CFPB enters consent order with fintech company to resolve alleged UDAAP practices arising from use of algorithm

The CFPB announced that it has entered into a Consent Order with Hello Digit, LLC (“Digit”) to resolve the CFPB’s allegations that Digit engaged in deceptive acts and practices in connection with an automated savings tool it offered to consumers. The settlement requires Digit to pay a $2.7 million fine and at least $68,145 in consumer restitution.

Digit is a fintech company that offers a personal financial management app that includes an automated savings tool. When signing up for the Service, Digit requires consumers to give Hello Digit access to their checking accounts. Using its own proprietary algorithm, Digit analyzes consumers’ checking account data to determine how much a consumer should save. It then initiates automatic electronic funds transfers (“autosavings”) to transfer money from consumers’ checking accounts to interest-bearing “for the benefit of” accounts held in Digit’s name at third-party institutions (“Digit Savings Accounts”). Consumers are charged a monthly subscription fee of $5 for this service.

The CFPB found that despite using “message themes to consumers” that the automated savings tool saved “the perfect amount” and that there were “no overdrafts,” Digit knew from the start that (1) the algorithms had limitations that prevented Digit’s ability to accurately predict an appropriate amount to withdraw from consumers’ checking accounts, and (2) the auto savings caused routine overdrafts, resulting in overdraft fees charged by consumers’ banks. Digit also showed consumers that if it caused an overdraft through an auto savings account, it would refund any overdraft fees a consumer incurred. However, Digit did not refund consumers for all overdrafts and received daily complaints about overdrafts. It also retained significant interest income earned on the funds held in the digital savings accounts, but represented to consumers that it did not collect interest income.

The CFPB found that Digit engaged in deceptive acts or practices in violation of the CFPA by misrepresenting that the service would save the “perfect amount” and have “no overdrafts,” that it would reimburse consumers for all overdraft fees caused by auto savings, and that it did not collect income from interest earned on digital savings accounts. The consumer restitution that Digit is required to pay under the consent order is intended to reimburse consumers for any unrefunded overdraft fees caused by Auto Savings. The consent order also prohibits Digit from continuing to misrepresent its automated savings tools.

In addition to serving as a reminder to companies about the need not to “overpromise” in their marketing materials and to be responsive to consumer complaints, the settlement highlights two ongoing CFPB themes: the focus on overdrafts and reservations about algorithms. Regarding algorithms, the CFPB has previously expressed concern about fair lending risks created by the use of algorithms. The CFPB’s prominent and repeated references to Digit’s use of algorithms in the press release appear to paint the use of algorithms in a negative light even outside of the fair lending context.