CFPB Bits of the Month – 2022 Annual Review – Fintech | Hudson Cook, LLP
In this article, we share a timeline of our monthly “bits” for 2022 that pertain to the Fintech industry.
So, what happened in 2022?
1. CFPB Acting General Counsel Says Some EWA Products Can Be Loans
On January 18, CFPB Acting General Counsel Seth Frotman responded to advocacy groups asking the CFPB to withdraw the Earned Wage Access (EWA) guidance. Frotman said some EWA products may qualify as “credit” under state and federal laws, and those that charge fees (or accept voluntary tips) may qualify as “loans” under the Truth in Lending Act. He further indicated that he would ask Director Rohit Chopra for clarification on the CFPB’s stance on EWA products.
2. The CFPB introduced its Office of Competition and Innovation
On May 24, 2022, the CFPB opened its “Office of Competition and Innovation” to help encourage innovation and competition. The Office of Competition and Innovation replaced its former “Office of Innovation”, opened in 2018 (and which at the time replaced “Project Catalyst”, launched in 2014). The Office for Competition and Innovation will analyze barriers to open markets, better understand how large players “crowd out” smaller players, host incubation events and encourage competition by training consumers on how to switch accounts and suppliers. As part of the amendment, the CFPB encouraged organizations and members of the public to submit rulemaking petitions to request greater clarity on specific rules.
3. The CFPB expressed concern about credit reporting for Buy Now Pay Later companies
On June 15, 2022, the CFPB expressed concern about how nationwide consumer reporting companies (NCRCs) planned to handle buy-now, pay-later (BNPL) companies. The CFPB indicated that the variations amounting to each NCRC’s plan for BNPL consumer data could result in inconsistent processing that would limit the potential benefits of provided BNPL data. The CFPB urged BNPL companies to provide both positive and negative data. The CFPB also encouraged NCRCs to adopt standardized BNPL furnishing codes and formats appropriate to the product’s unique characteristics. The CFPB will monitor progress in this area and invited consumers to file complaints about both Consumer Reporting and BNPL products as appropriate.
4. The CFPB lifted special regulatory treatment for an earned income access company
On June 21, 2022, the CFPB lifted a Sandbox Approval Order related to one company’s earned income access products. The previous approval order for Sandbox, issued in December 2020, indicated that the transactions addressed in the order would not create liability under the Truth in Lending Act. The CFPB informed the company on June 3, 2022 that it was considering terminating the approval order in light of certain public statements the company made that suggested the CFPB had approved its products. The company then notified the CFPB that it would change its business model and requested termination of the order. The CFPB, noting that it received requests for clarification regarding its advisory opinion on “earned wage access” products, plans to issue additional guidance to provide greater clarity regarding the application of the definition of “credit” under the Truth in Lending Act and Regulation Z. The CFPB has not yet issued this guidance.
5. CFPB issued a report on innovations in payments, including BNPL
On August 4, 2022, the CFPB released a report addressing new payment systems and their capacity to collect user data. The report looked at the growing presence of BNPL, embedded commerce and integrated “super apps”. According to the CFPB, while these technologies have “the potential to streamline payments, facilitate commerce, and improve the user experience,” they may “create more opportunities for companies to collect and monetize consumer financial data, and for large players to dominate consumer financial and commercial life.” The CFPB also warned that “while a variety of payment options create more options for consumers, varying regulatory requirements may risk regulatory arbitrage.” The CFPB concluded by noting that it would propose “financial data rights” rules, review BNPL to determine whether regulatory intervention is appropriate, and evaluate ways to protect consumers in real-time payments.
6. CFPB said behavioral targeting of individual consumers can create liability
On August 10, 2022, the CFPB issued an interpretive rule and Director Chopra delivered a related speech to the National Association of Attorneys General. The interpretation rule and the speech addressed digital marketing from large technology companies. According to the CFPB, digital marketers are not exempt from the Consumer Financial Protection Act and may be liable for “unfair, deceptive or abusive actions.” The interpretation rule indicates that digital marketers supply material services to financial institutions and are thus subject to consumer protection. As service providers, they are liable for breaches of consumer protection laws.
7. The CFPB required a savings app to pay $27 million
On August 10, 2022, the CFPB announced a consent order against a financial technology company that allegedly used a flawed algorithm that resulted in overdrafts and overdraft penalties for consumers. The company offered a mobile app that it promoted as a way to save consumers money. According to the CFPB, the company falsely guaranteed that consumers would not incur overdraft fees, broke promises to correct the mistakes and pocketed money that should have gone to consumers. The order requires the company to pay restitution to consumers and pay a civil monetary penalty of $2.7 million to the CFPB.
