Dive Brief:

• The Consumer Financial Protection Bureau is proposing a rule that would limit its ability to supervise individual nonbanks, according to a Tuesday entry in the Federal Register. 
• The CFPB said it’s seeking to adopt a standard definition of “risks to consumers with regard to the offering or provision of consumer financial products or services” that would “bind the Bureau” in designating nonbanks falling under CFPB supervision.
• The proposed rule has the potential to affect “a large population of firms,” the CFPB noted. “The Bureau expects that under the proposed rule it will be less likely to designate any particular entity for supervision, all other factors being equal,” the proposal notes.

Dive Insight:

The CFPB has the authority, through the Consumer Financial Protection Act, to supervise a nonbank determined to be engaged in conduct posing risks to consumers through its offering of financial products or services. 

With the proposed rule issued Tuesday, the CFPB is zeroing in on the meaning of “risks to consumers,” saying there’s not, to date, been a rule addressing that. Instead, the bureau has issued orders in individual cases.

That’s given the current CFPB regime “concerns,” the Federal Register entry said, including that the “ad hoc nature of individual orders creates a danger that the Bureau's application of ‘risks to consumers’ may not be consistent between orders.” 

The status quo also creates uncertainty for companies that may be designated for supervision about the standards the CFPB will apply to their case, and the lack of a binding framework around the meaning of “risks to consumers” means the bureau may not be in alignment with the law, the CFPB wrote. 

The proposed rule aims to address those concerns by binding the CFPB “to a standard that is consistent, foreseeable, and based on the best reading” of the related section of the Consumer Financial Protection Act. 

“This will ensure that the Bureau acts within the bounds of its statutory authority and provide clarity to institutions about the standard the Bureau applies,” the CFPB said in the proposed rule. 

Although a broader approach to “risks to consumers” has been taken in some past instances, the current CFPB contends that the related section of the Consumer Financial Protection Act indicates Congress intended the watchdog to “be squarely focused on serious conduct,” the proposal notes.

The potential for fewer firms under the bureau’s supervision means reduced costs of supervision for entities that might have been designated, the CFPB said. It also may influence the behavior of companies that could have seen themselves on the margin of being designated or not, the bureau said.  

Comments on the rule will be accepted until Sept. 25.

The move is another example of CFPB Acting Director Russ Vought’s apparent intentions to hobble the bureau, which had been highly active under Biden-era director Rohit Chopra. Vought has tried to slash the bureau’s workforce, shrink the level of funding it receives, rescinded numerous pieces of guidance, and dropped lawsuits and consent orders against banks and fintechs.    

The CFPB has prepared to close out nearly 2,000 matters requiring attention identified by the bureau’s bank examiners, Bloomberg Law reported Friday, as the door has reopened for Trump administration officials to drastically reduce the agency’s workforce.