Weekly Fintech Focus

  • The CFPB issues a policy statement to clarify the “abusiveness” standard.
  • CFPB proposes a settlement with payday lending company linked to tribal lender.
  • Visa will modify interchange rates the most in a decade.
  • ARRC releases checklist for transitioning from LIBOR to SOFR.
  • The Fed continues to move forward on faster payments and is working to more broadly address the digitalization of payments.
  • FinCEN’s Deputy Director discusses AML oversight in speech at the SIFMA Conference.

CFPB Issues Policy Statement on the “Abusiveness” Standard

Effective immediately, the Consumer Financial Protection Bureau (“CFPB”) issued a policy statement to clarify the “abusiveness” standard under the Dodd-Frank Act’s prohibition against unfair, deceptive, or abusive acts or practices. The CFPB cited uncertainty about the applicability and scope of the abusiveness standard that created compliance burdens on covered businesses.

Under the Dodd-Frank Act, an act or practice is abusive if it:

  • Materially interferes with the ability of a consumer to understand a term or condition of a consumer financial product or service; or
  • Takes unreasonable advantage of:
    • A lack of understanding on the part of the consumer of the material risks, costs, or conditions of the product or service;
    • The inability of the consumer to protect its interests in selecting or using a consumer financial product or service; or
    • The reasonable reliance by the consumer on a covered person to act in the interests of the consumer.

The policy statement says that in evaluating abusive acts or practices, the CFPB will:

  • Conduct a cost/benefit analysis that considers whether the “harms to consumers from the conduct outweigh its benefits to consumers (including its effects on access to credit).”
  • Consider the facts and circumstances of a particular matter, and “avoid alleging an abusiveness violation that relies on all or nearly all the same facts as an unfairness or deception violation.” Further, the CFPB will allege “stand-alone” businesses’ violations where it is consistent with the policy statement.
  • Not seek monetary damages for abusive acts or practices if the person has “made a good-faith effort to comply with the law based on reasonable—albeit mistaken—interpretation of the abusiveness standard.” The CFPB will still seek legal or equitable relief.

In a hearing before the House Financial Services Committee, members of both parties challenged CFPB Director Kraninger on this policy statement. Questions from lawmakers included concerns that the policy statement is still not specific enough, as well as challenges to specifics of the policy that some lawmakers felt would have led to significantly lower penalties in recent large enforcement actions. Kraninger did not commit to engage in a formal rulemaking to address lingering ambiguity regarding the abusiveness standard.

Visa Announces Largest Interchange Rate Changes in a Decade

Visa is reported to be planning the largest change in interchange rates in a decade to be rolled out in April and October 2020.  The new rate increases will apply to Visa’s public rates, so financial institutions and merchants may still negotiate different rates. The most significant changes affect card-not-present transactions for transactions made online or over the phone. For card-not-present transactions, the fee for a $100 purchase will increase from $1.90 to $1.99 with a traditional Visa card and increase from $2.50 to $2.60 for a premium Visa card. There are instances of reductions in certain rates, but these affect specific merchant categories, such as education and large supermarkets for transactions below certain dollar thresholds.

CFPB Proposes Settlement with Think Finance, LLC

The CFPB announced its proposed settlement with Think Finance, LLC and several of its subsidiaries regarding its 2017 lawsuit concerning alleged illegal collection of loans that were void. The CFPB alleged that Think Finance violated the Consumer Financial Protection Act by engaging in unfair, deceptive, and abusive acts and practices in attempting to collect on online installment loans and lines of credit that were issued in conjunction with three companies owned by Native American Indian Tribes.

The CFPB also alleged that Think Finance took funds from consumers’ bank accounts for debts that were not actually owed as a result of the loan(s) being partially or completely void under certain state laws as a result of exceeding rate caps or the lack of proper licensing of lenders. However, Think Finance denied its wrongdoing by asserting that the loans were legal because the rates and terms were authorized under the respective laws of the Native American Indian Tribes because the borrowers each expressly agreed that those tribal laws governed the loans.

The proposed settlement stipulates a final consent order that prohibits Think Finance from offering or collecting on loans to consumers in the 17 states where it allegedly committed those violations and imposes a $1.00 civil penalty on each Think Finance entity involved. This proposed settlement is part of a larger global resolution of Think Finance’s bankruptcy proceedings that includes settlements regarding a nationwide consumer class action involving a distribution of over $39 million for consumers that were affected.

