Source: https://www.federalregister.gov/articles/2012/02/17/2012-3775/defining-larger-participants-in-certain-consumer-financial-product-and-service-markets
Timestamp: 2015-10-09 01:32:30
Document Index: 251528048

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Federal Register | Defining Larger Participants in Certain Consumer Financial Product and Service Markets
-9608 (17 pages)
Document Number: 2012-3775
Shorter URL: https://federalregister.gov/a/2012-3775 Regulations.gov Docket Info
Supervision of Certain Nondepository Covered Persons 2 actions from March 2012 to July 2012
The Consumer Financial Protection Act of 2010 (Act)
established the Bureau of Consumer Financial Protection (Bureau) on July 21, 2010. One of the Bureau's key responsibilities under the Act is the supervision of very large banks, thrifts, and credit unions, and their affiliates,
This proposal (Proposed Rule or proposal) would establish, in part, the scope of coverage of the Bureau's supervision authority for nonbank covered persons pursuant to section 1024 of the Act.
That authority varies by consumer financial product or service market. Specifically, section 1024 grants the Bureau authority to supervise, regardless of size, nonbank covered persons that offer or provide to consumers: (1) Origination, brokerage, or servicing of residential mortgage loans secured by real estate, and related mortgage loan modification or foreclosure relief services; (2) private education loans; and (3) payday loans.
In addition, the Bureau has the authority to supervise any “larger participant of a market for other consumer financial products or services,” as defined by rule by the Bureau.
The Act requires the initial larger participant rule to be issued by July 21, 2012. This Proposed Rule would establish the initial larger participant rule for two markets: consumer debt collection and consumer reporting. The Bureau anticipates subsequent rulemakings to define larger participants in additional markets.
The Bureau is authorized to supervise nonbank entities subject to section 1024 of the Act by requiring the submission of reports and conducting examinations to: (1) Assess 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.
The Bureau solicited public comment on developing an initial proposed larger participant rule by publishing in the Federal Register a Notice and Request for Comment (Notice) on June 29, 2011,
and holding a series of roundtable discussions with industry, consumer and civil rights groups, and state regulatory agencies and associations.
The comment period for the Notice ended on August 15, 2011. The Bureau received more than 10,400 comments from individual consumers, consumer advocacy groups, industry trade groups, individual companies, state and Federal regulators, regulatory associations, and elected officials.
Issues addressed in the comments included which markets should be covered in the initial proposed rule, the particular criteria and thresholds the initial rule should use to measure the size of nonbank covered persons, available data sources, and measurement dates and supervision timeframes.
III. Summary of the Proposal Back to Top
IV. Legal Authority and Procedural Matters Back to Top
The Bureau proposes that, once issued, the final rule for this proposal would be effective 30 days after publication. The Bureau seeks comment on whether the proposed effective date is appropriate, or whether the Bureau should adopt an alternative effective date.
V. Section-by-Section Description of the Proposed Rule Back to Top
Proposed § 1090.100 sets forth the scope and purpose of the Proposed Rule. It states that the part defines those nonbank covered persons that qualify as larger participants of certain markets for consumer financial products or services pursuant to sections 1024(a)(1)(B) and (a)(2) of the Act. Proposed § 1090.100 further explains that a larger participant of a market covered by the part will be subject to the supervisory authority of the Bureau under section 1024 of the Act. Finally, proposed § 1090.100 provides that the part establishes rules to facilitate the Bureau's supervisory authority over larger participants pursuant to section 1024(b)(7) of the Act.
Proposed § 1090.101 defines terms used in the Proposed Rule. If a term is defined in the Act, the proposal generally incorporates that definition, with clarifications and modifications where necessary. The Bureau seeks comment on each of the definitions set forth in the Proposed Rule and any suggested clarifications, modifications, or alternatives. The Bureau notes that certain key terms defined by the Act and adopted by the proposal, such as “consumer,” are defined differently by some consumer protection regulations such as Regulation Z
or Regulation E.
The Bureau solicits comment on whether the Bureau should conform any of these definitions to other regulations for consistency and, if so, to which definitions it should conform.
Act. Proposed § 1090.101(a) states that the term “Act” means the Consumer Financial Protection Act of 2010.
Affiliated company. Section 1024(a)(3)(B) of the Act provides that for purposes of determining activity levels for, among other things, defining who is a larger participant of certain markets, the activities of affiliated companies (other than insured depository institutions or insured credit unions) shall be aggregated. The term “affiliated company” is not defined in the Act. For purposes of implementing section 1024(a)(3)(B)'s aggregation requirement, proposed § 1090.101(b) defines the term “affiliated company” in a manner guided by the definition of “affiliate” set forth in the Act,
with modifications to track the requirements of 1024(a)(3)(B). Thus, proposed § 1090.101(b) states that the term “affiliated company” means any company (other than an insured depository institution or insured credit union) that controls, is controlled by, or is under common control with, a person.
For purposes of the definition of “affiliated company,” proposed § 1090.101(b) provides that the term “company” means any corporation, limited liability company, business trust, general or limited partnership, proprietorship, cooperative, association, or similar organization.
Also for purposes of the definition of “affiliated company,” proposed § 1090.101(b) explains when a person shall be considered to have control over another person, guided by the definitions of the term control provided in section 2 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) (12 U.S.C. 5301),
section 3 of the Federal Deposit Insurance Act (12 U.S.C. 1813), section 2 of the Bank Holding Company Act (12 U.S.C. 1841), and the rules of other Federal financial regulators.
