On February 17, 2012, the Bureau of Consumer Financial Protection (the “Bureau”) published a proposed rule (the “Rule”) regarding “Defining Larger Participants in Certain Consumer Financial Product and Service Markets.” The Rule is authorized by Sec. 1024 of the Consumer Financial Protection Act of 2010 (Title X of the Dodd-Frank Act) and the public comment period expires on April 17, 2012. The Rule is significant in that it provides an early insight into the Bureau’s view of the scope of its supervisory jurisdiction for non-banks.

The Dodd-Frank Act established the Bureau on July 21, 2011, and gave the Bureau the responsibility of supervising very large banks, thrifts, credit unions and certain nonbank “covered persons.” The supervisory authority vested in the Bureau includes the power to conduct examinations of nonbank covered persons to assess compliance with Federal consumer financial law, obtain information about such persons' activities and compliance systems and procedures by compelling the production of reports and records, and assess risks to consumers and to the consumer financial markets from such activities.  Many of the organizations that are “covered persons” will be subject to examination by a federal agency for the first time as a consequence of the Dodd-Frank Act and associated rules.

For purposes of the Bureau’s supervisory authority, “covered persons” include:

(1) nonbanks of any size that offer or provide to consumers: (A) origination, brokerage, or servicing of residential mortgage loans secured by real estate, and related mortgage loan modification or foreclosure relief services; (B) private education loans; and (C) payday loans, and (2) any “larger participant of a market for other consumer financial products or services,” as defined by the Bureau. [1]

The Rule is the first in what the Bureau anticipates to be a series of rules defining “larger participants” in specific markets and would establish the definition of larger participant for the consumer debt collection and consumer reporting markets.  As to each market, the Rule proposes both a definition of the activity and an “annual receipts” test to measure if the person is a “larger participant” of the relevant market.

Definition of “consumer debt collection.”

Regarding consumer debt collection, the Bureau casts a wide net to capture “a range of consumer debt collection activities, including consumer debt collection activities undertaken by third party collectors, law firms, attorneys, and debt buyers.” The Rule defines “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. A person offers or provides consumer debt collection where the relevant debt is either: (1) Collected on behalf of another person; or (2) Collected on the person's own behalf, if the person purchased or otherwise obtained the debt while the debt was in default under the terms of the contract or other instrument governing the debt.

As noted in the Rule, this definition is similar to the terms of the federal Fair Debt Collection Practices Act[2] (“FDCPA”), which are also often echoed in state laws regulating debt collection.  It is unclear why the Bureau has chosen not to more expressly cross-reference the definitions and interpretations under the FDCPA; the potential for divergence between the Bureau’s treatment under the Dodd-Frank Act and interpretations under the FDCPA may create uncertainty as to coverage under both sets of rules.

Definition of “consumer reporting.”

The Rule defines “consumer reporting” as follows:

(i) Consumer reporting means:

(1) In general. 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.

(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

(ii) Provides the information described in paragraph (i)(2)(i) of this section to an affiliate.

(3) Exception for furnishing information to a consumer reporting entity. Consumer reporting does not include the activities of a person to the extent that a person provides information that solely relates to transactions or experiences between a consumer and the person, or the affiliate of such person, to another person that is engaged in consumer reporting.

(4) Exception for providing information to be used solely in a decision regarding employment, government licensing, or residential leasing or tenancy. Consumer reporting does not include the activities of a person to the extent that a person provides consumer report or other account information that is used or expected to be used solely in any decision regarding the offering or provision of a product or service that is not a consumer financial product or service, including a decision for employment, government licensing, or a residential lease or tenancy involving a consumer.

The Bureau proposes to exclude from the definition 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.

As with the definition of “consumer debt collection,” these provisions clearly derive but differ from the existing statute, in this case the federal Fair Credit Reporting Act (“FCRA”). For example, whereas the FCRA defines “consumer reports” and “consumer reporting agencies,” the Bureau’s proposal defines “consumer reporting.” And the proposal does so in terms that superficially resemble, but on closer review materially differ from, those of the FCRA. To take one instance, whereas the FCRA defines a consumer report as a communication of certain information that is used, expected to be used or collected as a factor in establishing a consumer’s eligibility for certain things, such as an extension of credit, the Bureau’s proposal defines consumer reporting to include providing certain information used or expected to be used in any decision regarding the provision of a consumer financial product or service.

This is a remarkable step. The FCRA is notoriously involuted and ambiguous, posing significant challenges to interpretation. Interpreting the FCRA alongside the Gramm-Leach-Bliley privacy regulations has proven still more challenging. Yet now the Bureau proposes to add further complexity, by establishing “larger participant” standards that resemble but do not duplicate the corresponding terms of the FCRA.

The Bureau does not expressly justify this proposed incremental complexity. In fairness, it may have taken the view that the terms of the Dodd-Frank Act do not permit it sufficient latitude to track the FCRA more closely – and indeed, paragraph (4) above reflects jurisdictional limits on the Bureau that do not exist in the FCRA. Nevertheless, the potential for confusion and the need for burdensome interpretation seems apparent as entities seek to understand if their activities as a “consumer reporting agency” under the FCRA make them subject to Bureau supervisory jurisdiction, and vice versa.

“Annual receipts” test.

To determine if a nonbank entity is a “larger participant” subject to supervision by the Bureau, the Rule proposes using a test based on the “annual receipts” of each nonbank entity resulting from activities related to the relevant market. The definition of “annual receipts” is adapted from the definition used by the Small Business Administration to define small business concerns; annual receipts includes “total income” plus “costs of goods sold” as the terms are defined and reported on IRS tax returns, and does not include net capital gains or losses. For “consumer debt collection”, the threshold would be more than $10 million in annual receipts, and for “consumer reporting”, the threshold would be more than $7 million. The Rule provides that once an entity qualifies as a larger participant, the designation will apply for at least two years from the first day of the tax year when the threshold was met, and includes a procedure to dispute the qualification.

The use of a flat “annual receipts” figure will create an ongoing need for the Bureau to update these amounts as the markets evolve. Moreover, using a flat number without any reference to overall market size or share might lead one to wonder: “larger than what? Larger than a “smaller participant”?

The Bureau notes in the Rule that it considered a variety of potential ways to determine if entities were “larger participants” in the markets for both debt collection and consumer reporting. The Rule does not provide any indication, however, as to whether the Bureau believes the “annual receipts” test will be the appropriate metric for other markets.

[1] The Bureau also has the power to supervise non-banks if the Bureau determines “by order, after notice and a reasonable opportunity …to respond” that such person is engaging in conduct that poses risks to consumers in connection with offering financial products or services.  Pub. L. 111-203, 124 Stat. 1376, § 1024(a)(1)(B), (a)(2) (2010). Finally, the Bureau also supervises “service providers” to all such persons.  Id. at § 1024(e); and see id. at § 1002(26).
[2] 15 U.S.C. § 1692(a)(6) (2006).