On November 7, the Consumer Financial Protection Bureau (CFPB) issued a proposed rule with request for public comment to amend existing regulations defining “larger participants” the CFPB supervises by adding a new section to define larger participants that offer digital wallets, payment applications, and similar services.
Specifically, the CFPB seeks to supervise large nonbanks that provide peer-to-peer (P2P) payments, funds transfers, or wallet functionalities through a digital payment application. The proposed rule would subject these nonbank digital consumer payment companies to the CFPB’s supervisory authority to conduct examinations and assess compliance with applicable federal consumer financial protection laws, such as the Electronic Fund Transfer Act, the Gramm-Leach-Bliley Act and the Dodd-Frank Act’s prohibition against unfair, deceptive, and abusive acts and practices. In addition to the proposed rule, the CFPB’s announcement cited yet again its April 25, 2022 warning that it will also use its “dormant authority” to examine nonbanks who “pose risks to consumers.”
Under the Dodd-Frank Act, the CFPB has the authority to supervise certain nonbanks through the use of rulemaking to define the term “larger participants” in a market. This action will represent the sixth market for which the CFPB has defined “larger participants,” having already defined the term for credit reporting, debt collection, student loan servicing, international money transfers (remittances), and automobile financing.
According to the proposed rule, a nonbank covered person would be classified as a larger participant if it satisfies two criteria:
- First, the nonbank covered person and its affiliated companies must provide general-use digital consumer payment applications with an annual volume of at least five million consumer payment transactions.
- The proposed rule defines “consumer payment transactions” to include payments to other persons for personal, household, or family purposes, excluding certain transactions such as international money transfers, exchanges of different currencies (such as crypto-assets), or the sale or lease of goods or services from an online or physical store.
- Second, the nonbank covered person must not be a small business as defined by the Small Business Administration.
Any nonbank covered person that qualifies as a larger participant would remain one for two years from the first day of the tax year when the person last met the larger-participant test. A company would be able to dispute its larger participant qualification. The CFPB would notify an entity when the CFPB intends to undertake supervisory activity and that entity would then have an opportunity to submit documentary evidence and written arguments in support of its claim that it was not a larger participant.
The CFPB’s proposed rulemaking follows its September Issue Spotlight, discussed here, which focused on the role that mobile device operating systems play in determining consumer’s payment options. According to CFPB Director Chopra in the press release announcing the rulemaking, “[p]ayment systems are critical infrastructure for our economy. These activities used to be conducted almost exclusively by supervised banks. Today’s rule would crack down on one avenue for regulatory arbitrage by ensuring large technology firms and other nonbank payments companies are subjected to appropriate oversight.”
Interested parties have until January 8, 2024, or 30 days after publication of the proposed rule in the Federal Register, whichever is later, to submit comments.
Troutman Pepper’s Consumer Financial Services team will be providing further analysis of the proposed rule through its blog and podcast over the coming weeks. As we noted in our podcast on this topic when the CFPB first announced that it was considering this rule, supervision is one of the CFPB’s most effective tools for detecting conduct that it may be concerned about and for pressuring companies to make changes to their business practices. We expect supervision in the area of consumer payments to have a dramatic impact on the industry, once the rule is finalized.