Nonbank trade groups are calling on the Consumer Financial Protection Bureau (CFPB) to narrow the definitions it will use to determine which nonbanks will be subject to federal supervision.
The bureau has proposed to regulate large debt collection and credit reporting firms, the first two industries to be identified by CFPB for inclusion in the program. But in comment letters to the agency, industry groups complained that the bureau is skirting a requirement to examine the impact that the proposal would have on small businesses.
They also said the thresholds the bureau has proposed are too low, and would include a number of small companies, rather than simply the largest participants in the market.
"The mere fact that this rule identifies 'larger participants' does not mean that it has no impact on small business," David Hirschmann, the president and chief executive of the U.S. Chamber of Commerce's Center for Capital Markets Competitiveness, said in a comment letter last month.
Hirschmann said the rule fails to comply with the Small Business Regulatory Enforcement Fairness Act, which requires the bureau to convene a panel of small business experts if it believes a rule would have a significant impact on small firms.
The imposition of exam requirements on larger firms could result in an increase in the cost of credit, as well as less access to it, which could ultimately hurt small companies, he argued. Hirschmann said the bureau should begin the SBREFA process immediately, which would likely delay the rule's implementation beyond July 21, when it is supposed to be finalized under Dodd-Frank.
The agency may already supervise nonbank mortgage, payday and student lenders of any size, but must establish parameters for identifying "larger participants" in other consumer markets. The CFPB has said it is also considering including money transmitters, prepaid-card issuers and debt-relief services for potential inclusion in the nonbank supervision program.
Some industry groups argued that the bureau's thresholds leave no room for a "middle market" — it merely excludes the smallest firms, rather than including only the largest.
Under the proposal, debt collectors with more than $10 million in annual receipts from debt collection activities would be subject to supervision, along with credit reporting firms with more than $7 million in annual receipts.
Using these criteria, the proposal would cover approximately 175 debt collection firms, only about 4% of all such firms, but representing roughly 63% of annual receipts from the entire market, according to CFPB's estimates. It would also cover approximately 7% of all credit reporting agencies, about 30 firms, which represent 94% of the annual receipts from that market.
The National Credit Reporting Association said using annual receipts to determine the threshold ignores another important marker of a "small business" — the number of employees.
"Many smaller companies (some averaging as little as 18 employees), will be classified by the rule as a 'larger participant' and regulated much in the same fashion as a depository institution with consumer funds in their possession," Terry Clemans, the group's executive director, wrote in a comment letter. "The added costs of this regulation may make it difficult for firms in this size category to compete, limiting competition in an already tight marketplace."
The group suggested doubling the threshold to $14 million.
The American Financial Services Association (AFSA), whose members include commercial finance companies, auto finance and leasing companies, mortgage lenders and services and credit card issuers, said none of its companies would be directly impacted by the proposal. But the group said the manner in which CFPB designates larger participants could be carried over to other markets as it expands its nonbank supervision program.
AFSA said the thresholds used for defining larger participants in the debt collection and consumer reporting markets — which rely in part on definitions used by the Small Business Administration — effectively capture all but the smallest market participants, rather than the largest.
"If the CFPB uses 'annual receipts' as the criterion for defining larger participants in other markets, specifically the market for consumer credit and related activities, we ask that the CFPB use a much higher threshold for identifying larger participants," Bill Himpler, the association's executive vice president, said in a letter.
Several companies also complained that the bureau's definition of debt collection is too broad, and could include companies whose primary business is not debt collection, and entities that assign debt to a third party but retain the servicing and collection rights. They encouraged the agency to use the exclusions under the Federal Debt Collection Practices Act to tailor its definition.
Consumer advocacy groups, on the other hand, suggested broadening the standards to make the rule more flexible and responsive to changes in the marketplace.
The bureau doesn't necessarily have to supervise every agency that falls into the larger participant category, but it should at least have the ability to do so, the Consumers Union argued.
Suzanne Martindale, a Consumers Union staff attorney, said CFPB needs to examine not just the largest companies, but those that have a disproportionate impact on certain consumers, such as seniors or members of the military.
"Different entities may have different business models and pose different risks," Martindale wrote in a letter April 17. "The bureau is not obligated to actually examine every 'larger' participant and can tailor its resources to an evolving understanding of where risks emerge."
Shanna Smith, the president of the National Fair Housing Alliance, said the bureau should also consider the effect that companies have on particular communities.
"For example, a market participant that serves a predominantly Spanish-speaking clientele may not have a large share of the overall marketplace, but its policies and practices may have a disproportionate impact on Latino and Spanish-speaking communities in any given geography regardless of its impact on the rest of marketplace," Smith said. "By limiting the definition of a larger participant to the percentage share of the overall marketplace, many participants that serve underserved groups may fly under the radar of the CFPB and allow abusive practices to go unaddressed."