Focus on Fintech: roundup of Q2 updates from the CFPB | Eversheds Sutherland (USA) LLP


1. Takeaways from Director Chopra’s semi-annual report to Congress

On April 6, 2022, the Consumer Financial Protection Bureau (CFPB) released its semi-annual report to Congress required by Dodd-Frank. The report covers the work of the CFPB from April 1, 2021 to September 30, 2021 and details the difficulties faced by consumers in purchasing or obtaining financial products and services, highlighting (i) the CFPB’s concerns about inaccurate tenant screening reports at the aftermath of COVID-19, (ii) the dramatic increase in consumer use of “buy now, pay later” products and (iii) the multitude of consumer complaints the CFPB received from January 2020 to September 2021 regarding failed attempts to correct consumer credit report information.

Significant CFPB initiatives during the reporting period included:

  • A roundtable examining racial bias in home appraisals
  • A cross-federal campaign to connect landlords and renters with available resources to help them stay in their homes when facing COVID-related housing insecurity
  • An initiative to reduce the fees that banks and financial companies charge consumers
  • Efforts to increase workforce and contract diversity
  • Outreach to engage financial institutions in the CFPB’s Diversity and Inclusion Self-Assessment process, including submitting assessments to the CFPB’s Inclusiveness Online Portal

In April, Director Rohit Chopra testified before the Senate Banking Committee and the House Financial Services Committee on the CFBP’s semi-annual report. Statements prepared by Chopra described highlights of his first six months as CFPB director as the agency “refocused its efforts to align with the goals Congress set for the agency” and highlighted the focus on the following initiatives:

  • CFPB will divert resources from small business investigations to focus instead on ‘big players engaged in large-scale damage’
  • The CFPB plans to pursue a regulatory approach that “places greater emphasis on simplicity and ‘clear lines’ whenever possible”
  • The CFPB will emphasize engagement with the public that will allow the agency to “hear directly from the public about potential regulations that should be developed or changed” and obtain feedback from local financial institutions and the business community at large, including those engaged in business practices that fall outside the jurisdiction of the CFPB but are nevertheless affected by the laws that the agency administers
  • Future CFPB initiatives will aim to promote competition “by lowering barriers to entry and increasing the number of companies competing for customers on the basis of quality, price and service”
  • The CFPB will continue to closely monitor the risk posed to the financial services ecosystem by Big Tech’s entry into consumer payments

2. The CFPB is moving away from the Fintech Sandbox program

On May 24, 2022, the CFPB issued a press release announcing its intention to replace the Office of Innovation with the new Office of Competition and Innovation, signaling the end of a Trump-era policy that offered some new fintech products a regulatory safe harbor. Opened in 2018 as the successor to the Obama-era CFPB’s Project Catalyst, the Office of Innovation’s primary purpose was to process requests for No Action Letters (NALs) and sandboxes that s applied to the specific product offerings of an individual company.

In its press release, the CFPB concluded that the NAL and sandbox initiatives “have proven to be ineffective and that some companies participating in these programs have made public statements indicating that the Bureau has provided them with benefits that the Bureau does not had expressly not done”. The press release encourages companies to file regulatory petitions seeking clarity on particular issues that “will apply to all companies in the market.” This preference for rulemaking over NALs and sandboxes aligns with the CFPB’s emphasis on increased guidelines and “clear line” rules.

3. CFBP’s Office of Competition and Innovation Seeks to Lead the Way to Open Banking and Continue Examination of Big Tech

As the CFPB bids farewell to the Innovation Bureau, the Competition and Innovation Bureau that will replace it will focus on open banking, according to the CFPB press release dated May 24, 2022. The CFPB plans also to use the new bureau to pursue Bureau scrutiny of Big Tech companies based on the CFPB’s stated concern that they “stifle competition by exploiting their network effects or market power.” The CFPB says the new office will support efforts to increase consumer choice and create market conditions where “the best products win”. Installed within the Research, Markets and Regulation division of the CFPB, the CFPB indicates that the new office:

  • Explore ways to reduce barriers to switching accounts and providers and giving consumers their “right to walk”;
  • Seek to understand how big players prevent smaller players from offering more user-friendly products;
  • Identify ways for innovators to overcome practical issues such as access to capital, talent or digital data currently blocked by big banks; and
  • Host events that will allow innovators to collaborate and interact with government regulators in formats that allow results to be shared publicly.

