The CFPB has released a supervisory order which establishes that the CFPB has supervisory authority over World Acceptance Corp. (WAC) based on the CFPB’s conclusion that it has reasonable cause to determine that WAC “is engaging in or has engaged in conduct that poses risks to consumers with regard to the offering or provision of one or more consumer financial products or services.”  According to the CFPB’s press release, the order represents the CFPB’s first supervisory designation order in a contested matter, pursuant to its procedural rules.

Section 1024(a)(1)(C) of the Dodd-Frank Act provides that the CFPB can supervise a nonbank covered person that the CFPB “has reasonable cause to determine, by order, after notice to the covered person and a reasonable opportunity for such covered person to respond . . . is engaging, or has engaged, in conduct that poses risks to consumers with regard to the offering or provision of consumer financial products or services.”  In April 2022, the CFPB announced that it planned to invoke this “dormant” authority and amended its procedural rule governing proceedings in which the CFPB invokes such authority (12 C.F.R. Part 190).  In November 2022, the CFPB issued further amendments to the procedural rule.

Pursuant to the procedural rule, the CFPB initiated a proceeding under Section 1024 by issuing a “Notice of Reasonable Cause” to WAC.  After receiving a recommendation regarding a determination pursuant to the procedural rule, Director Chopra issued a Decision and Order in which he found that the CFPB has reasonable cause to determine that WAC’s conduct poses four risks to consumers.  (The public version of the Decision and Order contains numerous redactions.)

The Decision and Order begins with a background discussion in which Director Chopra stated:

“Risk’ is not defined in [Dodd-Frank] but is a familiar term referring to “the possibility of loss or injury.”  In contrast to other Dodd-Frank Act provisions, CFPA section 1024(a)(1(C) does not specify the character or magnitude of “risks to consumers” that is required to subject a covered person to supervision.  Instead, Congress empowered the CFPB to determine whether the risks to consumers posed by a covered person’s conduct warrant supervisory oversight….Congress’s election not to use more specific or directive language in CFPA section 1024(a)(1(C), however, indicates that Congress intended to grant the CFPB significant discretion to determine whether the character and magnitude of the risks posed by a particular covered person’s conduct merit supervision.

(In January 2024, a bi-partisan group of House members sent a letter to Director Chopra to express concern about the absence of an adequate definition for “risks to consumers” in the CFPB’s procedural rule for exercising its risk-based authority and urged the CFPB to provide a clear definition or specific examples of “risk to consumers.”)

The four “risks to consumers” posed by WAC’s conduct as determined by Director Chopra based on consumer complaints received by the CFPB about WAC consist of the following:

1. Bundling loans with insurance coverage.  The complaints establish reasonable cause to determine that WAC’s conduct with respect to bundling loans with insurance products poses a risk to consumers.  Specifically, there is reasonable cause to determine that, as a result of such conduct, many of WAC’s customers do not understand that they are purchasing insurance coverage or that the coverage is optional and not required to take out the loan, and/or do not understand the true cost of their loan because the insurance premiums they were led to believe were mandatory are not included in the disclosed APR. 
2. Risk of harmful collection practices.  The complaints establish reasonable cause to determine that WAC’s collection practices pose risks to consumers.  Specifically, there is reasonable cause to determine that WAC engages in excessive, harassing, or coercive tactics to collect unpaid debts.
3. Risk of inaccurate credit reporting.  The complaints establish reasonable cause to determine that WAC’s furnishing and dispute investigation practices pose risks to consumers. Specifically, there is reasonable cause to determine that WAC reports inaccurate information to consumer reporting agencies and fails to adequately respond to consumer disputes regarding the accuracy of information it has furnished.
4. Risks related to serial refinancing.  The complaints establish reasonable cause to determine that consumers are exposed to various specific risks as a result of WAC’s practice of serially refinancing loans.  There is reasonable cause to determine that (1) repeated loan financing extends the time that a consumer is in debt and can trap consumers in a cycle of debt, (2) when a consumer refinances a loan, the consumer will (i) incur additional fees and charges, including a new origination fee, which increase the overall cost of credit, and (ii) be pressured or misled into purchasing unwanted insurance coverage or other ancillary products which increases the overall cost of credit, sometimes substantially, and (3) consumers will not understand the consequences of refinancing, including how the decision to refinance affects total costs of credit and maturity of the loans, and that WAC’s sale representatives will engage in sales tactics to pressure borrowers to refinance and, in doing so, obscure the loan renewal terms or without information about alternative payment options.  Accordingly, the CFPB has reasonable cause to determine that WAC’s refinancing practices pose risks to consumers.  The available evidence suggests little benefit to WAC’s customers from refinancing but that each refinancing allows WAC to charge new fees, sell ancillary products, and extend the period during which the consumer must pay interest.  Also, consumer complaints indicate that WAC may be taking unreasonable advantage of consumers’ lack of understanding of the material risks, costs, or conditions associated with refinanced loans.

