The Consumer Financial Protection Bureau today launched the first federal nonbank supervision program, and Richard Cordray, the agency’s brand-new director, said the program could pose a challenge to nonbank lenders.
“Novel and exotic mortgages battered housing markets and triggered the financial crisis that wrecked the economy and hurt millions,” Richard Cordray, Director of the CFPB, said in prepared remarks for a hearing at The Brookings Institution on Thursday, adding that many of the subprime loans made during the housing bubble were through nonbank mortgage brokers.
“Since most of these businesses are not used to any federal oversight, our new supervision program may be a challenge for them,” he said. “But we must establish clear standards of conduct so that all financial providers play by the rules.”
This new program will be an extension of the CFPB’s existing bank supervision program which began last July, with a purpose of ensuring that banks and nonbanks follow federal consumer financial laws.
“This is an important step forward for protecting consumers,” Cordray said in a statement. “Holding both banks and nonbanks accountable to consumer financial laws will help create a fairer, more transparent market for consumers. It will create a better environment for the honest businesses that serve them. And it will help the overall economic stability of our country.”
The bureau defines “nonbanks” as companies that offer or provide consumer financial products or services but don’t have a bank, thrift, or credit union charter, such as mortgage lenders and servicers, payday lenders, and debt collectors.
“There are thousands of nonbanks, with products that form a significant portion of the consumer financial marketplace and affect millions of Americans each year,” says the CFPB, adding that nonbank lenders originated nearly 2 million new mortgages in 2010.
The supervisory program is “designed to ensure that nonbanks comply with federal consumer financial laws” to “assess risk to consumers arising from those businesses” and will include “conducting individual examinations and may also include requiring reports from businesses to determine what business need greater focus on,” says the CFPB.
Nonbank examination will be the same as the agency’s bank examination, and examiners will use the CFPB Examination Manual as a field guide for both. Nonbank businesses will generally be alerted to an upcoming examination, says the CFPB, and those in violation of federal consumer financial laws will be faced with corrective actions.
The program will be coordinated with state regulators, when applicable, says the CFPB, and going forward, the bureau aims to expand its ongoing supervision of mortgage servicers to nonbank mortgage servicers; propose an initial rule to begin defining who meets the test for “larger participants” in certain nonbank markets; and publish rules to establish procedures to supervise a nonbank company where the CFPB has reasonable cause to believe it poses risks to consumers, among other plans.
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