Regulatory Practice Letter December 2012 RPL 12-24

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1 Regulatory Practice Letter December 2012 RPL CFPB Nonbank Supervision - Larger Participants for Debt Collection and Credit Reporting Final Rules Executive Summary In February 2012, the Bureau of Consumer Financial Protection ( CFPB or Bureau ) released a proposed rule to define larger participants in the consumer debt collection and consumer reporting markets for purposes of identifying certain nonbank financial services providers that would be subject to supervision under the Bureau s nonbank supervision program (see Regulatory Practice Letter 12-07). The CFPB has released two separate final rules that substantially follow the definitions outlined in the proposal. Accordingly, the CFPB has defined a larger participant : In the consumer debt collection market to include debt collectors with more than $10 million in annual receipts from debt collecting activities. The Bureau will commence its supervision authority over this market on January 2, In the consumer reporting market as companies that receive more than $7 million in annual receipts from consumer reporting activities. Supervision of these companies began September 30, For both consumer debt collectors and consumer reporting companies, the annual receipts used to determine if a person qualifies as a larger participant will generally be calculated as the average of the receipts for the three most recent fiscal years. A consumer debt collector or consumer reporting company that qualifies as a larger participant will be treated as a larger participant for not less than two years ( until two years from the first day of the tax year in which the person last met the applicable threshold to be defined as a larger participant ). Background Pursuant to Section 1024 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act ), the CFPB has the authority to supervise certain nonbanks regardless of size, including mortgage companies (originators, brokers, and servicers including loan modification or foreclosure relief services); payday lenders; and private education lenders. Section 1024 also gives the CFPB authority to supervise larger participants of other markets for consumer financial products and services that the CFPB identifies and defines by rule. In June 2011, the CFPB solicited input on the definition of a larger participant for six separate consumer financial product and service markets, which included consumer debt collection and consumer reporting (the two now subject to supervision) as well as: consumer credit

2 and related activities; money transmitting, check cashing and related activities; prepaid cards; and debt relief services. The CFPB has stated that it will release a series of larger participant rulemakings over time. Description Consumer Debt Collection Definitions The final larger participant consumer debt collection rule defines: Consumer debt collection to mean the activity of a debt collector to collect debts incurred by consumers primarily for personal, family, or household purposes and related to consumer financial products or services. Debt collector to mean any person who uses any instrumentality of interstate commerce or the mails in any business the principal purpose of which is the collection of any debts, or who regularly collects or attempts to collect, directly or indirectly, debts owed or due or asserted to be owed or due to another. The CFPB states this will include three main types of debt collection: 1) firms that buy defaulted debt and collect it for themselves; 2) firms that collect defaulted debt owned by another company in return for a fee; and, 3) attorneys that collect debt through litigation. Exceptions to the definition of debt collector generally include: any person that is not in the business of debt collecting but does so on behalf of a related or affiliated person; any nonprofit organization that performs bona fide consumer credit counseling and assists consumers in the liquidation of their debts at the request of consumers; any person collecting or attempting to collect any debt owed another person to the extent such activity concerns a debt originated or acquired by such person (but not loan servicing-related collections); or any person engaged solely in enforcing a security interest. Receipts to mean total income plus cost of goods sold, during a fiscal year. Annual receipts used for purposes of meeting the annual receipts threshold are generally measured as the average of the three most recent fiscal years for the person and its affiliates. However, the annual receipts for the person and each affiliate is calculated separately and then added together. Receipts that result from the collection of debt that was originally owed to a medical provider are excluded from the definition of annual receipts. (The CFPB notes that it is currently difficult for debt collectors to identify whether a particular medical debt resulted from an extension of credit.) Larger Participants in the consumer debt collection market to include persons with more than $10 million in annual receipts resulting from relevant consumer debt collection activities (except for receipts that result from collecting debts that were originally owed to a medical provider). A consumer debt collector that qualifies as a larger participant will be treated as a larger participant until two years from the first day of the tax year in which the person last met the applicable threshold to be defined as a larger participant.

