Welcome to the Big League or Prepare for the CFPB

The Federal Reserve of Atlanta notes three broad historical regulatory categories, including fintech regulations, in the United States since the American Revolution. If these trends did not exist, it would be unlikely that our financial institutions would have the safe and solid footing they have today.

Three regulatory periods and the next horizon

Fintechs may enjoy reading the Fed’s detailed report on regulatory nuances, but in short, there are three major blocks, plus an eye on the next era.

• The Crisis (1782–1930)
• The Regulatory Era (1913–1980)
• The Bank Data Era (1980 to present)
• The Next Phase: The Data Drive Era

Regulators have not completely neglected fintechs. There are facets of the Gramm-Leach-Bliley Act (GLB) that directly affect fintechs. Even the Bank for International Settlements (BIS) has a position in regulating low-regulated fintech.

Fintech regulations: Expect to meet your friendly regulators

Fintechs are paying special attention, as the CFPB is now adding you to its regulatory watch list. Fintechs operate with much lower regulatory barriers than banks, but this is likely to change. Bloomberg Law covers the trend in an article titled CFPB Adds Friction to Fintech Inclusion Efforts.

• As fintech firms increase their reach into underserved communities considering ESG strategies, the Consumer Financial Protection Bureau is also tightening enforcement around discriminatory practices and non-banking.
• Despite their laudable goals, these fintech companies may be exposed to even more significant regulatory risks, particularly from the Consumer Financial Protection Bureau. Recent announcements by this consumer watchdog highlight the need to develop appropriate policies and procedures to avoid regulatory action.
• In March 2022, the CFPB announced that it had updated its examination manual to address discriminatory practices by expanding the definition of unfair, deceptive or abusive acts and practices, or UDAAP, under the Dodd-Frank Act. Under this new definition, discriminatory practices may meet the criteria for “unfairness” even if they do not involve “credit” as required by ECOA.

This is a start. It is timely when the economy begins to move towards a recession.

• In March 2022, the CFPB announced that it had updated its examination manual to address discriminatory practices by expanding the definition of unfair, deceptive or abusive acts and practices, or UDAAP, under the Dodd-Frank Act. Under this new definition, discriminatory practices may meet the criteria for “unfairness” even if they do not involve “credit” as required by ECOA.

Another area where regulators should go

Banks are different from fintechs. Their assets and liabilities are sacred to consumers and require protection from high-risk investments. To protect people’s livelihoods, the Federal Reserve oversees the “safety and soundness.” These words should not be taken lightly.

Fintech regulations: High risk/high reward can be disruptive

When considering the volatility of fintechs when the economy begins to struggle, it is important to consider the unproven nature of these companies during an economic downturn. BNPL lending is undoubtedly an example, but even more so is consumer lending, where Oportun shares fell from $25.20 in November 2021 to today’s level of $4.42. And Oportun is undoubtedly not alone.

Regulations – they’re not that bad. They provide operational boundaries and consumer protection. Sure, sometimes it may feel like a root canal at your dentist, but when you meet the requirements, the playing field is level, assets are protected, and customers are treated fairly.

Overview after Brian Rileydirector, credit advisory service at Mercator Advisory Group.