Federal Consumer Watchdog Eyes Nonbanks

January 6, 2012

After months of political gridlock over the makeup of the Consumer Financial Protection Bureau, the bureau got a chief, Richard Cordray, who, on his first day of work (yesterday) made it clear that payday lenders, prepaid card companies and other non-bank providers of consumer financial services are a top priority.

"The CFPB's nonbank supervision will now begin in phases," the Bureau said in a public statement.

Created by the massive financial regulatory reform package known as the Dodd-Frank Act., the CFPB's mission is to oversee compliance with consumer protection laws by large financial institutions and large nonbank providers of credit to consumers. (Think EFT Act, Truth in Lending, Fair Debt Reporting.) And in some markets, the Bureau has authority over nonbanks regardless of size: mortgage companies, payday lenders and private education lenders.

"These are important markets," Cordray said in remarks to the Brookings Institution just hours after assuming his new post. "Many provide valuable services to customers who lack access to other forms of credit. And they are big markets. Nearly 20 million American households use payday lenders, and they pay roughly $7.4 billion in fees every year."

Cordray was nominated for the CFPB post by President Obama, but Senate Republicans have blocked a vote on the nomination over opposition to governance structure of CFPB. (They want it to be led by a panel; not a single director.) So the President made an end-run around the Senate, appointing Cordray to the post while the chamber was closed for its year-end recess.

There's a lot of chatter in Washington over the legality of the so-called "recess appointment" of Cordray that could hamper the agency's effectiveness. What's more, there's nothing stopping future, Republican administrations from scaling back or even eliminating the Bureau's authority. Asked about this during his appearance at Brookings Cordray said he didn't think that would be a problem provided "we do our jobs well."

Going forward, the CFPB has IDed six additional categories of nonbanks that warrant closer supervision. These are companies involved in:

• debt collection
• consumer reporting
• consumer credit and related activities
• money transmitting, check cashing and related activities
• debt relief services
• prepaid debit cards

Interestingly, retailers (even those with large prepaid debit card programs) are specifically exempt from CFPB oversight. This has led to several calls from consumer groups for regulating large retailers, like Walmart, that run prepaid card programs.

"Prepaid card issuers should be required to provide consumers with the same mandatory protections that come with traditional debit cards and to clearly disclose all fees so consumer know these fees upfront," wrote Michelle Jun, Senior Attorney at Consumers Union, the advocacy arm of Consumer Reports, wrote in a November letter to CFPB.

Americans use nonbanks to cash $60 billion in checks yearly

_{-Federal Reserve}