3 Supervisory Examinations Beginning January 2, 2013, debt collection companies that meet the definition of larger participants will be subject to supervisory examination by the CFPB. The CFPB released Examination Procedures specific to debt collection concurrently with the final rule. The objectives of the examination are to: Assess the quality of the regulated entity s compliance management systems, including its internal controls and policies and procedures, for its debt collection business; Identify acts or practices that materially increase the risk of violations of Federal consumer financial laws in connection with debt collection; Gather facts that help to determine whether a regulated entity engages in acts or practices that violate the requirements of Federal consumer financial laws; and Determine, in accordance with CFPB internal consultation requirements, whether a violation of a Federal consumer financial law has occurred and whether further supervisory or enforcement actions are appropriate. The Examination Procedures also identify and outline those Federal consumer financial laws applicable to debt collectors, which include, among others, the: Fair Debt Collection Practices Act; Fair Credit Reporting Act and its implementing Regulation V; Gramm-Leach-Bliley Act and its implementing Regulation P; Electronic Funds Transfer Act and its implementing Regulation E; and Equal Credit Opportunity Act and its implementing Regulation B. In addition to evaluating compliance with the Federal consumer financial laws, examiners will assess other risks to consumers, including unfair, deceptive, or abusive acts or practices ( UDAAP ) as well as whether debt collectors: Provide required disclosures (i.e., identifying themselves and the amount of debt); Provide accurate information; Have a consumer complaint and dispute resolution process (including the adequacy of timeliness of the resolutions); and Communicate civilly and honestly with consumers. Separately, the CFPB states that in supervising a consumer debt collector that qualifies as a larger participant it will examine an entity s collection of medical debt along with other activities subject to the Fair Debt Collection Practices Act ( FDCPA ) and Federal consumer financial laws even though the collection of medical debt is not included in the qualifying annual receipts calculation. Consumer Credit Reporting The CFPB published its final larger participant rule for the consumer credit reporting market on July 20, 2012 and began supervision of that market on September 30, Under the final rule, a nonbank person that offers or provides consumer reporting would be a larger participant of the consumer reporting market if the person s annual receipts (generally measured as the average of the three most recent fiscal years) resulting from relevant consumer reporting activities is more than $7 million. The consumer reporting market includes consumer reporting agencies selling consumer reports, consumer report resellers, analyzers of consumer reports and other account information ( analyzers ), and specialty consumer reporting agencies.

4 As the first larger participant rule, the consumer credit reporting final rule added a new Part 1090 to Chapter X in Title 12 of the Code of Federal Regulations entitled Defining Larger Participants in Certain Consumer Financial Product and Service Markets. Part 1090 is divided into two parts. Subpart A establishes general definitions, concepts, protocols, and procedures relating to the Bureau's supervision of larger participants and assessment to determine whether entities are larger participants. Subpart B identifies the particular markets covered by the larger participant nonbank supervision rules, the definitions of terms for measuring participation in those markets, and the tests used for assessing which entities are the larger participants in those identified markets. The final rule is substantially similar to the proposed rule with what the CFPB terms minor modifications including modifications to the definitions of affiliated company, consumer financial product or service, and nonbank covered person, as well as an increase from 30 days to 45 days as the amount of time permitted a nonbank person that does not believe it meets the definition of a larger participant in a covered market to provide written response to the CFPB. Supervisory Examinations Like those for Debt Collections, the CFPB has released Examination Procedures specific to consumer credit reporting. The Federal consumer financial laws identified and outlined as applicable to consumer credit reporting companies include primarily the Fair Credit Reporting Act and its implementing Regulation V, and the Gramm- Leach-Bliley Act and its implementing Regulation P. Examiners will examine consumer credit reporting companies for compliance with the Federal consumer financial laws and also will evaluate whether, among other things, consumer reporting companies: Use and provide accurate information (including reasonable procedures to ensure accuracy, screening of incoming information and matching information to a consumer s file); Handle consumer disputes (including conducting reasonable investigations of consumer disputes, and evaluating the systems, procedures, and policies used by the company for tracking, handling, investigating, and resolving consumer inquiries, disputes, and complaints); Make disclosures available (including disclosing file information and credit scores to consumers); and Prevent fraud and identity theft (including protecting active duty military consumers). Commentary The CFPB is already actively engaged in both the consumer debt collection and consumer reporting markets. It has entered into at least one enforcement action that specifically identifies concerns related to consumer debt collection practices, and through its Web site, has begun to accept complaints related to consumer reporting, which the CFPB can use going forward to develop an understanding of the market and to target examinations.

