Weekly Fintech Focus

• On November 16, 2022, the U.S. Department of the Treasury (USDT) released a new report titled “Assessing Impacts of New Entrant Non-bank Firms on Competition in Consumer Finance Markets.” The report calls for enhanced oversight of the consumer financial activities of non-bank firms (particularly bank-fintech relationships) and offers several recommendations that aim to address concerns relating to consumer protection and market integrity.
• On November 15-16, 2022, Acting Comptroller of the Currency Michael J. Hsu testified before the U.S. Senate Committee on Banking, Housing, and Urban Affairs and the U.S. House Financial Services Committee to discuss the Office of the Comptroller of the Currency’s (OCC) regulatory priorities. These priorities include guarding against complacency by banks, reducing inequality in banking, adapting to digitalization, and managing climate-related financial risks.
• On November 16, 2022, the Consumer Financial Protection Bureau (CFPB) released a new “Supervisory Highlights” report on legal violations identified during the agency’s supervisory examinations in the first half of 2022. In particular, the report includes findings that relate to junk fees, which have increasingly come under scrutiny by the Biden administration and the CFPB.
• On November 30, 2022, the CFPB filed an amicus brief with the U.S. Court of Appeals for the Fourth Circuit, arguing that Regulation Z’s prohibition on offsets (i.e., forbidding lenders from unilaterally withdrawing money from consumers’ deposit accounts to cover debts incurred through credit card plans) extends to borrowers who have home-equity lines of credit that can be accessed by a credit card.
• On December 1, 2022, the CFPB took action against a financial services company that allegedly deceived consumers into thinking they were depositing funds into a guaranteed return savings product within a commercial bank, but which funds were actually placed in risky investment vehicles and crypto-assets by the company’s founder.

New Treasury Report Shows Fintech Industry Requires Additional Oversight To Close Gaps, Prevent Abuses, and Protect Consumers

On November 16, 2022, the U.S. Department of the Treasury (USDT), in consultation with the White House Competition Council, released a new report titled “Assessing Impacts of New Entrant Non-bank Firms on Competition in Consumer Finance Markets.”

Notably, the report calls for enhanced oversight of the consumer financial activities of non-bank firms (particularly bank-fintech relationships) and offers several recommendations that aim to address concerns relating to consumer protection and market integrity. The report joins a chorus of other recent announcements that make similar calls for such enhanced supervision. The report’s recommendations are discussed in more detail below.

Enable Competition in Responsible Consumer Credit Underwriting. According to the report, federal banking regulators should support responsible consumer credit underwriting approaches designed to increase credit visibility, reduce bias, and prudently expand access to credit to consumers. In particular, the report calls on banking regulators to:

• Leverage the existing supervisory framework for model risk management to provide additional clarity and consistency with respect to the use of alternative data and complex algorithms in credit underwriting systems (including by banks acting as lenders through bank-fintech partnerships).
• Engage with supervised institutions that seek to implement new credit underwriting approaches through pilot programs.
• Assess current credit underwriting, fair lending, and consumer lending guidance to identify potential gaps, including information that would be useful to develop risk management processes for underwriting approaches that use alternative data or complex algorithms.
• Clarify or supplement existing supervisory frameworks to help ensure model risk management processes sufficiently guard against outcomes that are unsafe or unsound, or that violate consumer protection laws.
• Coordinate with other federal agencies regarding principles or practices for identifying and mitigating violations of fair lending statutes due to the use of alternative data.

Enable Effective Oversight of Bank-Fintech Relationships. The new report further recommends that federal banking regulators should implement and apply a clear and consistent supervisory framework for bank-fintech relationships to address competition, consumer protection, and safety and soundness concerns.

To that end, banking regulators should first finalize the interagency guidance on risk management of third-party relationships (TPRM Guidance), which they proposed in July 2021.

Next, the report calls for the contractual arrangements underlying bank-fintech relationships to support a robust, risk-based approach to reviewing a bank’s activities. In particular, banking regulators should encourage banks to negotiate effective oversight provisions in their contracts with fintech companies that align with the bank’s internal oversight and risk management of its consumer banking activities, including those performed on behalf of the bank by fintech companies.

