U.S. Developments

Federal Reserve to Build Real-Time Payments System

After years of speculation, the Federal Reserve announced this week it will create a real-time payments system, which it expects to be live by 2023 or 2024. The system, the FedNow Service, was announced by Federal Reserve Governor Lael Brainard during a speech at the Federal Reserve Bank of Kansas City. During the announcement, Brainard highlighted the strong support for the project the Federal Reserve received during its public comment period, noting that 90 percent of the comments called for the creation of the system. The system will allow near-instant transfers of funds 24 hours a day, 7 days a week, between depository institutions eligible to hold accounts at Federal Reserve Banks.  Eligible depository institutions will also be able to designate a service provider or agent to submit or receive payment instructions on the institutions’ behalf. The FedNow Service will be designed for payments of $25,000 or less.

The FedNow Service will offer real-time payments and operate alongside a similar offering from private organization The Clearing House, which is owned by several of the largest financial institutions in the United States. The FedNow Service aims to achieve faster payments that are ubiquitous, safe, and efficient, by providing broader access to real-time payments than is currently available, specifically by offering a service designed to benefit banks of all sizes.  Similar to The Clearing House’s RTP Network, the FedNow Service will transmit payment messages including both the information required to originate and receive payments and additional descriptive information related to the payment.

You can read the Federal Register notice here and the FAQs here. Comments on the FedNow Service are due within 90 days of notice publication in the Federal Register.

Multistate Investigation into Payroll Advance Companies Launched

A coalition of state financial regulators, led by New York’s Department of Financial Services (“NYDFS”), is investigating possible violations of state interest and usury laws by payroll advance businesses. Specifically, the investigation will explore if the use of tips and membership fees by these companies are unlawful interest rate charges. NYDFS says it has sent requests for information to a number of unnamed payroll advance companies as part of the investigation. The other states joining the investigation include Connecticut, Illinois, Maryland, New Jersey, North Carolina, North Dakota, Oklahoma, South Carolina, South Dakota, and Texas, and also Puerto Rico.

CFPB Provides Positive Comments on Startup’s Use of Alternative Credit Data

In a blog post on its website, the Consumer Financial Protection Bureau (“CFPB”) provided an update on its first no-action letter. The letter, issued to lending startup Upstart, allowed the company to use alternative data, such as a borrower’s education and employment history, to evaluate loan applications. The post noted that, based on data shared by Upstart, the use of alternative data increased the loan approval rate by 27% while allowing annual percentage rates 16% lower than the average. The CFPB also noted that the increased approvals were consistent across race, sex, and ethnicity, and that no further fair lending analysis would be required under Upstart’s compliance plan based on its results. The post goes on to encourage other lenders to develop new ways to increase access to credit for all Americans, especially those with past credit issues or little to no credit history.

The post comes on the heels of a House-led task force hearing on a proposed bill that would allow for the use of alternative credit data, including items like rent and phone payments.