Focus on Fintech: Summary of Q2 updates coming out of the CFPB | Eversheds Sutherland (US) LLP

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

On April 6, 2022, the Consumer Financial Protection Bureau (CFPB) released its semiannual report to Congress required under Dodd-Frank. The report covers the CFPB’s work from April 1, 2021 through September 30, 2021 and describes the difficulties consumers face in shopping for or obtaining financial products and services, highlighting (i) the CFPB’s concerns about inaccurate tenant screening reports in the wake of COVID – 19, (ii) the dramatic increase in consumer use of “Buy Now, Pay Later” products, and (iii) the volume of consumer complaints the CFPB received January 2020 through September 2021 related to failed attempts to correct consumer credit report information.

Significant CFPB initiatives during the period mentioned in the report include:

• A Roundtable Examining Racial Bias in Home Appraisals
• A cross-federal campaign aimed at connecting homeowners and renters with available resources to help them stay in their homes when confronted with COVID-related housing insecurity
• An initiative to reduce the fees charged by banks and finance companies to consumers
• Efforts to increase the workforce and diversity of assignments
• Outreach intended to engage financial institutions in the CFPB’s diversity and inclusion self-assessment process, including submitting assessments to the CFPB’s Inclusion Web Portal

In April, Director Rohit Chopra testified before the Senate Banking Committee and the House Committee on Financial Services about the CFBP’s semiannual report. Chopra’s prepared remarks outlined the highlights of his first six months as CFPB director, as the agency “focused its efforts to align with the goals that Congress set for the agency” and emphasized the following initiatives:

• CFPB will shift resources away from investigating small firms to instead focus on “large actors engaged in large-scale harm”
• The CFPB plans to pursue a regulatory approach that will “put a higher premium on simplicity and ‘bright 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 input from local financial institutions and the broader business community, including those engaged in business practices outside the CFPB’s authority who are nevertheless affected by the laws the agency administers
• Future CFPB initiatives will aim to promote competition “by lowering barriers to entry and increasing the pool of firms competing for customers based on quality, price and service”
• The CFPB will continue to closely monitor the risks posed to the financial services ecosystem by Big Tech’s entry into consumer payments

2. CFPB Moves Away From Fintech Sandbox Program

On May 24, 2022, the CFPB issued a press release announcing its plans to replace the Office of Innovation with the new Office of Competition and Innovation, signaling the end of a Trump-era policy that gave select new fintech products a regulatory safe harbor. Opened in 2018 as a successor to the CFPB’s Obama-era Project Catalyst, the Office of Innovation’s primary purpose was to process applications for No Action Letters (NAL) and Sandboxes that applied to a single company’s specific product offering.

In its press release, the CFPB stated its conclusion that the NAL and sandbox initiatives proved ineffective and that some firms participating in these programs made public statements indicating that the Bureau had given them benefits that the Bureau expressly did not. The press release encourages companies to submit rulemaking petitions to request greater clarity on particular issues that “will apply to all companies in the market.” This preference for regulations over NALs and sandboxes is consistent with the CFPB’s focus on increased guidance and “bright lines.”

3. CFBP Office of Competition and Innovation Looks to Chart Path to Open Banking and Continue Scrutiny of Big Tech

When the CFPB says goodbye to the Office of Innovation, the Office of Competition and Innovation that replaces it will focus on open banking, according to a May 24, 2022 CFPB press release. The CFPB also plans to use the new office to continue the agency’s scrutiny of Big Tech companies based on the CFPB’s stated concern that they are “stifling 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.” Housed in the CFPB’s Division of Research, Markets and Regulation, the CFPB says the new office will:

• Explore ways to reduce the barriers to switching accounts and providers and give consumers their ‘rights of passage’;
• Try to understand how larger players hinder smaller players who offer more consumer-friendly products;
• Identify ways for innovators to overcome practical issues such as access to capital, talent or digital data currently blocked by large banks; and
• Organize events that will allow innovators to collaborate and interact with public regulators in formats that allow results to be shared publicly.

