Weekly Fintech Focus
- The CFPB and OCC are taking a keen interest in bank overdraft practices.
- The CFPB is working to encourage coordination with states on enforcement actions and to target repeat corporate offenders.
- CFPB and HUD once again encourage the use of Special Purpose Credit Programs to remedy historical discrimination.
- The Kansas City Fed issued a report on Buy Now Pay Later programs.
- The FTC and DOJ meet with G7 counterparts to discuss competition issues for digital markets.
- The FTC spotlights a rapid increase in gift card scams.
CFPB and OCC Scrutinizing Overdraft Practices
On December 1, the CFPB published two research reports on checking account overdraft fees showing reliance of banks on overdraft fees for revenue.
In prepared remarks for a press call on the publication of the reports, CFPB Director Rohit Chopra described the reports as showing that “[r]ather than competing on transparent, upfront pricing, large financial institutions are still hooked on exploitative junk fees that can quickly drain a family’s bank account.”
Director Chopra announced that the CFPB “will be enhancing its supervisory and enforcement scrutiny of banks that are heavily dependent on overdraft fees,” and that the CFPB’s bank examiners have been directed to prioritize examinations of banks that are “heavily reliant on overdraft.” Director Chopra also noted that when investigating, the CFPB will “seek to uncover the individuals who directed any illegal conduct.”
On December 8, Acting Comptroller of the Currency Michael Hsu delivered remarks before the Consumer Federation of America on reforms to overdraft programs. In those remarks, Acting Comptroller Hsu stated that OCC staff recently concluded a review of overdraft programs and identified the following as attributes of “responsible and fair” overdraft programs:
- requiring consumer opt-in to the overdraft program;
- providing a grace period before charging an overdraft fee;
- allowing negative balances without triggering an overdraft fee;
- offering consumers balance-related alerts;
- providing consumers with access to real-time balance information;
- linking a consumer’s checking account to another account for overdraft protection;
- collecting overdraft or non-sufficient fund fees from a consumer’s next deposit only after other items have been posted or cleared; and
- not charging separate and multiple overdraft fees for multiple items in a single day and not charging additional fees when an item is re-presented.
Acting Comptroller Hsu also confirmed that the OCC has been working with the CFPB on the issue of overdrafts, and that the agencies “will strive to coordinate to ensure there are effective guardrails and backstops in case the momentum for overdraft reform stalls.”
CFPB Director Outlines Approaches for Enforcement of Consumer Financial Protection Laws
In prepared remarks for a meeting of the National Association of Attorneys General on December 7, CFPB Director Rohit Chopra outlined approaches for enforcement of consumer financial protection laws.
- Encouraging Enforcement by States: Director Chopra encouraged state AGs to bring actions under the Consumer Financial Protection Act, particularly when federal protections are stronger than state statutes. He also stated that he has directed CFPB staff to explore ways to encourage enforcement by states—for example, by seeking civil penalties that the states could then use to bolster deterrence in their states.
- Coordination with States: Director Chopra also signaled that in CFPB investigations, the CFPB “will alert state enforcers and regulators when we find their orders are being flouted.”
- Repeat Offenders: Director Chopra also took aim at “repeat offenders” and “corporate recidivism,” proposing to “forcefully address repeat lawbreakers to alter company behavior and ensure similar companies realize it is cheaper to obey the law than to break it.” He stated that the CFPB is exploring “all possible remedies” to address the underlying issues that drive repeat corporate offenses.
- Enforcement Against Management: Notably, Director Chopra emphasized the CFPB is exploring remedies “directed at the senior management and executive levels” so that executives and managers “know that they will face repercussions for illegal acts they direct.”
It has been anticipated the CFPB would take a more assertive enforcement posture under Director Chopra. These remarks underscore that Director Chopra and the CFPB are actively taking steps in line with those expectations.
CFPB and HUD Encourage Special Purpose Credit Programs
The Department of Housing and Urban Development (HUD) issued a statement and legal opinion encouraging lenders to develop and utilize Special Purpose Credit Programs (SPCPs) to remedy effects of racial and ethnic homeownership and wealth gaps. The CFPB issued a statement supporting the HUD’s actions. As in prior statements by these agencies, these new statements reiterate that SPCPs that conform with the Equal Credit Opportunity Act and Regulation B generally do not violate the Fair Housing Act and lenders may consider utilizing SPCPs to serve disadvantaged communities.