In explaining how the new office would “look for structural issues blocking success”, the CFPB potentially sent a bow to the big banks by saying the research “could include deeper explorations of the payment network market or the credit reporting system, which are essential to our financial system but have only a few dominant players. The CFPB also stated that “[a] future regulation by the CFPB under Section 1033 of the Consumer Financial Protection Act will allow consumers access to their own data,” indicating that the agency is ready to act on the information gleaned during of its survey at the end of 2021 on the plans of big technologies in terms of payment solutions.

4. Chopra set to simplify regulations and provide more guidance:

On June 17, 2022, CFPB Director Rohit Chopra issued a press release titled “Rethinking the Approach to Regulation”, signaling the CFPB’s intention to move towards simpler and clearer rules and to significantly increase the amount of guidance for industry. Citing the historical tendency for regulation to issue “rules that are overly complicated and fit for the existing regulatory landscape,” Chopra says the CFPB now aspires to communicate the Bureau’s expectations in simple, straightforward terms and plans to communicate its expectations in a that can “resist as the market changes over time. The CFPB sees this approach as a way to further its goal of promoting consistency among regulators enforcing federal consumer finance law, a topic we discuss here.

Regarding rulemaking, Chopra expressed the CFPB’s following priorities: implementing long-standing congressional directives that have been ignored, including those related to consumers’ access to their financial records, Small Business Lending Transparency and Quality Control Standards for Automated Valuation Models under Dodd-Frank. review authorities authorized by Congress that have not been used, such as the authority to register certain non-bank financial companies to identify potential scammers and other repeat offenders. Chopra says the CFPB will also look at rules the agency inherited from other agencies as well as rules that the CFPB continued in its first decade of existence that need a fresh look. These include rules developed by the Federal Reserve under the Credit Card Act of 2009, rules developed by the Federal Trade Commission to implement the Fair Credit Reporting Act, and CFPB Qualified Mortgage Rules. Finally, Chopra pointed to the CFPB’s advisory opinion program and dissemination of consumer financial protection circulars as tools through which the agency would provide increased guidance and promote consistency among enforcers.

5. The CFPB looks carefully at credit card charges

On June 22, 2022, the CFPB took a step toward resolving credit card company penalty policies by issuing a Notice of Proposed Rulemaking. The CFPB assesses whether credit card late fees and payments are ‘reasonable and proportionate’ as it seeks data on card issuers’ revenues and expenses, the deterrent effect of late fees and the role what late fees do to the profitability of card issuers.

After Congress enacted the Credit Card Accountability and Disclosure Act of 2009 (CARD Act) that reduced a range of junk fees, coercive contract terms and other problematic practices, the Federal Reserve Board voted in 2010 to implement provisions of the CARD Act that required penalties to be “reasonable or commensurate with the omission or violation”. However, the Fed has also included a safe harbor for issuers whose fees fall within specified limits, whether or not those fees are necessary to deter late payments.

A March report released by the CFPB, Credit card late fees, found that many major issuers charged the maximum allowable late fees and the market continued to generate significant profits from late fees, with the $12 billion companies charged in penalties in 2020 accounting for 10% of the total cost of customer credit cards. The report concluded that credit card companies generate a disproportionate share of this revenue from customers living in low-income neighborhoods.

The advance notice of proposed rulemaking asks card issuers, consumer groups and the public to comment. The CFPB seeks to understand: 1) how credit card issuers set late fees, how they determine the reasonableness of these fees in relation to the actual cost to the card issuer, and how the fees relate to the balance statement; 2) whether revenue targets are factored into fee-setting decisions and how fees are factored into card issuer profitability; 3) the actual costs to card issuers associated with late payments; 4) the extent to which late fees and fee amounts act as a deterrent, net of other consequences that issuers may impose; 5) methods used by card issuers to encourage timely payments; 6) the typical timing of consumer payment delays (for example, “what percentage of accounts are less than 24 hours late versus 30 days late?”); and 7) the annual income generated from interest and fees compared to annual expenses. The deadline for submitting comments is July 22, 2022.

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