CFPB Targets $125B Nonbank Lending Segment

The Consumer Financial Protection Bureau (CFPB) plans to create new rules to regulate large nonbank personal loan providers, addressing concerns about an uneven playing field.

This action follows a petition highlighting the CFPB's current lack of oversight over a significant portion of the nonbank personal loan market, amounting to 85 million accounts and $125 billion in outstanding balances.

The CFPB acknowledges the validity of these concerns, noting current supervision of banks and payday lenders but not other nonbank personal loan providers.

However, the future of this rulemaking is uncertain due to the upcoming presidential transition and potential changes in CFPB leadership.

The regulation will cover three types of personal loan products:

• Short-term installment loans (3-12 months)

• Longer-term loans

• Revolving loans and lines of credit

The proposed rulemaking aims to protect economically vulnerable consumers who:

• Cannot obtain traditional credit cards

• Have exhausted available credit

• Need to refinance existing debt

Consumer Trends

• Over 56% of consumers used installment payment options in the last year

• 76% of buy now, pay later (BNPL) users report high satisfaction levels

The CFPB's move represents a significant step towards comprehensive oversight of nonbank personal loan providers, ensuring greater consumer protection in the evolving financial landscape.

What is the purpose of the petition and who initiated it?

The petition requests the Consumer Financial Protection Bureau (CFPB) to initiate a rulemaking process to define "larger participants" in the nonbank personal loan market. This would give the CFPB the authority to supervise these larger nonbanks.

The petition was jointly filed by the Consumer Bankers Association (CBA) and the Center for Responsible Lending (CRL).

The CBA is a national trade group focused on retail banking and personal financial services for consumers and small businesses. Its members include:

• The largest bank holding companies

• Regional banks

• Super-community banks in the U.S. (collectively holding two-thirds of the assets of depository institutions)

The CRL is a nonprofit, nonpartisan research and policy organization that works to protect homeownership, expand family wealth, and eliminate abusive financial practices. It's affiliated with the Center for Community Self-Help, a large nonprofit community development financial institution.

Despite often having differing views on financial regulation, both the CBA and the CRL agree that the lack of a rule defining "larger participants" creates an uneven playing field in the personal loan market and poses risks to consumers that the CFPB should address through this rulemaking.

CFPB's Nonbank Personal Loan Supervision Deep Dive

• The CFPB hasn't set a specific threshold for defining "larger participants" in nonbank personal lending. Instead, they'll use a multifaceted approach, taking into account factors like asset size, loan volume, transaction numbers, consumer risks, and existing state oversight.

• The $10 billion asset threshold applies only to banks, not nonbank lenders. The CFPB will conduct separate rulemakings to establish specific market thresholds for nonbanks. For instance, they've already set thresholds for markets like consumer reporting, debt collection, and student loan servicing.

• It remains unclear whether the 85 million accounts figure cited by the CFPB includes BNPL providers.

• The CFPB announced its intent to pursue rulemaking on January 8, 2025.

• The next steps involve drafting the proposed rule, internal review, a potential public comment period, and finally, rule finalization.

• Given the complexity of defining "larger participants" and potential political pushback, a realistic implementation timeline points to late 2025 or early 2026.

• While grandfathering provisions haven't been explicitly detailed, the CFPB's approach to other nonbank registries suggests a phased implementation, possibly with retroactive reporting and graduated compliance periods for different categories.

• "Personal loans" are broadly defined as unsecured loans to individual consumers, typically for purposes like debt consolidation, home renovations, or unexpected expenses.

• The rule will likely exclude pure business-purpose loans but might encompass hybrid products with both personal and business elements.

• The CFPB will likely scrutinize marketplace lenders and bank partnerships, especially "rent-a-bank" schemes aimed at circumventing state interest rate caps.

• While the CFPB hasn't explicitly stated they'll differentiate between prime and subprime lenders, their risk-based supervision model suggests they'll consider factors like default rates and lending practices, which inherently distinguish between these segments.

• The CFPB will likely apply a consistent supervisory approach mirroring bank examinations, focusing on risk-based assessments of consumer protection policies and practices.

• Data reporting requirements will likely involve comprehensive data collection on transaction and account balances, loan terms and conditions, payment initiation details, and demographic data.

• Compliance infrastructure requirements may include a designated senior executive responsible for compliance, annual attestations, record maintenance, and the ability to share consumer data electronically.

• Cost estimates for compliance infrastructure are still being determined. However, initial investments could be modest, with potential additional costs for system development, training, and data management.

• CFPB Director Rohit Chopra is spearheading this initiative, with support from the Consumer Bankers Association and the Center for Responsible Lending.

• Besides CRL involved in this specific rulemaking petition, the CFPB has engaged in extensive coordination with other federal regulators, including the FTC, Federal Reserve, OCC, FDIC, and NCUA. They've also established memoranda of understanding with over 20 state attorney general offices, aiming for a consistent approach across state and federal levels.

• Current compliance costs for supervised nonbanks vary significantly depending on size and complexity. Estimates range from 2.9% to 8.7% of non-interest expenses for smaller institutions.

• Banks hold approximately 10% of personal loan balances, finance companies hold 39%, and miscellaneous companies hold the remaining share, with 79% of their holdings coming from fintech loans. The total personal loan market size is estimated at $356.1 billion, with fintech lenders accounting for $49.9 billion.

• Technology vendors offer various capabilities for compliance management, including automated regulatory change tracking, real-time risk monitoring, centralized documentation, and AI-powered insights.

• Increased regulatory supervision could potentially compress valuation multiples of supervised entities due to higher compliance costs. However, it might also raise market entry barriers, benefiting well-capitalized institutions.

In summary, the CFPB's decision to oversee nonbank personal lenders shows a major change. While uncertainties remain around specific thresholds and implementation timelines, the industry must prepare for a future with stricter oversight, more robust compliance requirements, and a greater emphasis on consumer protection.

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