• For example, through its contract with a fintech company, a bank could require the company to adhere to certain compliance and risk management practices, including those applicable to the bank but not otherwise applicable to the company. These contracts could also provide a bank with access to information necessary to assess whether certain activities comply with regulations and risk management policies to which the bank’s consumer banking activities are subject.

Encourage Competition in Responsible Small-Dollar Lending. The report also recommends that federal banking regulators and other agencies should be consistent in supervisory practices related to small-dollar lending programs.

First, bank-fintech lending relationships that use the privileges of a bank should be subject to regulatory standards for responsible consumer lending programs. In particular, banking regulators should:

• Take action to apply the Interagency Lending Principles for Offering Responsible Small-Dollar Loans (SD Lending Guidance) more consistently across similarly situated banks.

• Review and revise supervisory practices with respect to the SD Lending Guidance to address (1) coverage for larger loans (i.e., $10,000 or more), and (2) the ways in which the SD Lending Guidance applies to a bank-fintech lending relationship, including the activities performed by a fintech firm or other third-party.
• Continue to provide banks with sufficient specificity on how they can provide small-dollar loan and related products while operating in compliance with applicable law and regulations.

Second, non-bank lenders providing alternative forms of consumer credit also should be subject to appropriate regulation and supervision. In particular, the Consumer Financial Protection Bureau (CFPB) should:

• Continue to investigate and monitor developments related to small-dollar installment loan products (e.g., Buy Now, Pay Later (BNPL)) and consider what guidance may be appropriate and possible for the agency to provide.
• Review its authorities to consider if and how the agency might provide direct supervision of larger non-bank consumer lenders, including BNPL and installment loan providers.
• Revisit its 2020 advisory opinion regarding earned wage access programs and review whether such programs that meet the advisory opinion’s requirements should not be considered credit products subject to the requirements under the Truth in Lending Act (TILA) and Regulation Z.

Enabling Secure Data Sharing. Finally, the report recommends that federal regulators should help promote a more unified approach to oversight of consumer-authorized data sharing. On the one hand, banking regulators should make clarifications to the final TPRM Guidance to address a bank’s obligation to protect consumer-authorized data from misuse. On the other hand, the CFPB should finalize its ongoing Section 1033 rulemaking, as well as review its authorities to consider if and how the agency might supervise data aggregators.

Acting Comptroller of the Currency Discusses Regulatory Priorities on Capitol Hill

On November 15-16, 2022, Acting Comptroller of the Currency Michael J. Hsu testified before the U.S. Senate Committee on Banking, Housing, and Urban Affairs and the U.S. House Financial Services Committee to discuss the Office of the Comptroller of the Currency’s (OCC) regulatory priorities. These priorities include guarding against complacency by banks, reducing inequality in banking, adapting to digitalization, and managing climate-related financial risks.

With respect to adapting to digitalization, Hsu’s written testimony states that “financial technology generally, and fintech and big technology companies specifically, will warrant much more of our attention going forward.”

In particular, his written testimony notes how OCC (1) has adjusted its bank information technology examinations so they now include assessments of ransomware, artificial intelligence (AI), cloud computing, and distributed technology; (2) is focused on ensuring banks have an effective risk management framework in place for bank-fintech partnerships; and (3) is working closely with its interagency peers to minimize opportunities for regulatory arbitrage and races to the bottom.

In his remarks, Hsu draws attention to the OCC’s recent announcement that it will establish an Office of Financial Technology in early 2023, stating that the office will “enable us to engage more substantively with non-bank technology firms and to better supervise bank-fintech partnerships so that we can help ensure that consumers of banking services are treated fairly, as well as help maintain a level playing field as the industry evolves.”

CFPB Supervisory Examinations Find Credit Reporting Failures, Junk Fees, and Mishandling of COVID-19 Protections

On November 16, 2022, the Consumer Financial Protection Bureau (CFPB) released a new “Supervisory Highlights” report on legal violations identified during the agency’s supervisory examinations in the first half of 2022.