Proposed § 1090.101(b) thus provides that a person has control over another person if: (i) The person directly or indirectly or acting through one or more other persons owns, controls, or has power to vote 25 percent or more of any class of voting securities or similar ownership interest of the other person; (ii) the person controls in any manner the election of a majority of the directors, trustees, members, or general partners of the other person; or (iii) the person directly or indirectly exercises a controlling influence over the management or policies of the other person, as determined by the Bureau.
Annual receipts. Proposed § 1090.101(c) is informed by the method of calculating “annual receipts” used by the SBA
in determining whether a business is a “small business concern.” Under proposed § 1090.101(c), for purposes of calculating “annual receipts,” the term “receipts” means “total income” (or in the case of a sole proprietorship, “gross income”) plus “cost of goods sold” as these terms are defined and reported on Internal Revenue Service (IRS) tax return forms. The term does not include net capital gains or losses. Annual receipts are measured as the average of a person's most recently completed three fiscal years, or the average receipts for the entire period the person has been in business if it has less than three completed fiscal years.
The calculation of annual receipts also implements the aggregation requirement in section 1024(a)(3)(B) of the Act by providing that the annual receipts of a person shall be added to the annual receipts of each of its affiliated companies. Such aggregation includes the receipts of both the acquired and acquiring companies in the case of an acquisition occurring during any relevant measurement period.
The Bureau considered defining “annual receipts” as the term is used in the U.S. Economic Census, but this term includes revenue from all business activities, whether or not payment was received in the census year, including net investment income, interest, and dividends.
The Bureau believes that the SBA's definition of “annual receipts” is more appropriate as a guide for this proposal because, by excluding net capital gains and losses, it does not capture this investment income, which is not generated from market activities in a given year.
Assistant Director. Proposed § 1090.101(d) states that the term “Assistant Director” means the Bureau's Assistant Director for Nonbank Supervision or her or his designee. Under proposed § 1090.101(d), the Director of the Bureau may perform the functions of the Assistant Director as set forth in the Proposed Rule. Proposed § 1090.101(d) further provides that, in the event there is no Assistant Director, the Director of the Bureau may designate an alternative Bureau employee to perform the functions of the Assistant Director.
Bureau. Proposed § 1090.101(e) states that the term “Bureau” means the Bureau of Consumer Financial Protection.
Consumer. Proposed § 1090.101(f) incorporates the definition of “consumer” set forth in section 1002(4) of the Act. Thus, proposed § 1090.101(f) states that the term “consumer” means an individual or an agent, trustee, or representative acting on behalf of an individual.
Proposed § 1090.101(g) defines the consumer financial product or service of “consumer debt collection” to ensure that it captures a range of consumer debt collection activities, including consumer debt collection activities undertaken by third-party collectors, law firms, attorneys, and debt buyers. The proposed definition describes consumer debt collection as collecting or attempting to collect, directly or indirectly, any debt owed or due or asserted to be owed or due to another and related to any consumer financial product or service.
It also indicates the debt may either be collected on behalf of another person or on the person's own behalf if the debt was obtained while in default, to ensure consumer debt collection activities of debt buyers are covered. The Bureau invites comments on all aspects of the definition of the term “consumer debt collection,” including possible alternatives to the proposed definition.
Consumer financial product or service. Proposed § 1090.101(h) incorporates the definition of the term “consumer financial product or service” set forth in section 1002(5) of the Act. Proposed § 1090.101(h) provides that the term “consumer financial product or service” means any financial product or service as defined in section 1002(15) of the Act that is described in one or more categories under: (a) section 1002(15) of the Act and is offered or provided for use by consumers primarily for personal, family, or household purposes; or (b) clause (i), (iii), (ix), or (x) of section 1002(15)(A) of the Act
and is delivered, offered, or provided in connection with a consumer financial product or service referred to in the immediately preceding subparagraph (a).
The definition of the consumer financial product or service of “consumer reporting” proposed in § 1090.101(i) is guided by the activity described in sections 1002(5)(B) and (15)(A)(ix) of the Act. The Bureau is proposing to modify this definition for the purposes of this Proposed Rule generally to exclude the activities of persons that furnish information about their own experiences or transactions with consumers and persons that use consumer report or other account information for their own purposes. While these activities do not typically result in annual receipts, the Bureau believes expressly excluding these activities will provide greater certainty for nonbank entities that do engage in these activities. Moreover, many large furnishers of information to consumer reporting entities are already subject to the Bureau's supervisory authority under the Act.
Proposed § 1090.101(i) states that the term “consumer reporting” means collecting, analyzing, maintaining, or providing consumer report information or other account information, used or expected to be used in any decision by another person regarding the offering or provision of any consumer financial product or service. The language “by another person” revises the language of the Act to prevent the possibility of a person's own use of consumer report information being included in the definition. The definition also provides exceptions for the activities of a person providing information related to their (or their affiliate's) transactions and experiences with a consumer to an affiliate or to a consumer reporting entity, as well as the exception detailed in the Act for information used solely in a decision regarding employment, government licensing, and residential leasing. This definition covers different types of consumer reporting agencies such as credit bureaus, consumer report resellers, and specialty consumer reporting agencies such as those specializing in consumer check verification and payday lending transactions.
The Bureau invites comments on all aspects of the definition of the term “consumer reporting,” including possible alternatives to the proposed definition.
