In its first action under its new director, the Consumer Financial Protection Bureau (CFPB) is taking steps to supervise a big chunk of the mortgage industry and other nonbank financial business that had previously gone unregulated. The CFPB launched its “Nonbank Supervision Program” one day after President Obama used a controversial recess appointment to name Richard Cordray, a former Ohio State Attorney General, as the agency’s first director.

Addresses previously unregulated sector

 

The move brings under federal authority various nonbank financial businesses that previously had gone unregulated, including payday lenders, debt collectors, student loan companies and the like. It has particular significance for the mortgage industry – and mortgage borrowers – because the term also includes mortgage brokers, nonbank mortgage lenders, mortgage brokers, loan modification companies, mortgage servicers and credit reporting agencies, among others.

 

“This is an important step forward for protecting consumers,” Cordray said in a statement. “Holding both banks and nonbanks accountable to consumer financial laws will help create a fairer, more transparent market for consumers. It will create a better environment for the honest businesses that serve them. And it will help the overall economic stability of our country.”

 

Loan modification fraud among concerns

 

The nonbank sector of the consumer financial services industry has drawn more than its share of criticism and complaints of consumer abuses. The CFPB is currently working with the Treasury Department to investigate reports of widespread fraud in the for-profit loan modification industry.

 

Payday lenders are often accused of taking advantage of people in tight financial straits by charging excessive interest rates. And mortgage brokers and nonbank lenders have been blamed for playing a major role in the subprime mortgage crisis by encouraging borrowers to take out risky subprime mortgages they didn’t understand and were unlikely to be able to afford over the long term.

The action doesn’t create any new regulations immediately, but simply extends to nonbank financial institutions the same authority that the CFPB already had over banks. Those authorities were given to the CFPB under the Dodd-Frank Act creating the agency.

The CFPB generally defines a nonbank financial institution as a company that offers consumer financial products or services, but doesn’t offer checking or savings accounts or have a bank, thrift or credit union charter.

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