In general, supervisory examinations review whether companies are complying with federal consumer protection laws. If the CFPB uncovers problems, it shares its findings with companies to help them remediate any violations. Usually, companies take action to fix identified problems, but for more serious violations, or when companies fail to take action, the CFPB may open an investigation for potential enforcement action.

The new report details findings across consumer financial products and services, including auto servicing, consumer reporting, credit card account management, debt collection, deposits, mortgage origination, mortgage servicing, and payday lending.

In particular, the report includes findings regarding junk fees, which have increasingly come under scrutiny by the current administration, including the CFPB.

• According to the report, examiners identified instances where auto loan servicers failed to ensure consumers received refunds for unearned fees related to add-on products. These unearned fees arose where consumers had paid off their auto loans early but had been charged by auto dealers and finance companies for all payments for add-on products as a lump sum at origination.
• Separately, the report notes that examiners found that mortgage servicers engaged in abusive acts or practices by charging sizable phone payment fees of which consumers were unaware. The report states that services charged consumers $15 fees to make payments by phone but that, during calls with consumers, customer service representatives did not disclose the existence or amount of such fees. The report also states that general disclosures that consumers “may” incur a fee for phone payments did not sufficiently inform consumers of the material costs.
• In addition, the report notes that examiners found that mortgage servicers engaged in unfair acts or practices when they charged consumers fees during forbearance plans pursuant to the Coronavirus Aid, Relief, and Economic Security (CARES) Act.

In response to these findings, the report states that servicers are developing remediation plans to reimburse or compensate consumers. More generally, the report states that the CFPB will increase its focus on repeat offenders, particularly those who violate agency or court orders, and that as part of this focus, it has created a “Repeat Offender Unit.”

Other findings of note include those that relate to consumer reporting and credit card account management.

• With respect to consumer reporting, the report states that examiners found deficiencies in credit reporting companies’ (CRC) compliance with dispute investigation requirements under the Fair Credit Reporting Act (FCRA), as well as furnisher compliance with accuracy and dispute investigation requirements under the FCRA and Regulation V. For example, examiners found that CRCs failed to report the outcome of complaint reviews to the CFPB, while furnishers inaccurately reported information despite actual knowledge of errors and failed to send updated or corrected information after determining that information they reported to CRCs was incomplete or inaccurate.
• With respect to credit card account management, the report states that examiners identified violations of Regulation Z, particularly its provisions relating to billing error resolution and rate reevaluations. In addition, the report notes that entities have engaged in deceptive and unfair marketing, sale, and servicing of credit card add-on products. For example, according to the CFPB, entities misled consumers when claiming that they were eligible for certain products when they were not, as well as when claiming they could cancel product coverage simply by calling a number but instead requiring additional steps to cancel, among others.

CFPB Files Amicus Brief in the Fourth Circuit Regarding Protections for Consumers With Credit Card and Savings or Checking Accounts With the Same Bank.

On November 30, 2022, the Consumer Financial Protection Bureau (CFPB) filed an amicus brief with the U.S. Court of Appeals for the Fourth Circuit, arguing that Regulation Z’s prohibition on offsets (i.e., forbidding lenders from unilaterally withdrawing money from consumers’ deposit accounts to cover debts incurred through credit card plans) extends to borrowers who have home-equity lines of credit that can be accessed by a credit card.

Here, Plaintiff was a Maryland homeowner who opened a home-equity line of credit (HELOC). Under the HELOC agreement, Plaintiff’s bank issued him a credit card, which he used to access this line of credit. Plaintiff also opened two deposit accounts at the same bank. The bank withdrew nearly $1,400 from one of Plaintiff’s deposit accounts to pay amounts due on his HELOC; later, the bank withdrew nearly $1,600 from Plaintiff’s other deposit account to cover further amounts due on his HELOC. Plaintiff contended that he never authorized these transfers and filed suit alleging that the bank violated the offset provision by taking funds from his deposit accounts to pay off his HELOC account.