Larger participant. Proposed § 1090.101(j) defines the term “larger participant” to mean a nonbank covered person that meets a test under § 1090.102, and which remains a larger participant for the period provided in § 1090.103 of this part.
Nonbank covered person. Section 1024 of the Act relates to “covered persons” as defined in section 1002(6) of the Act that are not insured depository institutions or credit unions, or, in the case of such entities with assets of more than $10 billion, their affiliates, as set forth in sections 1025(a) and 1026(a) of the Act. Proposed § 1090.101(k) therefore excludes from the definition of “nonbank covered persons” persons described in sections 1025(a) and 1026(a) of the Act and provides that the term “nonbank covered person” means, except for persons described in sections 1025(a) and 1026(a) of the Act: (a) Any person that engages in offering or providing a consumer financial product or service; and (b) any affiliate of a person described in subparagraph (a) of this paragraph if such affiliate acts as a service provider to such person.
Person. Proposed § 1090.101(l) incorporates the definition of “person” set forth in section 1002(19) of the Act. Proposed § 1090.101(l) states that the term “person” means an individual, partnership, company, corporation, association (incorporated or unincorporated), trust, estate, cooperative organization, or other entity.
Supervision or supervisory activity. Proposed § 1090.101(m) defines the terms “supervision” or “supervisory activity” to mean the Bureau's exercise, or intended exercise, of supervisory authority by initiating or undertaking an examination, or requiring a report, of a person pursuant to section 1024 of the Act.
Proposed § 1090.102(a) relates to the market for consumer debt collection. As explained in the section-by-section description of proposed § 1090.101(g), this market encompasses the collection, or attempted collection, of debt related to the consumer financial products or services described in sections 1002(5) and (15)(A) of the Act. Such activity includes the collection of debt related to consumer credit, certain consumer leases, and a variety of other consumer financial products or services, but generally not other debt incurred by individuals, such as medical debt.
Participants in the debt collection market generally include third-party debt collectors, debt buyers, and collection attorneys and law firms. Third-party collectors primarily collect debt on behalf of a debt owner, the person that originated the debt or purchased it. Third-party collectors typically are compensated through contingency fees calculated as a percentage of the debt they collect.
Creditors' practices vary in how they use outside collection agencies; in some cases creditors use collection agencies in the early stages of delinquency prior to charge off (charge off usually occurs 120 or 180 days after delinquency, depending on the type of debt).
In other cases, creditors use third-party debt collectors after a debt has been written off by the creditor.
Debt buying is another important component of the consumer debt collection market. As the name indicates, debt buyers purchase debt, either from the original creditor or from another debt buyer, usually for a fraction of the balance owed.
They profit when their recoveries exceed the combined costs of debt acquisition and of collecting from debtors, including overhead (or direct and indirect costs of collection). Debt buyers sometimes use third-party collection agencies or collection law firms to collect their debt, but many also undertake their own collection efforts. Finally, debt buyers also may decide to sell purchased debt to another debt buyer.
Collection attorneys and law firms also play a key role in the consumer debt collection market.
They sometimes are the primary (or only) debt collector with which a consumer will interact. Collection attorneys and law firms may collect through litigation (i.e., filing suit against consumers to collect debt). They also may collect in the same manner as other debt collectors, such as by sending dunning letters and making phone calls. By one estimate, approximately one in 20 delinquent accounts gets referred to a law firm that specializes in debt collection.
Consumer debt collection is a market for “consumer financial products or services” under section 1024(a)(1)(B) of the Act and is thus appropriate for inclusion in a larger participant rulemaking. Moreover, consumer debt collection is critical to the functioning of the consumer credit market and has a significant impact on consumers. By collecting delinquent debt, collectors reduce creditors' losses from non-repayment and thereby help to keep consumer credit available and potentially more affordable to consumers. Available and affordable credit is vital to millions of consumers because it makes it possible for them to purchase goods and services that they could not afford if they had to pay the entire cost at the time of purchase. Further, debt collection is a large, multi-billion dollar industry that directly affects a large number of consumers. In 2011, approximately 30 million individuals, or 14 percent of American adults had debt that was subject to the collections process (averaging approximately $1,400).
Although these figures include not only consumer debt covered by the Act and the Proposed Rule, but also other types of debt such as medical debt, they indicate the importance and central role of consumer debt collection as a market for consumer financial products or services.
The Bureau received comments from consumer groups recommending that the Bureau define each of the various debt collection activities described above as separate markets. Although the collection of consumer debt encompasses these different business models and it may be reasonable to define them as separate markets, it is difficult based on current market practices to draw a bright line separating them. Some third party-collectors also buy debt, and debt buyers may utilize in-house or third-party collectors. Similarly, collection attorneys and law firms may, in addition to representing debt owners, buy debt and collect on their own behalf.
The Bureau is also not aware of any currently available data that would be useable to devise separate tests for these nonbank covered persons. Thus, the Proposed Rule provides for a single-market approach to consumer debt collection.
The Bureau proposes in § 1090.102(a) to use annual receipts as the criterion for defining larger participants in the market for consumer debt collection. As noted above, the Proposed Rule is guided by and adapts the SBA's definition of “annual receipts.” The Bureau believes that annual receipts are a reasonable criterion because, among other things, they are a meaningful measure of the level of participation of an entity in a market and the entity's impact on consumers. For example, third-party collectors, debt buyers, and collection law firms earn income from recovering delinquent consumer debt. Those recoveries are the result of market participation, either through traditional collection means or litigation. Thus, the level of a person's market participation is reflected by the amount of that person's annual receipts. Moreover, by adapting the SBA's definition of “annual receipts,” which has been used by the SBA for purposes of measuring small business concerns since soon after the inception of its program,
the Proposed Rule uses a criterion that should be familiar to nonbank covered persons, thereby reducing regulatory burden. Further, the calculation for annual receipts is based on IRS tax forms and, as a result, generally can be determined by using business records created in the ordinary course of business.