Brainard Discusses the Digitalization of Payments

Federal Reserve Governor Brainard recently spoke at a symposium on the future of payments at Stanford’s Graduate School of Business and discussed the benefits and risks created by the digitalization of payments. He emphasized the federal government’s need to engage in the future of payments to ensure regulatory perimeters are set appropriately and that payment is safe, efficient, and fast.

Governor Brainard highlighted BigTech and FinTech companies as the major players that are driving the digital transformation of payments. He noted that BigTech companies provide payments in support of core nonfinancial services through their platforms, rather than relying on legacy systems controlled and run by banks. The network effect of BigTechs provide users with the benefit of convenience and ease of use. Both BigTechs and FinTechs offer competition to banks through new product offerings and lower transaction costs. This creates risks, too, as banks are held to safety and soundness standards and are subject to more stringent requirements for consumer protection, including data security standards and fraud resolution requirements. As a result, Governor Brainard says the federal government should conduct a review of its oversight framework for retail payment systems to identify gaps.

Governor Brainard also discussed the U.S. real-time payment infrastructure and plugged the developing FedNow Service that is planned to offer real-time payments in the next few years. Brainard noted that the FedNow Service and The Clearing House’s RTP service are both moving the U.S. banking system to real-time payments, and that the roll-out of the FedNow Service will “provide a neutral foundation for private sector innovation in developing end-user services” that is broader than what is currently available with only one real-time payment service.

ARRC Releases Checklist for Transitioning from LIBOR to SOFR

In the Perkins Coie Derivatives & Repo Report, our colleagues have published an in-depth look on the Alternative Reference Rates Committee’s (“ARRC”) recent release of a practical implementation checklist for firms transitioning from the London Interbank Offered Rate (“LIBOR”) to the Secured Overnight Financing Rate (“SOFR”). The checklist contains several considerations across several work categories. In summary, the 10 key topics addressed include:

  1. Establish Program Governance
  2. Develop a Transition Management Program
  3. Implement a Communication Strategy
  4. Identify and Validate Exposure
  5. Assess Contractual Remediation Impact and Design Plan
  6. Develop a Product and Portfolio Strategy
  7. Risk Management
  8. Develop an Operational and Technology Readiness Plan
  9. Accounting and Reporting
  10. Taxation and Regulation

The ARRC was convened by the Federal Reserve Board and the Federal Reserve Bank of New York in cooperation with other federal agencies to promote the transition from the U.S. Dollar LIBOR. For detailed information about the 10 topics listed above, please visit here.

FinCEN Deputy Director Speaks at SIFMA AML and Financial Crimes Conference

The Deputy Director of the Financial Crimes Enforcement Network (“FiNCEN”), Jamal El-Hindi, delivered remarks at the Securities Industry and Financial Markets Association (“SIFMA”) 20th Annual Anti-Money Laundering and Financial Crimes Conference covering (i) issues that he has seen with respect to the Bank Secrecy Act (BSA) and anti-money laundering (“AML”), (ii) the importance and value of BSA information, and (iii) his thoughts on the regulatory landscape in the United States.

Mr. El-Hindi specifically recognized that the securities and futures sector includes a very complex group of interrelated parties that handle numerous aspects of transactions. In doing so, he highlighted the disconnect between the AML principles that FinCEN established regarding transparency in transactions and the complexity noted within the transactions and amongst the relationships. Mr. El-Hindi also noted that any highly competitive culture may discourage sharing customer information when it could potentially result in losing a customer to a competitor.

The Deputy Director also highlighted several key statistics related to the information that the industry provides FinCEN to make the financial system more resilient to illicit activity including the deterrent value that company reporting and AML programs have created.

Lastly, Mr. El-Hindi noted that discussions on the changing regulatory landscape tend to boil down to whether the government over-regulates or under-regulates the industry. The Deputy Director pointed out that the industry tends to believe that regulators over-regulate when they come into an area. However, from his perspective, regulators tend to under-regulate when measured against their full authority out of fear of over-regulating an industry. In addition, Mr. El-Hindi highlighted that FinCEN, amongst other agencies, focuses on data and metrics when making regulatory changes.