Weekly Fintech Focus
- The UK published a report calling for the urgent regulation of BNPL products.
- The OCC postponed publication of the Fair Access to Financial Services rule.
- The Acting Director of the CFPB is putting a renewed emphasis on issues of racial equity with a push to enforce fair lending violations.
- The new administration will take a fresh look at the recently finalized FHA disparate impact rule.
- The Federal Reserve announced that its FedNow RTP service will be launched sooner than expected.
UK Set to Move Forward on BNPL Regulation
The United Kingdom Financial Conduct Authority (FCA) recently issued a report on the market conditions for buy-now pay-later (BNPL) unsecured lending. The report recommends urgent changes to the regulatory framework for BNPL products as those services are currently unregulated in the UK and have relied on exemptions within current law. The report documents the rapid growth of consumers using BNPL products, which was accelerated by the pandemic, but noted that while BNPL adoption has grown, it also has led to many consumers to fall into problematic debt. In response, the report recommends outcome-based regulation to protect consumers that delivers similar protections to consumers as they would receive for other loan products.
The report calls out numerous potential consumer harms, including poor consumer understanding of different BNPL products and insufficient protection for consumers. The report also notes that the current BNPL market structure focuses on outcomes for retailers rather than the consumer, so the current purchase process is optimized to drive cart conversion rather than consumer understanding and protection. Potential regulation will likely address consumer disclosures, advertising, and potentially ability to repay obligations to address repeat use of BNPL products.
OCC Postpones Fair Access Rule
As we discussed last week, the administration’s regulatory freeze has led the Office of the Comptroller of the Currency (OCC) to postpone publication of its Fair Access to Financial Services final rule. The rule would have codified OCC guidance that banks should conduct risk assessments of individual customers, rather than making decisions about whole classes of customers. The OCC’s announcement of the pause in publication of the final rule reiterated that the OCC’s longstanding position is that banks should avoid terminating broad categories of customers without assessing individual customer risk. The postponement will allow the next confirmed Comptroller of the Currency to review the final rule.
CFPB to Pursue Fair Lending Enforcement Under New Administration
Dave Uejio was recently installed as the Acting Director of the Consumer Financial Protection Bureau (CFPB). In a letter to CFPB staff, Acting Director Uejio summarized his priorities for his tenure at the CFPB with an emphasis on expediting enforcement actions relating to COVID-19 and reversing policies of the last administration that he states weakened enforcement and supervision. Additionally, his letter states that the CFPB should be taking action on issues of racial equity. The CFPB has authority to enforce many laws related to racial equity, including the Truth in Lending Act (TILA) and the Equal Credit Opportunity Act (ECOA). Acting Director Uejio intends to elevate and expand existing investigations and exams and engage in new ones to ensure that the CFPB’s docket addresses racial equity. As a result, fair lending will be a top priority, with the potential of the CFPB to refocus on issues of disparate impact.
Biden Issues Memorandum to Reevaluate the HUD FHA Disparate Impact Rule
A recent memorandum issued by the Biden Administration directed the federal government to work to end housing discrimination. This includes directing Department of Housing and Urban Development (HUD) to examine its recently finalized rule implementing the agency’s Fair Housing Act (FHA) disparate impact standard. We discussed the finalization of this rule in our blog here. As we noted before, the disparate impact rule codified a burden-shifting framework for disparate impact claims but left out a controversial defense for algorithms used in making housing and housing financing decisions. The defense for algorithms was controversial at the time it was proposed, and it is unlikely to be revived by the new administration.
The Fed to Launch the FedNow RTP Service Sooner than Expected
On February 2, 2021, the Federal Reserve (the Fed) announced it plans to roll out FedNow, its real-time payments (RTP) service a year ahead of schedule, by the end of 2023. Esther George, president and chief executive of the Federal Reserve Bank of Kansas City during her keynote speech at the Chicago Payments Symposium said the Fed will be making every effort to implement FedNow even sooner.
As the Fed describes it: at the most fundamental level, the service will provide interbank clearing and settlement that enables funds to be transferred from the account of a sender to the account of a receiver in near real-time and at any time, any day of the year. Depository institutions (and their service providers) will be able to utilize this fundamental capability to offer value added services to customers. The Fed has been criticized for the delay in providing a government RTP when over 30 other countries have RTPs. The Fed is now hiring and appears to be pushing to roll out the RTP soon.
Larger banks have already signed up to the private Clearing House Payments Co., a bank-owned processor, while fintechs, smaller banks, and credit unions are looking forward to FedNow. According to George, FedNow could emulate the ACH model through a direct exchange of payments between operators, where a payment originating with a user of one service could be received by a user of the other’s service.
FedNow service will be available to depository institutions in the U.S. and will enable individuals and business to send instant payments through depository institution accounts. The initial launch will provide the following advantages:
- access to intraday credit
- liquidity management tools
- core clearing and settlement functionality
- request-for-payment capability
- tools to support participants in their handling of payment inquiries, reconcilements and certain exceptions
- fraud prevention tools
Though the Fed and industry would prefer ubiquity – ability of the service to reach all financial institutions and interoperability, according to George these features may not be part of the initial elements of the FedNow service.
Pricing is a key factor and FedNow’s pricing structure has not been announced as yet. George suggested there may be a mix of per-item charges (to be paid by receiving or sending banks) and fixed participation fees. Smaller banks have long feared volume-based pricing would confer an advantage on larger banks. Hence, FedNow’s update on pricing is eagerly awaited.