Nearly two years ago, in April 2022, the CFPB issued a press release announcing its intent to start exercising its authority to examine non-bank financial services institutions that the CFPB has “reasonable cause to determine pose risks to consumers.” The agency also indicated that it would release to the public the results of such supervision. These actions signaled a substantial change from the CFPB’s past exercise of its supervisory authority, even though Section 1024(a)(1)(C) of the Consumer Financial Protection Act provided this type of authority since 2010.

As set forth in the April 2022 procedural rule also associated with this press release, when the CFPB intends to exercise its supervisory authority over a non-bank entity, agency procedures require the CFPB to issue a notice. Then, the subject entity may either consent to the CFPB’s authority or contest it. In the past, entities almost uniformly consented. The CFPB, under this process, has already designated certain nonbanks for supervision under this rule, but those designations have been confidential because they were not challenged. But on February 13, 2024, the CFPB published its first order establishing a supervisory designation in a contested matter. This order also came less than one week after the CFPB announced a significant update to its Supervisory Appeals Process.

The order concerns World Acceptance Corporation, one of the nation’s largest personal installment lenders. After an approximately six-month-long process that involved several rounds of briefing, the CFPB determined that World Acceptance had met the legal requirements for supervision. In other words, the CFPB determined that it had reasonable cause to believe World Acceptance’s conduct “poses risks to consumers with regard to the offering or provision of consumer financial products or services.” Specifically, the CFPB concluded that it had reasonable cause to believe that the company was (1) misleading consumers by not adequately informing them that the insurance coverage it offers is optional, (2) engaging in excessive, harassing, and coercive collection practices, (3) furnishing inaccurate information to consumer reporting agencies that negatively impacted consumer credit scores, and (4) harming consumers by using a business model that relies on serially refinancing loans. The agency concluded that any one of these findings on its own met the legal requirements for supervision.

Notably, the CFPB’s conclusions appear to have been based entirely (or almost entirely) on unverified consumer complaints. While World Acceptance disputed these complaints, as well as the fact that complaints may be used to make these types of conclusions in the first place, the CFPB rejected those arguments. The CFPB also rejected additional arguments that the risks posed by an entity must be unique for it to require supervision in this manner. And the agency clarified that there was no finding that World Acceptance has engaged in any wrongdoing or is a “risky business” (although the CFPB’s findings make it appear that the CFPB believes it will likely find instances of wrongdoing in the future). Following the CFPB’s conclusions, World Acceptance is entitled to petition to have this supervisory designation lifted in two years.

Takeaways

In addition to the specific conclusions about World Acceptance, the CFPB’s order is important in many ways. It lays out the standards and procedures the agency uses to establish a supervisory designation in a contested matter and shows that the agency intends to continue to flex its supervisory authority. The order confirms that the CFPB believes the “reasonable cause” standard required to subject an entity to supervision is less demanding than a preponderance of the evidence standard. The order also clarifies that unverified consumer complaints are sufficient to subject an entity to CFPB supervision. And the order establishes that an entity’s conduct could subject it to supervision even if that conduct was rampant within the relevant industry. In other words, the CFPB need not find that an entity’s conduct posed a unique risk to consumers to subject the entity to supervision. Finally, the order explains that a previous investigation by the CFPB does not foreclose the possibility that an entity could later be subjected to supervision: The CFPB previously opened and closed an investigation into World Acceptance, but that did not bar the agency from opening a new investigation based on substantially the same alleged conduct. The order went to great lengths to confirm that World Acceptance is not subject to any monetary penalties or new legal requirements, and there has been no finding that the entity is a “risky” business. According to the CFPB, “[t]he relatively low bar for subjecting a covered person to supervision . . . reflects the relatively limited impact of such a determination on the entity.” Even if that is the case, World Acceptance presumably expended substantial resources throughout the appeals process and will expend more now that it is subject to CFPB supervision — and as we stated above, it appears the CFPB expects to find wrongdoing in its future supervision of World Acceptance. As to others that might encounter similar treatment in the future, the sheer costs associated with supervision of this nature are a legitimate concern, as are the costs (both monetary and reputational) associated with disputing this designation.