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

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The CFPB announced that it has entered into a consent order with Hello Digit, LLC (“Digit”) to settle the CFPB’s claims 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 civil money penalty and at least $68,145 in consumer redress.

Digit is a fintech company that offers a personal-finance-management app that includes an automated savings tool.  When signing up for the service, Digit requires consumers to grant 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 fund transfers (“autosaves”) 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 $5 monthly subscription fee for this service.

The CFPB found that despite using “messaging themes to consumers” that the automated savings tool saved “the perfect amount” and that there were “no overdrafts,” Digit knew from its inception that (1) its algorithms had limitations that hampered Digit’s ability to precisely predict an appropriate amount to withdraw from consumers’ checking accounts, and (2) the autosaves routinely caused overdrafts, resulting in overdraft fees charged by consumers’ banks.  Digit also represented to consumers that if it did cause an overdraft through an autosave, it would reimburse any overdraft fees a consumer incurred.  However, Digit did not reimburse consumers for all overdrafts and received complaints about overdrafts on a daily basis.  It also retained significant interest income earned on the funds held in the Digit Savings Accounts but represented to consumers that it did not collect interest revenue.

The CFPB found that Digit engaged in deceptive acts or practices in violation of the CFPA by misrepresenting that its service would save the “perfect amount” and have “no overdrafts,” that it would reimburse consumers for all overdrafts fees caused by autosaves, and that it did not collect revenue from interest earned on Digit Savings Accounts.  The consumer redress that Digit is required to pay under the Consent Order is intended to reimburse consumers for all unreimbursed overdraft fees caused by autosaves.  The Consent Order also prohibits Digit from continuing to make misrepresentations about its automated savings tool.

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

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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