Weekly Fintech Focus
- FTC files suit against a mobile app that advertised high-interest deposit accounts and easy access to customer funds but failed to deliver.
- OCC proposes rule to ensure fair access to financial services and to codify the reversal of policies imposed under Operation Choke Point.
- CFPB issues an advisory opinion clarifying that certain earned wage access services are not credit under Regulation Z.
FTC Alleges Mobile App’s Deposit Promises Were Deceptive
Following a May 2020, civil investigative demand, the Federal Trade Commission (FTC) filed suit against the operators of a mobile banking app, alleging that they falsely promised users high interest rates on their deposit accounts and failed to provide customers with their requested funds within the represented time frames in violation of the prohibitions against deceptive acts or practices under the FTC Act.
The mobile app advertised high-interest bank accounts that placed consumer funds at unspecified FDIC-insured banks. The mobile app also represented to consumers that they would have “24/7” access to their money with “No Lockup” so that consumers could have their withdrawn funds returned in five or fewer business days. The FTC alleges that many times consumers requested withdrawals, but would not receive their money until weeks or months had gone by accompanied by repeated complaints.
Additionally, other advertisements described the interest available as “the industry’s best possible rate” or described the bank accounts as the “best paying high interest bank account” that pays “more than 200x” the interest rates of other banks. The mobile app represented to consumers that the minimum base interest rates on consumer deposits was up to 1.0%. In reality, the base interest rate received by consumers was 0.04%, and in some situations the mobile app stopped calculating or did not pay interest at all on the deposited funds.
OCC Proposes Rule to Ensure Fair Access to Financial Services
The Office of the Comptroller of the Currency (OCC) released a notice of proposed rulemaking that would prohibit national banks and federal savings associations from declining to service whole industries that are engaged in lawful business activities. If finalized, the proposal would be the first codification of the reversal of the notorious “Operation Choke Point,” which was launched in 2012 and resulted in banks being pressured to deny access to financial services to companies with reputational concerns, including high risk merchants such as money services businesses, payday lenders, firearms dealers, privately-owned correctional facilities, ATM operators, tobacco sellers, and gambling entities.
The OCC notes that despite the guidance issued by the OCC and other regulators over the years, many banks are still engaging in category-based risk evaluations and deny access to financial services to customers in those categories. Further, the OCC explains that banks are making these decisions based on “pressure from advocates from across the political spectrum whose policy objectives are served when banks deny certain categories of customers access to financial services.” In short, the OCC understands that banks’ actions on these categories of customers are based on criteria unrelated to safe and sound banking practices.
Under the proposed rule, the OCC clarifies that large banks are obligated to provide fair access to financial services. Banks should consider customers on a case-by-case basis, and evaluate whether the individual customer meets the bank’s criteria and whether the bank has the expertise or knowledge to offer a service to a specific business. The proposed rule would require that banks do the following:
- Make each financial service it offers available to all persons in the geographic market it serves on proportionally equal terms.
- Not deny any person a financial service offered by the bank except to the extent justified by such person’s quantified and documented failure to meet quantitative, impartial risk-based standards established in advance by the bank.
- Not deny any person a financial service offered by the bank when the effect of the denial is to prevent, limit, or otherwise disadvantage the person from entering or competing in a market or business segment; or in such a way that benefits another person or business activity in which the bank has a financial interest.
- Not deny, in coordination with others, any person a financial service the bank offers.
The proposed rule does not address other aspects of OCC policy, such as the OCC’s merchant processing guidance, which still contains directives that banks should consider a merchant’s “business lines and any products the merchants offer” when evaluating a merchant’s credit quality, and also acknowledges that “[c]ertain types of businesses are inherently more risky,” resulting in acquiring banks compiling lists of prohibited or restricted merchants. Similarly, other regulators like the Federal Trade Commission have imposed obligations on payment processors to prohibit or restrict certain merchant categories. Whether and to what extent the OCC’s proposal will result in a trickle-down of a loosening of restrictions on higher-risk merchants is a major question mark hanging over the merchant processing industry as this proposed rule is considered.
CFPB Greenlights Certain Earned Wage Access Services
Fintech companies have developed many forms of services that give consumers access to their wages ahead of schedule, i.e., Earned Wage Access (EWA). In general, an EWA provider will enable employees to request an amount of the wages the employee has accrued prior to their standard payday or the date on which funds are disbursed to the employee. The EWA provider then recoups the funds through a payroll deduction or a bank account debit on the employee’s payday. Regulatory uncertainty has clouded each of the EWA models on the market in addition to recent consumer class action lawsuits. From a regulatory perspective, it has been unclear whether EWA services are consumer credit or a cash advance under Regulation Z, or whether they trigger other regulatory frameworks like money transmission licensing. Many providers seemed to take the position that offering the EWA service without fees or without installments was enough to make sure the EWA service was not a loan. For EWA services, like many other services that provide access to funds, the lack of fee or the avoidance of installments does not completely avoid obligations under federal lending laws or licensing obligations in some states.
The Consumer Financial Protection Bureau (CFPB) in one of its first advisory opinions regarding EWA services details some guardrails that help clear up some of the uncertainty around these services. In short, the CFPB is of the opinion that EWA transactions that meet the following criteria are not “credit” for purposes of Regulation Z (12 C.F.R. § 1026.2(a)(14):
- The EWA service provider contracts directly with employers to offer the service to employees.
- The amount of the EWA advance cannot exceed the wages the employee has earned so far.
- The EWA service provider does not charge the employee any fees or request tips or any other payment from the employee.
- The EWA provider has no legal claim against the employee to be repaid for the EWA funds, and the repayment for the EWA funds comes directly from an employer-facilitated payroll deduction from the employee’s next paycheck.
- The employee has discretion to choose the method by which they receive the EWA funds.
- The EWA provider makes all disclosures of the terms of the EWA service to the employee, including that the EWA service will not result in debt collection activities related to the EWA transaction.
- The EWA provider does not conduct a credit assessment of the employee, i.e., does not pull the employee’s credit report or use other consumer report data.