The district court below held that Plaintiff’s HELOC was not a covered “credit card plan” under Regulation Z’s offset provision,[1] because Regulation Z exempts HELOCs from the definition of a different term (i.e., “credit card account under an open-end (not home-secured) consumer credit plan”). Plaintiff appealed.

According to the CFPB, the district court’s analysis of the offset provision is atextual, as well as inconsistent with the regulatory history and context.

• First, with respect to the regulation’s text, the CFPB argued that, most plainly, “credit card plan” (which appears in the offset provision) and “credit card account under an open-end (not home-secured) consumer credit plan” (which is a term Regulation Z defines to exclude HELOCs) are different phrases, and thus, convey different meanings. The CFPB states that the former refers broadly to a credit card plan, while the latter refers to credit card accounts under a subset of credit plans—open-end, not home-secured ones. According to the CFPB, the district court conflated these two terms and violated basis principles of textual interpretation. (In the Defendant-bank’s view, porting in the latter term’s definition was necessary to give the term “credit card plan” some meaning beyond the defined term “credit card”).
• Second, with respect to the regulation’s history, the CFPB argued that the term “credit card plan” dates to the introduction of the offset provision in the 1970s, while the term “credit card account under an open-end (not home-secured) consumer credit plan” was added a decade ago to implement an unrelated amendment to the regulation (and at that time, it was clarified that the new term of art did not alter unrelated portions of the regulation). Thus, the district court’s conflation of the two regulatory terms runs counter to the CFPB’s own understanding of how broadly the latter term reached, according to the agency.
• Lastly, with respect to context, the CFPB argued that other provisions of Regulation Z confirm that the two terms at issue are not the same. In particular, the CFPB noted that the district court’s narrowing of the offset prohibition (i.e., to exclude HELOCs) conflicts directly with the CFPB’s commentary on that same provision.

Although the majority of the CFPB’s brief focuses on the scope of the offset provision, it also discusses an exemption for HELOCs in Regulation X. With respect to that exemption, the CFPB agreed with the district court below that Regulation X properly exempts HELOCs from certain statutory requirements for how mortgage loan servicers must respond to requests for information and error correction. (Plaintiff had written to his bank objecting to the offset and requesting a full accounting, to which the bank responded more than 60 days after receiving it. Plaintiff alleged that the bank violated these statutory requirements with an untimely and inadequate response, but the district court pointed to the exemption for HELOCs).

CFPB Takes $19 Million Action Against Loan Doctor and Edgar Radjabli for Offering Fake High-Yield Bank Accounts

On December 1, 2022, the Consumer Financial Protection Bureau (CFPB) took action against a financial services company that allegedly deceived consumers into thinking they were depositing funds into a guaranteed return savings product within a commercial bank, but which funds were actually placed in risky investment vehicles and crypto-assets by the company’s founder.

According to the CFPB, the company made several false, misleading, and inaccurate marketing representations in advertising its savings product. Specifically, the CFPB alleges that the company falsely represented that:

• Customer deposits would originate loans for healthcare professionals, when in fact deposits were never used in such a manner.
• Customer deposits would be held in an Federal Deposit Insurance Corporation (FDIC)-insured account, or backed by a “cash alternative” or “cash equivalent,” when in fact these deposits were placed in a hedge fund controlled by the company’s founder and in crypto-assets, as well as invested in actively traded securities or loaned to investors.
• Customers deposited funds into accounts like traditional savings accounts with guaranteed returns, but the funds were instead invested in volatile securities and other investments, as the company was not a commercial bank.
• Accounts paid interest at rates between 5% and 6.25% in years prior to 2019, when in fact such accounts were not taking deposits until August 2019.

If approved by the court, the proposed settlement would require the company and its founder to refund approximately $19 million to approximately 400 depositors, permanently stop engaging or assisting others in any deposit-taking activities, and pay a civil money penalty to the CFPB in the amount of $391,530 (though $241,530 would be remitted because the defendants paid that amount in penalties to the U.S. Securities and Exchange Commission (SEC) due to a similar action brought by that agency).

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