In addition, the U.S. Census Bureau's 2007 Economic Census (Economic Census)
provides an available data source for determining the general contours of the market for consumer debt collection based on the criterion of annual receipts and thereby for defining the larger participants of that market. The Economic Census undertakes a direct survey of domestic business establishments and releases comprehensive statistics about key features and activity levels of these businesses, including total annual receipts.
To conduct an Economic Census, the Census Bureau mails out data collection forms for all establishments of multi-unit companies, large single-unit employers, and a sample of small employers (generally defined as three or fewer employees).
There are limitations to the use of the Economic Census data on annual receipts in the debt collection market for purposes of the Proposed Rule. Most importantly, the Economic Census data are not limited to the collection of consumer financial debt, but rather include both business and non-financial consumer debt, such as medical debt.
They may also be under-inclusive because entities that fall within the NAICS code may not correctly identify themselves or may otherwise fail to respond to the Census; moreover, the NAICS code may not include all persons engaged in activities that meet the definition of consumer debt collection under this proposal. However, although over-inclusive and possibly under-inclusive, the Economic Census data are nevertheless useful in showing the general contours of the consumer debt collection market, the relative size of participants within it on an aggregated basis, and how the participants are clustered by size. This information is thus helpful for purposes of developing a test to determine which participants in the market for consumer debt collection are larger participants based on the criterion of annual receipts.
The Bureau anticipates considering alternative or additional criteria for measuring larger participants of the market for consumer debt collection in the future if additional data for the debt collection market become available to the Bureau, whether through registration of nonbank covered persons by the Bureau or otherwise.
In that event, the Bureau may also consider potential amendments to the annual receipts criterion used in the Proposed Rule. The Bureau seeks comment on the proposed criterion and any additional or alternative criteria that might be used for measuring larger participants in the consumer debt collection market, as well as on any data sources available for such criteria.
Threshold. Under the Proposed Rule, a nonbank covered person is a larger participant in the market for consumer debt collection if its annual receipts meet a specified threshold. As with regard to the selection of the criterion itself, the Bureau has broad discretion in setting the threshold above which an entity would qualify as a larger participant. The Bureau proposes more than $10 million in annual receipts as the threshold to define larger participants in the consumer debt collection market. Using this threshold, proposed § 1090.102(a) states that if a nonbank covered person offers or provides consumer debt collection, and has annual receipts of more than $10 million resulting from that activity, it will be a larger participant of the consumer debt collection market.
The Bureau believes that this threshold is a reasonable means of defining larger participants in this market.
Based on the Economic Census, the proposed threshold would likely bring within the Bureau's scope of supervision approximately 175 entities
out of approximately 4,500 firms engaged in debt collection under NAICS code 56144. Thus, approximately 4 percent of all collection firms would be covered by the proposed threshold.
For comparison, based on the Economic Census data, the median for annual receipts among collection firms is roughly $500,000, significantly below the proposed threshold.
The Bureau believes that the proposed definition would result in sufficient coverage of the debt collection market to enable the Bureau effectively to identify and assess risks to consumers in that market and assess nonbank covered persons' compliance with Federal consumer financial laws. The firms that would be covered by the proposed threshold generate approximately 63 percent of collections receipts.
Thus, although covering only a small percentage of firms in the market, under the proposed threshold, the Bureau's supervision program would cover nonbank entities interacting with a significant portion of consumers with debt under collection.
Two trade associations for the debt collection industry each suggested that the Bureau set a threshold that would cover third-party collection firms and debt buyers with annual revenues of more than $250 million. Based on available data, however, the Bureau estimates that $250 million in annual receipts would cover, at most, approximately seven or fewer firms comprising only approximately 20 percent of overall collection industry receipts.
The Bureau does not believe that this recommended threshold would result in sufficient market coverage to allow it effectively to assess compliance with Federal consumer financial laws and detect and assess risks to consumers. Further, by covering only a handful of actors in a market of approximately 4,500 firms, the recommended threshold would omit many firms that would fairly be described as larger market participants. Indeed, the Act provides that the Bureau's supervision authority extends to the “larger,” not merely the “largest,” participants in a market.
The threshold set forth in the Proposed Rule would provide the Bureau with the ability to supervise a broader range of market participants than only the very largest and identify and evaluate risks to consumers in different segments of the market.
Finally, the threshold set forth in the Proposed Rule is substantially above the SBA's size standard for defining small business concerns. Under the SBA's rules, a debt collection firm with annual receipts of $7 million or less is a small business concern.
Consequently, the Bureau believes that small business concerns under the SBA's rules generally should not meet the Proposed Rule's threshold for the consumer debt collection market.
