particular market, a number of approaches 
are available. Determining the appropriate criteria and thresholds to 
be used should be approached in light of the applicable statutory 
language, which refers to a ``larger participant'' of a market.\15\ 
This statutory language is not limited only to the ``largest'' 
participants in each market, but at the same time does not encompass 
smaller market participants.
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    \15\ Id. Sec.  1024(a)(1)(B).
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    In determining the criteria to measure the size of market 
participants, the CFPB should consider criteria that will allow it to 
administer the program efficiently by readily identifying larger 
participants based on objective available data. Whatever the criteria 
used, the Act provides that, for purposes of computing the activity 
levels of a market participant, the activities of the participant 
``shall be aggregated'' with the activities of nondepository 
``affiliated companies.'' \16\ Examples of potential criteria that 
could be used to define larger participants of a market include one or 
a combination of the following: annual number of transactions in the 
market; annual value of transactions (e.g., total loan volume); annual 
receipts or revenue; geographic coverage (e.g., number of states where 
engaged in business); asset size; and outstanding loan balances.
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    \16\ Id. Sec.  1024(a)(3)(B).
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    The thresholds used to define a larger participant under the 
criteria used could be based on an absolute approach (e.g., a covered 
person with an annual loan volume of $X is a larger participant), or it 
could be based on a relative approach (e.g., every market participant 
having an annual loan volume of a certain amount relative to other 
participants). These approaches are not necessarily exclusive: multiple 
criteria (each with its own threshold) could be used in identifying 
larger participants.
    A related issue is whether the CFPB should tailor the criteria and 
thresholds to each market, given the significant differences among 
various markets. For example, a larger participant in a market for 
consumer credit might be defined using criteria and thresholds 
different from those used in the market for consumer debt collection. 
Alternatively, the initial rule might be structured around a single set 
of criteria and thresholds applicable across all markets.
    The CFPB seeks public comment on the following:
     Should a larger participant be defined based on the 
relative size of the participants within a market (e.g., whether the 
number of annual transactions of the market participants is above the 
mean or median) or, alternatively, should a larger participant be 
defined based on an absolute threshold, such as doing business in a 
specified number of states?
     Should more than one criterion be used to determine the 
size of a market participant, such as the number of annual transactions 
and/or the number of states in which the participant conducts business?
     Should the same criteria and thresholds be used to define 
a larger participant for every market, or should different criteria and 
thresholds be tailored for each market based on the market's 
characteristics?

B. Data To Be Used in Measuring Criteria

    Whatever criteria are selected for a particular market, the CFPB 
must be able to measure the criteria as they relate to specific market 
participants.

[[Page 38061]]

For example, if the criteria selected to define a larger participant 
includes the number of states in which a market participant conducts 
business, the CFPB will need access to data establishing which covered 
persons meet the specified threshold for that criterion. The data that 
could be used in connection with an initial rule might include: (1) 
Public data, including from sources such as the Securities and Exchange 
Commission's online EDGAR database, and state and federal licensing and 
registration records; (2) nonpublic state or federal supervisory or 
other data; (3) commercial data, such as proprietary industry market 
analyses; and (4) data obtained directly from market participants.
    The CFPB is considering the establishment of a registration program 
for certain covered persons through a future rulemaking.\17\ If such a 
registration program is established, the CFPB may receive relevant 
information from covered persons subject to that program that would 
supplement existing data used to measure market participants.\18\ This 
additional data could be useful in determining which covered persons 
meet the applicable thresholds.
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    \17\ See id. Sec. Sec.  1022(c)(7) and 1024(b)(7).
    \18\ The number of covered persons that may be subject to these 
registration requirements may be larger than the number that will be 
subject to CFPB supervision under section 1024(a)(1).
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    The CFPB seeks public comment on the following:
     For each market, what reliable data sources are available 
and would be suitable for the CFPB to use in its larger participant 
determinations?
     What data should the CFPB collect through a registration 
process to use in its larger participant determinations?

C. Measurement Dates and Supervision Timeframes

    In measuring the size of market participants, an initial rule might 
require the CFPB to determine whether a covered person is a larger 
participant by measuring applicable criteria for the immediately 
preceding calendar year or years, or at one or more points in time. For 
example, if the annual number of transactions is used, coverage could 
be determined by evaluating the market participant's annual 
transactions for the previous calendar year or years. An initial rule 
would also need to consider how to treat certain significant events 
relevant to ``larger participant'' determinations, such as the merger 
of market participants.
    A related issue is how long a market participant should be subject 
to supervision once it has met the thresholds for being a larger 
participant. For example, if a market participant meets the larger 
participant threshold in one year, for how long should it be subject to 
CFPB supervision if in the subsequent year its size falls below the 
applicable threshold? One consideration relevant to these issues is 
whether the period should be long enough to permit the CFPB to conduct 
a subsequent examination if an initial examination found violations of 
law or otherwise raised compliance concerns.
    The CFPB seeks public comment on the following:
     In evaluating a market participant's size, should the CFPB 
measure the size of a market participant based on the relevant criteria 
for the previous one year, two years, or more--or at one or more than 
one points in time? Should a market participant be a larger participant 
if it meets the applicable threshold in any one of a specified number 
of prior years, or only if it meets the threshold in the most recent 
period?
     What factors should the CFPB consider in connection with 
the treatment of events such as the merger of market participants 
during an assessment time period?
     Are there alternative approaches for establishing an 
assessment time period that the CFPB should consider?
     For what length of time should a market participant be 
subject to supervision once it meets the applicable threshold? How 
should subsequent changes in the participant's size be treated?