BNPL Sector Faces Increased Potential for Regulatory Attention as Popularity Grows
Buy-now-pay-later (BNPL) companies have seen explosive U.S. growth since 2020 and have for the most part gone largely unsupervised despite having to abide by federal and state fair lending, credit reporting, and anti-money laundering laws. During the pandemic, BNPL companies gained a lot of traction with consumers with roughly 44% of consumers using the services. According to Bloomberg, consumer complaints about BNPL companies have been almost nonexistent with consumers filing only 426 complaints against Affirm, Afterpay, Klarna, and Sezzle on the CFPB’s consumer complaint database between Jan. 1, 2019, and Nov. 10, 2021.
With the growing popularity of BNPL, the Federal Reserve Bank of Kansas City recently issued a research briefing titled “The Appeal and Proliferation of Buy Now, Pay Later: Consumer and Merchant Perspectives,” which outlined the benefits and risks of BNPL to consumers and merchants. On the consumer side, the briefing breaks the BNPL model into two types. The first type of BNPL products includes those that generally target younger consumers (e.g., millennials, Gen Z) and financially underserved consumers. The second type of BNPL products targets broader consumer segments and offers longer-term installments. With the first type, regulators are concerned that since users of BNPL products tend to skew younger, any resulting financial trouble could hinder their future access to credit or even ability to obtain certain types of employment. The briefing also highlights risks across both types such as the fact that BNPL lenders are not required to consider a consumer’s ability to repay loans and the potential encouragement of impulse buying.
Given that risks to consumers have in some respects begun to materialize, there have been increased calls for regulatory attention. For example, users have fallen behind on payments or have been subject to unexpected overdraft fees with their consumer bank. Specifically, Klarna and Afterpay are facing class actions alleging that they failed to warn consumers about potential overdraft fees that result each time a creditor tries to withdraw from a consumer’s bank account. Thus, while the CFPB currently is not heavily focused on this sector beyond encouraging U.S. BNPL companies to take steps to ensure users are adequately informed of the risks that BNPL can present, BNPL companies may want to make sure that their models are not at risk of running afoul of any potentially applicable consumer protection laws or future consumer protection concerns that may arise in response to this emerging sector.
FTC and DOJ Meet with G7 on Competition in Digital Markets
Recently, the Federal Trade Commission chair Lina Khan and the Department of Justice Antitrust Division Assistant Attorney General Jonathan Kanter met with their G7 counterparts to discuss competition in digital markets. The summit was hosted by the UK Competitions and Market Authority and involved G7 authorities from Canada, France, Germany, Italy, Japan, the UK, and the US, plus other invitees, including Australia, India, South Africa, and South Korea.
In a statement following the summit, FTC Chair Khan noted that the attendees were working to collectively learn from their experiences to “boost our anti-monopoly work worldwide” and “redouble our enforcement efforts to target unfair methods of competition in digital markets.” The DOJ’s Kanter explained that there is a “great deal of urgency” for global competition regulators to “confront the daunting challenges presented by data-driving technologies” in the modern digital economy.
These statements by Khan and Kanter do not completely align with other messages coming from the Biden administration, as Commerce Secretary Raimando recently said that the US has “serious concerns” about legislation currently under consideration in the EU (including the Digital Markets Act) that she says “will disproportionately impact US-based tech firms and their ability to adequately serve EU customers and uphold security and privacy standards.” Secretary Raimondo’s statement noted that the US understands that the EU is working “to create a fair, transparent, and safe digital space” and encouraged the EU “to continue listening to our concerns by stakeholders before finalizing their decision.”
It is still early days in global regulatory efforts to understand competition forces within the technology and financial services industries. The past few years have seen incredible energy in new companies and startups developing new services for consumers and businesses to engage in digital markets and at the same time have seen larger players continue to consolidate. The global competition regulatory landscape will continue to be an important area to focus on for the fintech industry going forward.
FTC Spotlights Gift Card Scams
In a new Federal Trade Commission data spotlight, the report shows a major increase in gift card scams. In the first nine months of 2021, nearly 40,000 consumers reported losing $148 million in gift card scams, eclipsing the total amount reported for all of 2020. Consumers most often reported that they had paid scammers who were impersonating large companies or government agencies. The report also found that one retailer in particular, Target, was the most popular choice for scammers. Scammers used Target gift cards to obtain about $35 million in payments, which was more than twice as much as any other brand of gift cards. The median amount lost by consumers that paid by Target gift cards was $2,500, which is higher than any other brand, and a third of those consumers reported losses of $5,000 or more. Further, scammers directed consumers to buy other brands of gift cards from Target stores more often than any other location.