Proposed § 1090.102(b) relates to the market for consumer reporting. As explained in the section-by-section description of proposed § 1090.101(i) above, the consumer reporting market includes the largest consumer reporting agencies selling comprehensive consumer reports, consumer report resellers, and specialty consumer reporting agencies. The largest consumer reporting agencies collect, among other information, credit account information, items sent for collection, and public records such as judgments and bankruptcies. Resellers purchase consumer information from one or more of the largest agencies, typically provide further input to the consumer report (including by merging files from multiple agencies or adding information from other data sources), and then resell the report to lenders and other users. Specialty consumer reporting agencies primarily collect and provide specific types of information that may be used to make eligibility decisions for particular consumer financial products or services, such as payday loans or checking accounts, or for other determinations, such as eligibility for employment or rental housing. However, certain types of specialty consumer reporting agencies, depending on their activities, may not be engaged in offering consumer financial products or services within the meaning of the Act, and for that reason would not be “covered persons” subject to the Bureau's supervisory authority.
These effective exclusions are implemented in the definition of consumer reporting in proposed § 1090.101(i).
The consumer reporting market is appropriate for inclusion in the Proposed Rule because it is a market for a consumer financial product or service under section 1024(a)(1)(B) of the Act. Additionally, consumer reporting is of fundamental importance to the broader market for consumer financial products and services. Consumer reports (commonly referred to as “credit reports”), which contain information about consumers' credit histories and other transactions, and the credit scores derived from these reports, affect many aspects of consumers' lives. Consumer reports are important tools that lenders use to assess borrower risk when evaluating applications for credit cards, home mortgage loans, automobile loans, and other types of credit. Consumer reports may also be used to determine eligibility and pricing for other types of products and services and other relationships, such as checking accounts. The consumer reporting market affects hundreds of millions of consumers. The Consumer Data Industry Association estimates that each year there are more than 36 billion updates made to consumer files at consumer reporting agencies,
and three billion reports issued.
It also estimates that each of the three largest consumer reporting agencies maintains credit files on more than 200 million consumers.
Criteria. As noted in the section-by-section description of the consumer debt collection market above (proposed § 1090.102(a)), the Bureau has broad discretion in choosing criteria for measuring whether a nonbank entity is a larger participant of a covered market. The Bureau considered several criteria to measure participants in the consumer reporting market. These include, among others, annual receipts; number of unique consumer reports sold or otherwise provided to a third party annually; number of individual consumers a nonbank covered person collects, analyzes, and maintains data about, or provides consumer reports on, annually; and number of employees.
The Bureau proposes in § 1090.102(b) to use annual receipts as the criterion for defining larger participants in the consumer reporting market. As in the consumer debt collection market, the Bureau proposes to use as a guide the SBA's definition of “annual receipts.” The Bureau believes that annual receipts resulting from consumer reporting activities provide a reasonable indication of the level of market participation by a person and its impact on consumers. Consumer reporting agencies earn income from selling consumer reports and other market-related activities that directly affect consumers. As a result, the greater the annual receipts of a consumer reporting agency, the greater its market participation and the greater its impact on consumers. In addition, as with the consumer debt collection market, by adapting the SBA's definition of “annual receipts,” which has been used by the SBA since soon after the inception of its program, the proposed test is intended to be sufficiently straightforward so as not to put undue burden on nonbank covered persons in determining or disputing whether they are subject to the Bureau's nonbank supervision program.
There are limited data available to develop a test for defining larger participants in the consumer reporting market. Although several of the largest participants in this market are public companies, the majority of firms are private and do not publicly disclose data. However, as with the consumer debt collection market, for the criterion of annual receipts, the 2007 Economic Census data provides an available data source.
The Bureau analyzed the Economic Census data for annual receipts for NAICS code 561450 (credit bureaus). Encompassed within this code are both “consumer reporting agencies” and “mercantile (business-to-business) reporting agencies.” Consequently, as with the consumer debt collection market, a limitation of the Economic Census data is that they are over-inclusive.
They are also under-inclusive because entities that fall within the NAICS code may not correctly identify themselves or may otherwise fail to respond to the Census; moreover, the NAICS code may not include all persons engaged in activities that meet the definition of consumer reporting under this proposal. An additional limitation of the Economic Census data for this particular NAICS code is that for certain census tiers, the aggregated annual receipts data are kept confidential.
The data are nonetheless useful in showing the general distribution of the size of participants in the consumer reporting market.
The Bureau proposes adopting more than $7 million in annual receipts as the threshold to define larger participants in the consumer reporting market. Applying this threshold, proposed § 1090.102(b) states that if a nonbank covered person offers or provides consumer reporting and has annual receipts of more than $7 million resulting from this activity, it will be a larger participant of the consumer reporting market.
The Bureau believes that this threshold is reasonable, in part, because available data indicate that it would enable the Bureau to cover in its nonbank supervision program the largest consumer reporting agencies as well as a number of larger specialty consumer reporting agencies.
The Bureau believes that this threshold would cover a sufficient number of market participants to enable the Bureau effectively to assess compliance and identify and assess risks to consumers, but at the same time cover only the “larger” participants of the market.
While there are hundreds of consumer reporting agencies, according to the 2007 Economic Census, a threshold of more than $7 million in annual receipts would cover no more than 39 credit bureaus, or 7 percent of credit reporting agencies (including both mercantile credit reporting agencies and consumer reporting agencies).
Because the Economic Census indicates that 75 percent of these credit bureaus are consumer reporting agencies,
this threshold would likely cover approximately 30 out of approximately 401 consumer reporting agencies. However, some of those consumer reporting agencies may be specialty consumer reporting agencies providing, for example, consumer reports only for employment background screening or rental decisions. As noted above, such agencies do not offer consumer financial products or services within the meaning of the Act, and are effectively excluded from the Bureau's supervisory jurisdiction.