III. Consideration of Markets To Include in the Initial Rule

    A variety of consumer financial products and services offered by 
nondepository covered persons could be subject to the CFPB's 
supervision program under a larger participant rule. The CFPB is 
interested in public comment regarding which markets for consumer 
financial products and services should be addressed in an initial rule. 
Specifically, the CFPB solicits comment on whether the categories 
discussed below should be covered in the initial rule, whether each 
particular category consists of a single market or multiple markets, 
and whether other markets also should be addressed.\19\ Although the 
CFPB anticipates including certain specified markets in an initial 
rule, additional markets may be added through subsequent rulemakings.
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    \19\ The participants in markets discussed in this Notice may be 
subject to any number of Federal consumer financial laws depending 
on their specific activities that they are engaged in. Examples of 
such laws include the Truth in Lending Act, the Fair Debt Collection 
Practices Act, the Equal Credit Opportunity Act, and the Fair Credit 
Reporting Act, and, more broadly, the relevant portions of the 
Consumer Financial Protection Act. See Act Sec.  1002(14) (defining 
``Federal consumer financial law'').
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A. Debt Collection

    With regard to the collection of debt related to consumer financial 
products or services, market participants may collect on behalf of 
another entity that owns the debt, or collect on their own behalf after 
purchasing the debt from a creditor or other holder of the debt. The 
debt collection market affects a large number of consumers. About 30 
million individuals, or 14% of consumers, now have debt that is subject 
to the collections process, and the average debt those consumers have 
under collection is approximately $1,400.\20\
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    \20\ Federal Reserve Bank of New York, Quarterly Report on 
Household Debt and Credit (February 2011).
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B. Consumer Reporting

    A range of actors engage in consumer reporting-related activities. 
A handful of large credit bureaus compile and maintain data and provide 
credit reports on individual consumers. The reports include credit 
history and other credit-related information furnished to the credit 
bureaus by certain creditors and other entities. Additional market 
participants resell information compiled by the large credit bureaus, 
or operate as specialty consumer reporting agencies that offer such 
services as verifying consumer check writing history to facilitate the 
acceptance of consumers' personal checks by retailers. The consumer 
reporting market is of fundamental importance to the market for 
consumer credit. The Consumer Data Industry Association estimates that 
there are over 54 billion updates to consumer reports, and 3 billion 
reports issued, each year. In addition, each of the large credit 
bureaus maintains credit files on over 200 million consumers.\21\
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    \21\ ANSI-BBB, Identity Theft Prevention and Identity Management 
Standards (2008).
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C. Consumer Credit and Related Activities

    There are a variety of activities relating to consumer credit that 
might be covered in an initial rule.\22\ Market participants include 
finance companies, consumer lenders, and loan servicers

[[Page 38062]]

and brokers. Relevant products include, for example, secured credit 
such as automobile loans, and unsecured consumer installment loans. 
Revenues in auto lending and financing, and other sales financing, 
total $60 billion annually.\23\ The CFPB's authority relating to 
consumer credit providers is subject to important exceptions in the 
Act, including exceptions relating to vehicle dealerships and retailers 
and merchants.\24\ The CFPB will need to consider carefully how the 
respective consumer credit-related product and service markets should 
be defined.
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    \22\ Mortgage originators, brokers, and servicers, payday 
lenders, and private education lenders are specifically enumerated 
in Section 1024(a) as subject to the CFPB's supervisory authority. 
Accordingly, whether covered persons engaged in those activities are 
subject to CFPB supervision would not depend upon the content of a 
larger participant rule. See Act at Sec.  1024(a)(1)(A), (D), and 
(E).
    \23\ IBIS World Industry Report. Auto Leasing, Loans and Sales 
Financing in the U.S. (2009).
    \24\ See Act Sec.  1029 (dealership exclusion); id. Sec.  
1027(a) (merchant and retailer exception).
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D. Money Transmitting, Check Cashing, and Related Activities