With regard to each risk determination, Director Chopra stated that WAC, in its briefing, did not discuss or contest any of the consumer complaints regarding the practices in question, nor did it “cite any of its responses to those complaints or explain how such response adequately addressed the consumer’s allegations.”  He further stated that “to the extent World believes that the consumer complaints discussed in this order are inaccurate, not credible, or contradicted by other evidence, that argument was not developed in this proceeding and has been waived.”  In connection with his risk determinations regarding bundling loans with insurance coverage and collection practices, Director Chopra also indicated that WAC’s responses to individual complaints that it submitted to the CFPB prior to the proceeding “illustrate why supervision is warranted.”  According to Director Chopra, “[t]hose responses generally either disregard the substance of the relevant portion of the consumer’s complaint, offer a conclusory denial of any wrongdoing, or in some cases, describe the relevant facts differently than the consumer without providing evidence sufficient to resolve the factual allegation.  Accordingly, those responses do not provide a sufficient basis to disregard those complaints.”

Director Chopra rejected WAC’s argument that unverified consumer complaints are insufficient to designate WAC for supervision.  According to Director Chopra, “the CFPB is only required  to establish reasonable cause that WAC’s conduct poses risks to consumers” and “consumer complaints, even if unverified, are sufficient to satisfy that burden, particularly, where, as here, World Acceptance’s supplemental brief does not dispute the veracity of the relevant complaints and World Acceptance’s responses to those complaints, which were submitted to the CFPB, in many instances confirm or fail to dispute relevant facts.”

Director Chopra also rejected WAC’s additional arguments as to why the specific complaints cited by the CFPB were an insufficient basis for a risk determination.  With regard to WAC’s assertion that its complaint volume was not materially different from other lenders, Director Chopra stated that a unique volume of complaints is not required to support a risk determination and the CFPB’s determination that WAC’s conduct poses risks to consumers “is based on the substance and seriousness of the complaints.”  With regard to WAC’s assertion that the CFPB should have considered WAC’s handling and resolution of complaints, Director Chopra stated that WAC’s submission of “written responses to complaints that, in some cases, raise factual disputes does not render those complaints an improper basis for a supervision designation.”  He commented that “supervision will allow the CFPB to resolve those sorts of factual disputes for itself.”

WAC also unsuccessfully argued that the CFPB must articulate a specific basis for its risk determination rather than relying on generalizations that would apply to any lender in its market.  According to Director Chopra, nothing in Dodd-Frank requires a finding that the risks posed by WAC’s conduct are unique or specific to WAC.  Director Chopra also rejected WAC’s argument that the fact that the CFPB’s previously investigated and closed its investigation of WAC is evidence that WAC’s conduct does not pose a risk to consumers.  He indicated that decisions to close investigations can be based on non-substantive considerations and the closing of an investigation should not be interpreted by the market as a conclusion that the CFPB believes the entity “does not pose risks in any of its business dealings.”  He also indicated that in contrast to the CFPB’s enforcement authority which extends to persons that violate federal consumer laws, “a supervisory designation requires only a showing that the entity’s conduct poses risks to consumers and that showing is subject to a more lenient burden of persuasion than an enforcement proceeding.”

When a company receives a Notice of Reasonable Cause, it is advised by the CFPB to either accept supervisory jurisdiction or run the risk of being involuntarily subjected to supervision by the CFPB.  The recipient is further told that if the latter occurs, the CFPB will issue a public order containing the reasons why the CFPB believes that the company poses risks to consumers.  This has been referred to as “naming and shaming.”  

The CFPB’s procedure is blatantly unfair and raises due process concerns.  A company receiving a Notice of Reasonable Cause is presented with a Hobson’s choice–consenting to supervisory jurisdiction even when it is unwarranted or contesting the Notice and losing (as did WAC here) and then being named and shamed even though there has been no finding that the company violated the law.  Even if a company seeks judicial review of the CFPB’s determination, to prevent the public disclosure of the CFPB’s determination, it would have to obtain an injunction from a district court enjoining the CFPB’s public release of its determination and the court would have to allow the entire proceeding to be filed under seal.  Faced with this Hopson’s choice, it is not surprising that, except for WAC, we are not aware of any recipient of a Notice of Reasonable Cause that has not agreed to accept supervisory jurisdiction. 

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