Weekly Fintech Focus
- The CFPB sent orders to five large BNPL companies seeking information on their business practices and regulatory posture.
- The CFPB published its Fall 2021 rulemaking agenda, giving some insight into what the next year holds for CFPB activity.
- The CFPB renewed its call for tech workers to become whistleblowers related to potential violations of consumer financial laws.
- The CFPB published updated FAQs related to EFTA and Regulation E.
CFPB Seeks Business Practice Information from BNPL Companies
On December 16, 2021, the Consumer Financial Protection Bureau (CFPB) issued a statement announcing its inquiry (pursuant to its market monitoring authority under 12 USC § 5512(c)(1)) into the business practices of five large buy now, pay later (BNPL) companies. The companies targeted by the CFPB’s order provide consumers with the ability to purchase goods and services from third-party merchants and pay the BNPL firm for such purchase over time. The CFPB’s stated interest is related to consumers’ debt loads and management under BNPL payment plans and the BNPL companies’ engagement in regulatory arbitrage and data harvesting activities. The BNPL companies must respond to the CFPB by 5:00 p.m. ET on March 1, 2022.
- Accumulating Debt: The CFPB is concerned that customers will use BNPL for everyday purchases through the very user-friendly BNPL interfaces and not understand the debt load they are taking on. Generally, a BNPL service enables the customer to defer payment and split the purchase into smaller installments, typically four or less, including a down payment of 25% of the purchase price at the time of purchase. Some of the BNPL firms also offer longer term installment options.
- Regulatory Arbitrage: The CFPB is concerned that some BNPL firms are not adequately or correctly understanding the consumer protection laws that apply to their products, and as a result, are not providing the correct disclosures to consumers. Similarly, other credit products that consumers use at point of sale, like credit cards, have more robust regulatory requirements than BNPL transactions, which could result in consumer confusion or lighter protections for BNPL users in the event of disputes. Finally, depending on the consumer protection laws the BNPL company thinks apply, it may be following different rules related to late fees and other credit policies.
- Data Harvesting: BNPL companies have access to large amounts of data on their customers, including payment histories. With this data and with the BNPL companies’ creation of closed loop shopping apps, the BNPL companies can guide consumers to preferred merchants. Additionally, the CFPB is concerned about the future state of BNPL as the market forces the companies to compete on the merchant discount rate, thereby reducing revenue from that source. When that occurs, the CFPB wants to understand BNPL companies’ plans for monetization, including through their customer data sets.
CFPB Fall 2021 Rulemaking Agenda Published
The CFPB recently published its Fall 2021 rulemaking agenda, which is current as of November 1, 2021. The agenda identifies the regulatory matters that the CFPB intends to consider and take action on during the coming year. The preamble to the agenda notes that the agenda is not a direct reflection of all of Director Rohit Chopra’s priorities as the agency anticipates the new director will assess regulatory actions and prioritize as reflected in the upcoming Spring 2022 rulemaking agenda.
Most relevant to the fintech industry, the agency rule list includes anticipated action over the next year on the following:
- Consumer Access to Financial Records. In early 2022, the advance notice of proposed rulemaking (ANPRM) comment period will end and the CFPB will be engaging in pre-rule activity regarding a rule to implement Section 1033 of the Dodd-Frank Act, which requires the CFPB to prescribe rules that would require covered persons to make available to consumers, upon request, transaction data and other information concerning a consumer financial product or service that the consumer obtains from the covered person. Section 1033 also states that the CFPB must prescribe by rule standards to promote the development and use of standardized formats for information made available to consumers.
- Small Business Lending Data Under Equal Credit Opportunity Act (ECOA). In early 2022, the notice of proposed rulemaking (NPRM) comment period will end and the CFPB will be reviewing comments to develop the final rule related to Section 1071 of the Dodd-Frank Act, which requires the CFPB prescribe the type of data financial institutions must report concerning credit applications made by women-owned, minority-owned, and small businesses.
On its list of long-term actions the agenda notes that the CFPB will continue work on potential future rulemaking activities related to artificial intelligence in consumer finance. The agency had engaged in numerous requests for information (RFIs) over the years, and while no direct actions are planned, the agency will continue to consider how to monitor and address the use of AI for consumer financial services.
The agency’s inactive rule list still contains items like rulemaking activities related to (i) the definition and supervision of large participants for certain consumer financial products and services, (ii) overdraft services, (iii) consumer reporting, (iv) credit card regulation review, and (v) Regulation E modernization.
CFPB Makes a Call for Tech Worker Whistleblowers
On December 15, 2021, the CFPB published a blog post calling for tech workers to engage with the CFPB through the agency’s whistleblower program to alert the agency to potential violations of consumer financial laws. As part of this blog post, the CFPB called special attention to the use of artificial intelligence and algorithms as part of the consumer financial marketplace as areas for tech worker whistleblowers to focus on.
CFPB Publishes Updated Electronic Fund Transfer Act FAQs
The CFPB recently published updated FAQs related to the Electronic Fund Transfer Act (EFTA) and Regulation E. The updated FAQs provide commentary on covered transactions, covered financial institutions, and error resolution. A number of the FAQs address issues related to the applicability of EFTA and Regulation E to P2P payments and other mobile transactions. The FAQs also address the conditions under which service providers may be considered financial institutions under the law.