4. Who Else May be Affected by the Rule?
“Service Providers”
Importantly, the new rule also covers “service providers”: any person who provides a material service to a larger participant in connection with their offering of a consumer financial product or service. The CFPB’s investigation and enforcement power over service providers, however, is not governed by the amount of their annual receipts.
As a result, the new rule threatens to affect many more debt collection firms than the CFPB’s projected estimate of 175. Law firms that provide services to a larger participant’s debt collection activities especially should be concerned with this broad CFPB reach, since they could be vulnerable despite limited engagement in debt collection activities.
“Risky” Businesses
While the CFPB has made strides in its attempt to supervise as many financial service companies as possible, the agency in May announced a proposal for a rule where a “riskiness” determination will allow it to supervise non-banks that it would otherwise not be able to reach. Likewise, the CFPB could theoretically try to assert supervision over entire industries based on its riskiness assessment. The bureau will be able to do so merely because of a subjective decision based upon company or industry conduct. This is an obvious and troublesome back door around the larger participant rule, which limits the CFPB’s supervision to non-banks offering consumer reporting whose annual receipts from consumer reporting exceed $7 million, and non-banks providing consumer debt collection whose annual receipts from such activity exceed $10 million.
5. What Should Companies and Firms Do Now?
While the CFPB has fundamentally altered the consumer protection regulatory landscape, the CFPB also is busy defining the scope of its direct examination and supervision powers, which will have a dramatic impact on the surprisingly broad sweep of the powers being claimed by the agency. At this stage, the force of the CFPB’s new supervisory authority over debt collectors still is being determined. Based on its recent enforcement actions, however—resulting in large settlements and fines of up to $250 million—any company under the CFPB’s purview must be knowledgeable about its practices and procedures. A CFPB investigation not only creates the risk of enormous compliance costs and settlement amounts, but also the danger of disclosing confidential documents and other privileged information. That disclosure presents a major risk of future litigation, especially given the high-profile nature of the CFPB enforcement actions.
For law firms engaging in debt collecting, moreover, the compliance pitfalls associated with a CFPB investigation are particularly significant. Legal professionals have heightened duties of confidentiality to their clients and must maintain certain ethical standards in their practices. These standards are established and regulated by state bars and could potentially be implicated during a CFPB enforcement action.
Although the CFPB contends that state bar regulations and conduct rules of federal consumer finance law are never in conflict, the legal basis for that claim has yet to be endorsed by any court. So law firms need to review their collection practices, including litigation involving security interests or other potentially defaulting assets. An internal audit by all companies potentially affected by the rule may be wise.
Ultimately, the takeaway for all “larger” debt collectors is that a CFPB investigation is no minor event. Establishing efficient compliance and response procedures now will only save more time and money in the future. Internal compliance audits should be under way to ensure preparedness for CFPB oversight in 2013 and beyond.
David N. Anthony and Alan D. Wingfield are partners in the Richmond, Virginia, office of Troutman Sanders and members of the firm’s CFPB team. Anthony also heads the firm’s financial services litigation practice group. Virginia Bell Flynn and H. Scott Kelly are associates with the CFPB team. They can be reached at cfpb@troutmansanders.com.
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