As a result, the Bureau believes that this threshold will cover fewer than 30 consumer reporting agencies. Again for comparison, the Bureau estimates that the median for annual receipts in this industry is less than $500,000, significantly below the proposed threshold.
The threshold of more than $7 million in annual receipts is consistent with the objective of supervising market participants that have a significant impact on consumers, in terms of the number of consumers affected by their operations. In the consumer reporting industry, prices range from two to three cents for prescreening products, from seven cents to sixty two cents for credit scores, and from one to two dollars for consumer reports, while some specialty reports may cost several dollars.
Thus, a company with more than $7 million in annual receipts would likely impact several million consumers. Further, the entities meeting the proposed threshold generate approximately 94 percent of industry receipts.
Although this market share coverage is higher than that resulting from the threshold proposed for the consumer debt collection market, the Bureau believes that this difference is appropriate in light of the different structures of the two markets, particularly the highly concentrated nature of the consumer reporting market and the different types of firms encompassed in the market.
Finally, the proposed threshold is consistent with the SBA's size standard for defining small business concerns. Under the SBA's rules, a consumer reporting firm with annual receipts of $7 million or less is a small business concern.
Thus, the Bureau believes that small business concerns under the SBA's rules generally should not meet the Proposed Rule's threshold for the consumer reporting market.
The Bureau believes that it is important that the Bureau have sufficient time to undertake and complete supervisory activities relating to a larger participant. Thus, proposed § 1090.103 states that a person qualifying as a larger participant under § 1090.102 shall not cease to be a larger participant under this part until two years from the first day of the tax year in which the person last met the applicable test under § 1090.102.
For the above reasons, the Bureau believes that establishing this minimum two-year supervision period is appropriate for the administration of the Bureau's supervisory authority and will avoid the inefficiency of more frequent determinations of an entity's status. The Bureau seeks comment on all aspects of proposed § 1090.103, and in particular on whether a longer or shorter supervision period might be appropriate.
Prior to its implementation of a registration program, the Bureau expects to use various data sources, including publicly available data, to identify which nonbank covered persons appear to qualify as larger participants. If the Bureau determines that an entity qualifies as a larger participant and, after assessing applicable criteria as set forth in the Act, including risk to consumers,
decides to undertake supervisory action in connection with that entity, the Bureau will send the entity a letter apprising it that it plans to undertake supervisory action on the basis of the entity's status as a larger participant. The Bureau recognizes that there may be instances when a person will dispute that it is a larger participant after receiving such a letter. Proposed § 1090.104 sets forth a procedure for such a person to dispute its classification as a larger participant by providing to the Assistant Director for Nonbank Supervision of the Bureau an affidavit setting forth an explanation of the basis for the person's assertion that it does not meet the definition of larger participant. Proposed § 1090.104 further permits a person to include with the response copies of any records, documents, or other information on which the person relied to make the assertion. Proposed § 1090.104 further provides that a person waives the right, at any time that it may dispute that it qualifies as a larger participant, to rely on any argument, records, documents, or other information that it fails to submit to the Assistant Director under this section. Moreover, proposed § 1090.104 states that a person who fails to respond to the Bureau's written communication within 30 days will be deemed to have acknowledged that it is a larger participant. Under proposed § 1090.104, after reviewing the affidavit and any other information submitted by the person disputing its status as a larger participant or deemed relevant by the Assistant Director, the Assistant Director must send the person a statement setting forth the Bureau's conclusion as to whether the person meets the definition of a larger participant. Additionally, the Proposed Rule provides that the Assistant Director may require that a person provide to the Bureau such records, documents, and information as the Assistant Director may deem appropriate to determine whether a person is a larger participant.
These provisions are proposed pursuant to the Bureau's authority under section 1024(b)(7) of the Act to facilitate the Bureau's supervision of larger participants of the markets covered by this Proposed Rule by permitting the Bureau to determine whether a person meets the test for being a larger participant.
The Bureau also proposes § 1090.104 pursuant to section 1022(b)(1) of the Act, which grants the Director the authority to prescribe such rules as may be necessary and appropriate to enable the Bureau to administer and carry out the purposes and objectives of the Federal consumer financial laws, such as its supervision of larger participants, and to prevent evasions of these laws. Providing a process whereby entities must come forward with information if they wish to dispute their status as larger participants, and providing the Bureau the ability to require such information, is necessary and appropriate for the Bureau to implement and efficiently exercise its supervision authority and to prevent evasion of section 1024 of the Act.
VII. Section 1022(b)(2)(A) of the Act Back to Top
Section 1022(b)(2)(A) of the Act calls for the Bureau to consider the potential benefits, costs, and impacts of its regulations.
The proposal, if adopted, would authorize the Bureau to exercise its supervisory authority with respect to certain nonbank covered persons defined as larger participants of the consumer debt collection and consumer reporting markets. Nonbank covered persons in the consumer debt collection market with more than $10 million in annual receipts and nonbank covered persons in the consumer reporting market with more than $7 million in annual receipts, as calculated in the manner set forth in the proposal, would qualify as larger participants and thus be subject to the Bureau's supervision authority. As noted, the Bureau estimates that these thresholds would encompass approximately 175 consumer debt collectors and 30 consumer reporting agencies.