Explaining how the new office would “research structural problems that block successes,” the CFPB potentially sent a shot across the bow of big banks by stating that research “could include larger explorations of the payment network market or the credit reporting system, both of which are critical to our financial system, but has only a few dominant players.” The CFPB also stated that “[a] future rulemaking by the CFPB under Section 1033 of the Consumer Financial Protection Act will give consumers access to their own data,” indicating the agency is prepared to act on the information gleaned from its late-2021 investigation into big tech’s plans for payment solutions.

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

On June 17, 2022, CFPB Director Rohit Chopra issued a press release titled “Rethinking the approach to Regulations”, signaling the CFPB’s intention to move toward simpler and clearer rules and significantly increase the amount of guidance to industry. Citing the historical regulatory tendency to issue “overly complicated and tailored rules for the existing regulatory landscape,” Chopra says the CFPB is now striving to communicate the Bureau’s expectations in plain and simple terms and plans to communicate those expectations in a flexible way that can ” withstand the development of the market over time.” The CFPB sees this approach as a way to further its goal of promoting consistency among regulators enforcing federal consumer law, a topic we cover here.

On rulemaking, Chopra expressed the following CFPB priorities: implementing longstanding congressional directives that have been ignored — including those related to consumers’ access to their financial records, transparency in small business lending and quality control standards for automated valuation models under Dodd-Frank — and review of authorities authorized by Congress that have gone unused, such as the authority to register certain non-bank financial companies to identify potential fraudsters and other repeat offenders. Chopra says the CFPB will also review rules the agency has inherited from other agencies along with regulations the CFPB followed 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 the CFPB’s Qualified Mortgage Rules. Finally, Chopra highlighted the CFPB’s advisory opinion program and circulation of consumer financial protection circulars as tools the agency would provide increased guidance and promote consistency among enforcers.

5. The CFPB is taking a hard look at credit card fees

On June 22, 2022, the CFPB took a step toward addressing the credit card company penalty rules by publishing an Advance Notice of Proposed Rulemaking. The CFPB assesses whether credit card fees and payments are “reasonable and proportionate” as it seeks data on the card issuer’s revenue and expenses, the deterrent effect of late fees and the role late fees play in the card issuer’s profitability.

After Congress passed the Credit Card Accountability Responsibility and Disclosure Act of 2009 (CARD Act) that limited a variety of junk fees, forced contract clauses, and other problematic practices, the Federal Reserve Board voted in 2010 to implement provisions in the CARD Act that required penalties to be “reasonable or proportionate to the omission or breach.” However, the Fed also included a safe harbor for issuers whose fees fall within specified limits, regardless of whether such fees were necessary to deter late payment.

A March report issued by the CFPB, Late credit card fee, found that many major issuers charged the maximum late fee allowed and that the market continues to generate significant profits from late fees, with the $12 billion companies charged in fines in 2020 accounting for ten percent of total customer credit card charges . The report concluded that credit card companies generate a disproportionate amount of this revenue from customers who live in low-income areas.

The Advanced Notice of Proposed Rulemaking solicits comments from card issuers, consumer groups and the public. The CFPB seeks to understand: 1) how credit card issuers set late fees, how they determine the reasonableness of those fees relative to the actual cost to the card issuer, and how the fees are tied to the statement; 2) whether income targets play a role in decisions on fee setting, and how fees play a role in the card issuer’s profitability; 3) the card issuers’ real costs associated with late payment; 4) the extent to which late fees and fee amounts have a deterrent effect, minus other consequences that issuers may impose; 5) the methods card issuers use to encourage timely payment; 6) the typical timing of consumers’ late payments (e.g, “what percentage of accounts are less than 24 hours late versus 30 days late?”); and 7) the annual income generated from interest and fees versus annual expenses. The deadline for submitting comments is 22 July 2022.

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