8. A CFPB study looked at BNPL transactions
On September 15, 2022, the CFPB issued that promise report at BNPL. The report, “Buy Now, Pay Later: Market Trends and Consumer Impacts,” warned that consumers “may receive uneven disclosure and protection.” Director Chopra commented that BNPL “is a fast-growing type of loan that acts as a close substitute for credit cards,” and that the CFPB “will work to ensure that borrowers have similar protections, regardless of whether they use a credit card or a Buy Now Pay later loans.” The CFPB also indicated that it will use interpretive guidance or rules to mandate BNPL providers to comply with “many of the baseline protections” that Congress has established for credit cards. To reduce the risk of “overextension,” the CFPB indicated that it will continue to address “appropriate and accurate credit reporting practices.”
9. A consumer group and a banking trade association asked the CFPB for more fintech regulation
On 15 September 2022, the Consumer Bank Association and the Center for Responsible Lending joined forces requested The CFPB is asking for a “larger participation rule” so the CFPB can “schedule investigations” of organizations that offer installment loans and lines of credit. The CRL and CBA called for regulations to cover fintechs originating and servicing personal loans. CRL and CBA believed that fintechs and non-bank lenders that provide personal loans are not subject to regular oversight by the CFPB, which has “created uneven competition and a great risk to consumers.”
10. The CFPB indicated that it was investigating a company’s reversal of a user policy
On October 12, 2022, Director Chopra discussed technology platforms on CNBC. Chopra stated that the CFPB ordered several technology platforms to provide information about people the platforms wanted to remove or fine. Chopra’s comments came after a mobile payment app reportedly released a policy update saying the app would fine users for “promoting misinformation.” The company indicated that it made the update in error. The Consumer Review Fairness Act prohibits businesses from using form contract provisions that prevent consumers from writing or posting negative online reviews or threaten them with legal action if they do.
11. The CFPB moved to scrap the previous administration’s innovation policy
On September 26, 2022, the CFPB issued a statement that it would allow its no-action letter and compliance assistance sandbox guidelines to expire on September 30, 2022. The CFPB further stated that no more applications will be accepted under the guidelines. The CFPB said it will, however, continue to accept applications filed under a third, more narrowly focused innovation policy to test new disclosures.
12. The CFPB sued a company to collect membership fees
On October 18, 2022, the CFPB sued an organization for allegedly tricking people into joining a discount club. The CFPB alleged that the company automatically and illegally enrolled consumers in its discount club when consumers thought they were signing up for a single event. The CFPB alleges that the company violated the Consumer Financial Protection Act by enrolling consumers and charging them for discount club memberships without their knowledge, consent or full understanding of the material terms of the transaction. The CFPB also noted that administrative agencies in Iowa and Vermont separately sanctioned the company for allegedly violating state consumer financial protection laws.
13. The CFPB published a bulletin regarding crypto complaints
On November 10, 2022, the CFPB released a complaint bulletin highlighting complaints the CFPB received related to cryptoassets. According to the CFPB, most consumers reported experiencing fraud, theft, account hacking and fraud. The CFPB also claimed that consumers were having trouble making transactions and transferring assets. Many consumers had difficulty accessing funds due to platform errors, identity verification issues, security blocks and technical issues with platforms. The CFPB also indicated that poor customer service is a common theme across crypto-related complaints.
14. The CFPB sought public input on major technology payment platforms
On November 5, 2022, the CFPB issued a request for comments on major technology payment platforms, their acceptable use policies as well as the use of fines, liquidation provisions and other penalties. The issue was linked to an earlier request for comment on the same questions.
15. The CFPB finalized a rule on nonbank supervision
On November 10, 2022, the CFPB finalized amendments to the Nonbank Supervisory Procedural Rule. In April 2022, the CFPB changed its procedures to allow the CFPB to make public decisions indicating that oversight of a company is warranted. Under the amended procedures, the non-bank entity has the opportunity to provide the CFPB with input on whether to withhold or modify the decision. The CFPB’s amendments and clarifications also indicate that the CFPB will not publish information that would fall within certain exceptions to the Freedom of Information Act. In the same way, the changes and clarifications extend the respondents’ time to provide input related to public release regulations from 7 working days to 10 working days.
16. The CFPB reached a $19 million settlement related to a company that allegedly offered fake high-yield bank accounts
On December 1, 2022, the CFPB settled a lawsuit with a company and its founder for allegedly offering fake high-yield bank accounts. The CFPB alleged that the parties made several false, misleading and inaccurate marketing representations in advertising health savings CD accounts. Specifically, the CFPB alleges that the company took millions of dollars from at least 400 people who opened and deposited money into the company’s advertised savings product. The CFPB alleges that the company and its founder falsely represented that: customer deposits would originate from loans to health care providers, customer deposits would be safe, the company was a commercial bank, and the CD accounts had a record of paying high interest rates. The proposed settlement would require the company and its founder to refund $19 million to approx. 400 depositors, to cease participating in deposit activities and pay a civil monetary penalty of $391,530.
