Will the CFPB Regulate Wal-Mart?

WASHINGTON — Bankers are already pleased that the Consumer Financial Protection Bureau is mandated to regulate nonbanks in addition to traditional financial institutions.

But the potential supervision of one particular alternative financial institution may draw the most cheers: Wal-Mart Stores Inc.

The giant retailer was famously blocked from past efforts to own a bank charter. But the consumer agency's apparent interest in money services products like those offered in Wal-Mart could subject the retailer to the same regulatory regime created for big banks in the Dodd-Frank Act.

"It seems to me that if one of the purposes of the CFPB is to level the playing field between banks and nonbanks, then it would be suitable for the bureau to regulate an entity such as Wal-Mart," said Ann Jaedicke, managing director of Promontory Financial Group.

At this stage, it is still unclear whether the bureau would ever examine Wal-Mart.

The issue depends partly on the outcome of a CFPB ruling which will define the scope of its nonbank supervision. But it also depends on if and when a director of the new agency is confirmed. Without a Senate-confirmed leader, the CFPB is limited in its enforcement powers just to banks.

But many experts say that the CFPB's interest in Wal-Mart — which offers multiple card products through third-party institutions, as well as check-cashing, remittance and wire transfer services — is only a matter of time, putting an ironic twist on the contentious history between the retailer and commercial banks.

"It's early in the game to say for sure, but everything that Wal-Mart offers in its financial services division could potentially come under CFPB scrutiny," said Ben Jackson, a senior analyst with the prepaid advisory service at Mercator Advisory Group.

Banking industry representatives said it would make sense for Wal-Mart to face such oversight, since even though the retailer lacks a charter it provides customers with financial options that are similar to what they would find at a bank.

"The CFPB was created in part to level the regulatory playing field for competition between banks and non-banks," said David Luigs, a counsel in the financial institutions group at Debevoise & Plimpton LLP. "If a CFPB … rule were to cover Wal-Mart services like check-cashing and money-transmission which many view as competing with bank services, both could face essentially similar supervision and regulation from the CFPB."

While Wal-Mart operates more full-fledged banks in other countries, its U.S. stores have been able to maintain a substantial financial services presence without a charter, offering services to customers who lack extensive banking relationships. The in-store Wal-Mart Money Center and a Web site provide check-cashing, bill pay and money transfer services. In addition, Wal-Mart has marketed credit cards and prepaid debit cards using partnerships with third-party institutions, including GE Capital Retail Bank and Green Dot Corp.

Once it has a confirmed director in place, the CFPB is authorized by Dodd-Frank to examine several nonbank sectors for compliance with consumer protection laws, in addition to its role ensuring consumer protection among banks. The law expressly requires the bureau to supervise nonbank mortgage companies, payday lenders and private student-loan providers. Beyond that, the regulatory reform statute allows the bureau to regulate so-called "larger participants" in other sectors, and set the parameters for which markets it monitors and what constitutes a "larger participant."

Although the bureau's legal authority to set the scope of its nonbank supervision is a matter of debate — the nonbank program is limited by the lack of a director — the CFPB did in June issue a "notice and request for comment", signaling which nonbank sectors it could choose to examine. Among the nonbank markets the bureau sought comment on were both money transmitters and prepaid card providers, both areas in which Wal-Mart participates.

"The statute excludes retailers with respect to their retailing activities, but the bureau can cover or reach eventually anyone who is providing financial products or services to consumers," said L. Richard Fischer, a partner at Morrison & Foerster. "The bureau has said nothing about those services yet — check cashing or money transfers services — at least I have not seen them say anything about that. But they are the types of services that the bureau could conclude constitute financial products or services.

"The likelihood is that any large provider of financial services will be considered a larger participant."

Some observers questioned whether CFPB would be that interested in Wal-Mart's financial offerings, since the retailer is not involved in direct lending through its U.S. operations and its aggressively low prices for products could lead the bureau to spend more time examining other providers.

"They're the total antithesis of people who are out clipping consumers for payday lending and things like that," said Randy Dennis, president of president of DD&F Consulting Group in Little Rock, who has consulted for Wal-Mart in its past financial services efforts. "I have a hard time seeing why there would be a whole lot of interest there."

But others said even though the bureau has not definitely said which nonbanks will get its attention, the June notice indicates an interest in the types of services Wal-Mart offers.

"It's a little unclear, but based on the proposed large participant rule and to the extent that Wal-Mart cashes checks and wires money, Wal-Mart seems to fit under the CFPB's purview," said Jaedicke.

Jackson said the extent of the bureau's interest in the card products offered by Wal-Mart would depend on whether the agency saw the retailer or its third-party issuers as being more accountable.

"The X factor is whether or not the CFPB would expect Wal-Mart to be responsible for the different aspects of the program such as terms and conditions and fees, or whether they would look toward Wal-Mart's partners such as GE Capital or Green Dot," he said.

Commercial banks, especially smaller institutions that have long feared competition from Wal-Mart, would likely welcome such federal oversight. An effort by the retailer to own a Oklahoma thrift in 1999, a subsequent 2002 application to buy a California industrial loan company and then a 2005 bid to charter a Utah ILC were all strongly opposed by the banking industry.

Even though Wal-Mart has repeatedly insisted its charter attempts were meant merely to save on payment-processing costs, united opposition by banks and unions and legislative attempts to bar commercially-owned ILCs forced Wal-Mart and other large retailers to withdraw their bids.

One of banks' chief concerns had been that an ILC could allow the retail giant and others to expand financial services while escaping the stronger regulatory requirements of other types of charters.

"If there is any nonbank that should be regulated it should be Wal-Mart, if you look at their size and reach into the financial services sector," said Terry Jorde, senior executive vice president and chief of staff for the Independent Community Bankers of America. "From the banking industry's perspective it's about time they get regulated just like the regulated banking industry has been for years and years."

But as much as banks may show their support for a regulated Wal-Mart, it would likely be tempered by the regulatory burden they will face from the CFPB. Overall, industry views are mixed about the CFPB's progress. On one hand, banks prefer the bureau being without a director, which limits its authorities. But on the other hand, as long as the bureau lacks a director, the agency is solely focused on banks.

The administration has nominated Richard Cordray, the CFPB's enforcement director, to lead the agency. But Senate Republicans have vowed to block any nominee absent proposed changes to the bureau's structure, including subjecting CFPB decisions to an oversight board and the congressional appropriations process.

"It's true that this would be a prime example of a leveling of the playing field that would be welcomed by many banks," Jo Ann Barefoot, the co-chairman of Treliant Risk Advisors, said of Wal-Mart coming under the bureau's jurisdiction. "Banks do welcome the idea of there being more regulation of other nonbank competitors as well. On the other hand, there's a lot of concern … about the bureau."