That the Bureau is authorized to undertake supervisory activities with respect to a nonbank covered person that qualifies as a larger participant does not necessarily mean that the Bureau would in fact undertake such activities. Rather, the Bureau would decide whether to use its limited resources to examine or otherwise exercise its supervisory authority over a larger participant based on criteria set by Congress, which focus on risks to consumers.
Conversely, nonbank covered persons in the consumer debt collection market with $10 million or less in annual receipts and nonbank covered persons in the consumer reporting market with $7 million or less in annual receipts, as calculated in the manner set forth in the proposal, generally would not be subject to the Bureau's supervision authority as larger participants of a covered market. They would, however, be subject to the Bureau's rulemaking and enforcement authority and subject to potential Bureau supervision pursuant to section 1024(a)(1)(C) of the Act.
The Bureau notes at the outset that there is little publicly available data with which to effectively measure or quantify the benefits, costs, and impacts of supervision for compliance with Federal consumer financial law generally; as applied to the consumer debt collection or consumer reporting markets, more specifically; or, even more particularly, to covered persons in these markets with annual receipts above the thresholds set by the Proposed Rule. The Bureau has sought information from State regulators and regulatory associations to help quantify the costs incurred by nonbank covered persons from supervision, but, to date, the Bureau has been unable to locate useful information. As a result, the analysis that follows qualitatively examines the benefits, costs, and impacts of the key provisions of the proposal.
The Bureau seeks comment on additional sources of data to evaluate the proposal. The Bureau will further consider the benefits, costs, and impacts of the Proposed Rule and any modifications the Bureau might make to the Proposed Rule prior to adopting a final rule.
The analysis considers the benefits, costs, and impacts of the key provisions of the proposal against a pre-statutory baseline, i.e., the benefits, costs, and impacts of the statute
and the regulation combined. Together, the Act and the Proposed Rule initiate a Federal supervision program for certain nonbank entities in the markets for consumer debt collection and consumer reporting. The benefits, costs, and impacts therefore are considered relative to a baseline where such a Federal supervisory regime does not exist for nonbank institutions in these markets.
In the following discussion, references to the proposal or the supervision program should be read to include the relevant provisions of the Act and the Proposed Rule regarding larger participants.
The potential benefit to consumers from the proposal is the increased consumer protection that should result from larger participants' likely increased compliance with Federal consumer financial law.
The potential costs derive from the resources that larger participants will use to respond to any supervisory activity by the Bureau and to improve their compliance where necessary.
The Bureau expects that the initiation of the supervision program in these markets will likely increase larger participants' compliance with Federal consumer financial law, and that such additional compliance will yield certain benefits for consumers that are affected by consumer debt collectors or consumer reporting agencies. For example, supervisory activity by the Bureau may lead to increased compliance with various statutes and regulations governing consumer debt collection and consumer reporting activities, such as the Fair Debt Collection Practices Act
and the Fair Credit Reporting Act,
As noted earlier, the Bureau may decide to undertake supervisory activity with regard to a larger participant only after considering the applicable statutory criteria including factors such as the size of the entity and risks to consumers. For larger firms or firms where there is evidence of risk to consumers, the benefits of the proposal should be highest. The largest firms are expected to impact the most customers; therefore, any lapses in compliance by such firms may have the largest negative impacts.
Any increase in compliance would therefore benefit a large number of customers or transactions. At the same time, these firms should be best able to bear any fixed supervisory costs given their size and their potential ability to spread these costs over the large number of consumers and transactions. Where there is evidence of risks to consumers, the benefits of supervisory activity are also expected to be high. As a result, the statutory criteria regarding supervision should ensure that those larger participants that are supervised and that incur the costs of that supervision are the same firms where the benefits are likely to be highest.
Under the proposal, larger participants, and in particular those with respect to whom the Bureau chooses to conduct supervisory activity, are expected to incur the majority of the resource costs of increased compliance and increases in the quality of the services provided (e.g. credit reports may become more accurate, or consumers in collection may be treated more fairly).
However, providers may pass on those costs to their customers (as noted, consumers do not generally purchase these types of services) who then may pass them on to consumers, in part through changes in prices for credit. The extent to which these costs are eventually reflected, on average, in higher prices for consumers or lower profits for the affected firms depends on the competitive conditions in the relevant markets. Some consumers could see higher costs of credit and less access, while for others the opposite could be true.
In developing the proposal the Bureau considered selecting different thresholds for each market. One alternative would be to set the thresholds substantially higher and cover only the very largest firms in each market. For example, a threshold of $100 million in annual receipts in the market for consumer reporting would cover only about 10 firms. Under such an alternative, the benefits of supervision to both consumers and covered persons would likely be substantially reduced, since firms impacting a large number of consumers and/or consumers in important market segments would be omitted. On the other hand, the potential costs to covered persons would of course be reduced if fewer firms were defined as larger participants and thus fewer were subject to the Bureau's supervision authority on that basis.
The proposal does not apply to depository institutions or credit unions of any size.
In addition, there is no additional or unique impact from the proposal on rural consumers.
An initial regulatory flexibility analysis is not required for this proposal because the proposal, if adopted, would not have a significant economic impact on a substantial number of small entities. If adopted, the rule would define a class of firms as larger participants and thereby authorize the Bureau to undertake supervisory activities with respect to those firms. The rule would not itself impose any obligations or standards of conduct on larger participants for purposes of RFA analysis. Moreover, even if the rule were considered to impose regulatory obligations for purposes of RFA analysis, the rule would impose such obligations only on nonbank covered persons in the consumer debt collection market with more than $10 million in annual receipts and nonbank covered persons in the consumer reporting market with more than $7 million in annual receipts, as calculated as set forth in the rule. As a result, a nonbank entity that would qualify as a larger participant would generally not meet the SBA standard for a small business, which in these markets has annual receipts at or below $7 million.