5 The impact of operating under the supervisory authority of the CFPB may involve the Bureau: Conducting examinations for compliance with Federal consumer financial laws; Conducting examinations to detect and assess risks to consumers, including targeted reviews in one entity or as part of horizontal reviews of a specific product or process across multiple entities; Requiring the submission of reports and other information about a nonbank financial service provider s activities and compliance systems; and Taking enforcement actions for noncompliance or failure to protect consumers. These actions seek to achieve what Director Cordray called the twin promises of the Dodd-Frank Act where the Bureau will be singularly focused on protecting consumers in the financial marketplace and holding large banks and nonbanks to the same standard. In order to carry out its mandate, the CFPB has rule-writing, examination and enforcement authority; compliance with Federal consumer laws will serve as a baseline. Consumer protection, encompassing the ability to adequately detect, prevent, and correct practices that increase the risk of violating those laws or causing harm to consumers, must become a business strategy. Entities that expect to qualify as a larger participant in the debt collection or consumer credit reporting markets should anticipate and prepare for the significant impact the CFPB will bring to bear on consumer protection in their business and market. They should begin to evaluate their preparedness for Federal oversight in light of the CFPB s expectations for an effective compliance management program, in line with what banks are required to have, which includes: Governance and Culture: Board and management oversight, structure and organization; Compliance Policies, Procedures and Processes: including written policies and procedures, risk assessments and consumer complaints (intake and resolution); People: roles and responsibilities, skills and training; and Monitoring, Testing and Reporting: data and reporting, monitoring and testing, vendor management, compliance audit and issue management. Market participants should consider reviewing their compliance management programs to identify potential gaps, and make adjustments as appropriate, in areas such as: Written policies and procedures designed to ensure compliance with applicable Federal and state consumer financial protection laws and regulations, including UDAAP; Periodic Quality Assurance reviews and ongoing compliance monitoring and testing; Assessments of any elevated risk of harm to consumers from the entity s products or processes; Oversight of affiliates or third-party service providers that participate in the provision of consumer financial products and services, including but not limited to, contracts, monitoring and testing, training programs and compensation structures;

6 Regulatory Practice Processes for receiving, investigating, and resolving consumer complaints and disputes; and Training programs for employees. The CFPB will identify nonbanks for examination on the basis of risks to consumers, including consideration of the company s asset size, volume of consumer financial transactions, extent of State oversight, and other factors determined relevant by the CFPB, such as consumer complaints or other evidence of potential consumer harm. Market participants should therefore also become generally familiar with the CFPB s Supervision and Examination Manual and the relevant market-specific Examination Procedures as laid out on the CFPB s Web site. Nonbanks in other markets identified by the CFPB in its June 2011 Notice and Request for Comment (including: consumer credit and related activities; money transmitting, check cashing and related activities; prepaid cards; and debt relief services) should anticipate the possibility proposed rulemakings defining larger participants in their consumer market may be forthcoming. Contact us: This is a publication of KPMG s Financial Services Regulatory Practice Contributing authors: Linda Gallagher, Principal: lgallagher@kpmg.com Amy Matsuo, Principal: amatsuo@kpmg.com Greg Matthews, Managing Director: gmatthews1@kpmg.com Earlier editions are available at: cations/regulatory-practice-letters/pages/default.aspx ALL INFORMATION PROVIDED HERE IS OF A GENERAL NATURE AND IS NOT INTENDED TO ADDRESS THE CIRCUMSTANCES OF ANY PARTICULAR INDIVIDUAL OR ENTITY. ALTHOUGH WE ENDEAVOR TO PROVIDE ACCURATE AND TIMELY INFORMATION, THERE CAN BE NO GUARANTEE THAT SUCH INFORMATION IS ACCURATE AS OF THE DATE IT IS RECEIVED OR THAT IT WILL CONTINUE TO BE ACCURATE IN THE FUTURE. NO ONE SHOULD ACT UPON SUCH INFORMATION WITHOUT APPROPRIATE PROFESSIONAL ADVICE AFTER A THOROUGH EXAMINATION OF THE FACTS OF THE PARTICULAR SITUATION KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. The KPMG name, logo and cutting through complexity are registered trademarks or trademarks of KPMG International WDC