    Money transmitting generally involves the receipt of funds by a 
transmitter that then sends the funds via wire transfer, ACH transfer, 
or other means to a recipient in another location on behalf of a 
consumer, for a fee. The check cashing business generally involves the 
cashing of consumer checks by retail establishments for a fee. The sale 
of money orders and related items provides products consumers can use 
to pay bills or conduct other financial transactions. Typically, 
businesses engaged in the foregoing activities offer a menu of several 
of these products and services to consumers.
    Money transmitting is a significant industry. Total transaction 
volume for money transmission was approximately $72 billion in 2005, 
with $40 billion of that amount transmitted internationally.\25\ The 
CFPB will need to consider whether to include money transmitting alone, 
or money transmitting and related consumer financial products and 
services such as check cashing, as a market or markets to be covered in 
an initial rule. If multiple products are included, the CFPB will need 
to consider carefully how the respective product and service markets 
should be defined.
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    \25\ KPMG, 2005 Money Services Business Industry Survey Study 
(2005).
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E. Prepaid Cards

    A prepaid card product is one in which funds are paid into an 
individual or pooled account by, or on behalf of, a consumer and can be 
accessed by the consumer via a card (and in some cases, by alternative 
means). Prepaid card products include general purpose reloadable open-
loop payment cards,\26\ non-reloadable open loop payment cards, closed-
loop gift or store cards,\27\ electronic benefits transfer cards,\28\ 
and payroll cards.\29\ Multiple parties may be involved in offering or 
providing a prepaid card product. However, under the Act, the 
definition of ``consumer financial product or service'' would not 
include the sale or reloading of prepaid cards by persons that do not 
exercise ``substantial control'' over the terms or conditions of the 
stored value provided to the consumer.\30\
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    \26\ An open-loop card usually carries the logo of a major 
payment network, such as American Express, Discover, MasterCard, or 
Visa, and can be used wherever those cards are accepted.
    \27\ A closed-loop card usually can be used only at one store, 
chain of stores, or group of stores (such as stores in a shopping 
mall). See Act Sec.  1002(28)(B) (setting forth exclusion for 
certain closed-loop cards).
    \28\ Electronic benefits transfer cards are made available by 
the Federal government and by state and local governments to allow 
individuals to access government benefits such as Social Security or 
unemployment compensation.
    \29\ Payroll cards are made available by employers to employees 
to access their salaries.
    \30\ Act Sec.  1002(5) and (15)(A)(v)(I) and (II).
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    Prepaid card products affect a large number of consumers. Over $140 
billion dollars in transactions were made with reloadable open-loop 
prepaid cards in 2009.\31\ Over 11 million households have used these 
cards.\32\ The CFPB will need to consider carefully whether to cover 
all or only certain types of prepaid card products in an initial rule, 
and, for those included, how to define the relevant market or markets.
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    \31\ Federal Reserve Board, Noncash Payment Trends in the United 
States: 2006-2009 (Apr. 2011).
    \32\ Federal Deposit Insurance Corporation, National Survey of 
Unbanked and Underbanked Households (Dec. 2009).
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F. Debt Relief Services

    Debt relief services refer to consumer financial products and 
services offered to reduce a consumer's debt.\33\ Providers generally 
offer one of two products or services.\34\ Providers of ``debt 
management plans,'' typically non-profit credit counseling agencies, 
work with creditors to develop repayment plans for consumers. These 
plans typically permit a consumer to repay the full credit balance owed 
under renegotiated terms, such as substantially reduced interest rates 
and fees. For consumers who are unable to repay the full balance owed, 
``debt settlement'' entities offer to negotiate with a consumer's 
creditors to enable the consumer to make a lump-sum payment of less 
than the entire balance owed to the creditor, thereby settling the debt 
obligation. Statistics on the size of these industries, as well as the 
size of other debt relief services, are not readily available.\35\ The 
CFPB will need to consider carefully how to define any debt relief 
provider market or markets included in an initial rule.
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    \33\ Principally, these providers offer to reduce consumers' 
credit card debt, but some providers offer to reduce medical or tax 
debt. Not included in the debt relief market are providers of debt 
relief services that relate to mortgage debt, commonly referred to 
as mortgage loan modification or foreclosure relief services. 
Section 1024(a)(1)(A) and (b) of the Act gives the CFPB authority to 
supervise those providers without regard to size.
    \34\ See generally, Federal Trade Commission, Telemarketing 
Sales Rule: Final Rule (debt relief services amendments), 75 FR. 
48458 (Aug. 10, 2010).
    \35\ Id.
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    The CFPB seeks public comment on the following:
     What consumer financial product or service markets should 
be included in the initial rule?
     How should the financial product or service markets 
included in the initial rule be defined? In addition to considerations 
relating to how to define the relevant product markets, should all 
markets be national in scope, or should the CFPB consider regional or 
other geographic markets in certain instances? If regional or other 
geographic markets should be considered, describe with specificity how 
they could be defined.
     What specific criteria should be measured, and threshold 
levels set, to define a larger participant in the markets identified 
above, and in any other markets that should be included in an initial 
rule? What data should be used to assess whether the thresholds have 
been met?

    Dated: June 21, 2011.
Alastair Fitzpayne,
Executive Secretary, U.S. Department of the Treasury.
[FR Doc. 2011-15984 Filed 6-28-11; 8:45 am]
BILLING CODE 4810-25-P
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