Finally, section 1024(e) of the Act authorizes the Bureau to supervise service providers to nonbank covered persons encompassed by section 1024(a)(1), which includes larger participants. Because the Proposed Rule does not address service providers, effects on service providers need not be addressed for purposes of this RFA analysis. Even were such effects relevant, the Bureau believes that it is very unlikely that any supervisory activities with respect to the service providers to the approximately 200 larger participants covered by this proposal would result in a significant economic impact on a substantial number of small entities.
X. Consultation With Federal Agencies Back to Top
In developing the Proposed Rule, the Bureau consulted or offered to consult with the Federal Trade Commission, as well as with the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, and the National Credit Union Administration, including regarding consistency with any prudential, market, or systemic objectives administered by such agencies.
PART 1090—DEFINING LARGER PARTICIPANTS IN CERTAIN CONSUMER FINANCIAL PRODUCT AND SERVICE MARKETS Back to Top
1090.100 Scope and purpose.
1090.101 Definitions.
1090.102 Covered markets and tests for determining larger participants of those markets.
1090.103 Status as larger participant subject to supervision.
1090.104 Determination of status as a larger participant.
12 U.S.C. 5514(a)(1)(B); 12 U.S.C. 5514(b)(7)(A); 12 U.S.C. 5512(b)(1); and 12 U.S.C. 5512(c)(5).
§ 1090.100 Scope and purpose.
§ 1090.101 Definitions.
(2) Exception for furnishing to an affiliated person. Consumer reporting does not include the activities of a person to the extent that a person— (i) Collects, analyzes, or maintains information that solely relates to transactions or experiences between the person and a consumer; and
(j) Larger participant means a nonbank covered person that meets a test under § 1090.102, and for the period provided in § 1090.103 of this part.
§ 1090.102 Covered markets and tests for determining larger participants of those markets.
§ 1090.103 Status as larger participant subject to supervision.
A person qualifying as a larger participant under § 1090.102 shall not cease to be a larger participant under this part until two years from the first day of the tax year in which the person last met the applicable test under § 1090.102.
§ 1090.104 Determination of status as a larger participant.
32. See“SBA Size Standards Methodology” at 4, available athttp://www.sba.gov/sites/default/files/size_standards_methodology.pdf.
33. U.S. Census Bureau 2007 Economic Census, available at
http://www.census.gov/econ/census07/.
34. As noted in the section-by-section discussion of the definition of “annual receipts” (proposed § 1090.101(c)), the SBA and the Economic Census use the term “annual receipts” somewhat differently. As used by the Economic Census, the term includes receipts from all business activities, including net investment income, interest, and dividends, whether or not payment was received in the census year. The SBA, by contrast, defines the term to exclude net capital gains and losses and thus does not capture investment income. Notwithstanding this difference in the meaning of the term, the Economic Census data regarding annual receipts remain useful for purposes of developing a general understanding of the market for consumer debt collection and establishing a test for defining larger participants in that market.
50. A description of the Economic Census and its methodologies may be found in the debt collection market section (proposed § 1090.102(a)) above.
55. The Bureau extrapolated the number of entities from the proportion of establishments that are part of consumer reporting agencies rather than part of mercantile reporting agencies. According to theEconomic Census, consumer reporting agencies account for almost 75 percent of all credit bureau entities (401 out of 535 in total). The Economic Census also indicates that the consumer reporting industry is highly concentrated. The 50 largest firms generate 96 percent of industry revenues. Conversely, the smallest 50 percent of firms generate approximately 1 percent of revenues.
61. For example, assume a nonbank consumer reporting agency's tax year were to run from July 1 to June 30. Assume the entity had $8 million in receipts in each of the tax years of 2010, 2011, and 2012 (July 1, 2010 to June 30, 2011; July 1, 2011 to June 30, 2012; and July 1, 2012 to June 30, 2013, respectively). That entity would have $8 million in annual receipts for the 2012 tax year (July 1, 2012 to June 30, 2013), as annual receipts are generally calculated as a three-year average. If the entity then had only $2 million in receipts for the 2013 tax year (July 1, 2013 to June 30, 2014), its annual receipts for the 2013 tax year would be $6 million. With the two-year supervision period, it would nevertheless remain a larger participant through June 30, 2014 because of its annual receipts in the 2012 tax year. On the other hand, assume the same facts but that the entity's tax year were to run from April 1 to March 31. In that case, the entity would remain alarger participant through March 31, 2014. If the entity were to continue to have $7 million or less in annual receipts for the 2014 tax year (April 1, 2014 to March 31, 2015), it would not be a larger participant for that year. However, if it were to have more than $7 million in annual receipts for the 2014 tax year, it would again qualify as a larger participant for that year and would remain a larger participant through March 31, 2016, even if its annual receipts again fell below $7 million for the 2015 tax year (April 1, 2015 to March 31, 2016).
65. The Bureau also proposes § 1090.104 in part pursuant to section 1022(c)(5) of the Act, which permits the Bureau to require that a nonbank person file with the Bureau, under oath or otherwise, annual or special reports or written answers to specific questions, to determine whether such person is a covered person.