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CFPB fines fintech for algorithm-induced overdraft charges
On August 10, the CFPB announced a consent order against a California-based fintech company for allegedly using an algorithm that caused consumers to be charged overdrafts on their checking accounts when using the company’s personal finance-management app. According to the Bureau, the app promotes automated savings with a proprietary algorithm, which analyzes consumers’ checking-account data to determine when and how much to save for each consumer. The app then automatically transfers funds from consumers’ checking accounts to accounts held in the company’s name. The Bureau asserted, however, that the company engaged in deceptive acts or practices in violation of the CFPA by (i) causing consumers’ checking accounts to incur overdraft charges from their banks even though it guaranteed no overdrafts and represented that its app never transferred more than a consumer could afford; (ii) representing that it would reimburse overdraft charges (the Bureau claims the company has received nearly 70,000 overdraft-reimbursement requests since 2017); and (iii) keeping interest that should have gone to consumers even though it told consumers it would not keep any interest earned on consumer funds. Under the terms of the consent order, the company is required to provide consumer redress for overdraft charges that it previously denied and must pay a $2.7 million civil penalty.
CFTC establishes the Office of Technology Innovation
On July 26, the CFTC announced the reorganization of their fintech and consumer protection efforts by establishing the Office of Technology Innovation (OTI), formerly LabCFTC. As previously covered by InfoBtytes, in 2019 the CFTC announced that LabCFTC operates as an independent operating office of the agency, reporting directly to the chair of the CFTC. LabCFTC was established in 2017 as an initiative to engage innovators in the financial technology industry and promote responsible fintech innovation (covered by InfoBytes here.) The CFTC noted that OTI will “continue the CFTC’s efforts in incorporating innovation and technology into the agency’s regulatory oversight and mission critical functions by supporting the operating divisions and the Commission’s participation in domestic and international coordination.” The CFTC also noted that OTI’s new structure will provide more flexibility to ensure that it serves “internal and external stakeholders by, among other things, continuing to support outreach and providing rotational opportunities for CFTC employees to gain exposure and expertise.”
OCC seeks fintech research
On July 25, the OCC announced that it is seeking academic papers and policy-focused research on the effects of financial technology entities and nonbanks on banking and the markets for lending, deposit, and payment services. According to the announcement, authors of selected papers will be invited to present to agency staff and invited guests at the OCC headquarters in November, which “will serve as a platform for interested academic, regulatory, and other experts to discuss research that explores how the banking system, and community banks in particular, leverage technology and respond to the growth of new providers of banking services, whether competitive or cooperative.” Submissions, which must represent original, unpublished research, are due August 21.
FDIC issues QBP for 1Q 2022
On July 21, the FDIC released FDIC Quarterly, 2022, Volume 16, Number 3, which analyzes loan performance at community banks in five manufacturing-concentrated states: Indiana, Kentucky, Louisiana, Michigan and Wisconsin. The featured article, Community Bank Performance in Manufacturing-Concentrated States, noted that community banks in these states support their local economies “through a higher share of commercial loans relative to community banks in other states,” including commercial and industrial loans, commercial real estate loans, and construction and development loans. The FDIC also noted that “the manufacturing industry is sensitive to business cycles and recessions, which has direct implications on community banks and has weighed on their profitability through both direct credit exposure to manufacturing firms and indirectly through the manufacturing industry’s impact on the local economy.” Though the agency acknowledged that the manufacturing sector recovered more quickly than expected from the Covid-19 pandemic, credit risks remain for banks in manufacturing-heavy states. The Quarterly further stated that “[t]he manufacturing industry remains susceptible to the risks of plant closure due to the evolving nature of the pandemic, or relocation of firms due to global market pressures as production and demand normalize.”
U.S.-EU release statement on Joint Financial Regulatory Forum
On July 20, EU and U.S. participants, including officials from the Treasury Department, Federal Reserve Board, CFTC, FDIC, SEC, and OCC, participated in the U.S. – EU Joint Financial Regulatory Forum to continue their ongoing financial regulatory dialogue. Matters discussed focused on six themes: “(1) market developments and financial stability risks, (2) sustainable finance and climate-related financial risks, (3) regulatory developments in banking and insurance, (4) regulatory and supervisory cooperation in capital markets, (5) operational resilience and digital finance, and (6) anti-money laundering and countering the financing of terrorism (AML/CFT).”
The statement acknowledged that the Russia/Ukraine conflict, as well as “inflationary pressures”, exposes “a series of downside risks to financial markets both in the EU and in the U.S.” The statement notes that financial markets have so far proven to be “resilient” and stressed that “[i]nternational cooperation in monitoring and mitigating financial stability risks remains essential in the current global environment in light of the negative impacts on global energy and commodities markets.” During the Forum, participants also discussed recent developments related to digital finance and crypto-assets, including so-called stablecoins, as well as potential central bank digital currencies. Additionally, participants discussed various issues related to third-party providers; climate-related financial risks and challenges, including sustainability reporting standards; the transition away from LIBOR; and progress made in strengthening their respective AML/CFT frameworks.
FHFA launches Office of Financial Technology
On July 18, FHFA announced the establishment of the Office of Financial Technology to help address emerging fintech risks and priorities. The new office will support the agency in: (i) developing strategies for FHFA-regulated entities to advance safe, responsible, and equitable fintech innovation; (ii) sharing best practices related to fintech in housing finance; (iii) establishing outreach through regulated entities to promote awareness and understanding of fintech innovation; (iv) facilitating interagency collaboration and partnerships with other regulators; and (v) providing resources on innovation, general trends, and emerging risks in housing finance. The new office will also help develop strategies for Fannie Mae, Freddie Mac, and the Federal Home Loan Banks to advance fintech in a responsible manner.
The agency also issued a request for information (RFI) on the role of financial technology in housing finance and the risks and opportunities presented by technology throughout the mortgage lifecycle. Among other things, the RFI seeks feedback on ways the agency can “constructively interact with other stakeholders to facilitate responsible innovation, including the identification of any barriers to or challenges in implementing fintech in the housing finance ecosystem, while also focusing on supporting equity in the housing finance landscape for both homeowners and renters.” FHFA stated it also has an interest in understanding ways technology might automate and increase the effectiveness of compliance and regulatory processes (broadly referred to as “regtech”), commenting that “[r]egtech provides an opportunity to enhance transparency, consistency, and standardization of those processes, while reducing compliance costs.” Comments are due by October 16.
Chopra outlines CFPB’s efforts to promote competition in financial markets
On July 11, CFPB Director Rohit Chopra provided an overview of recent steps taken by the agency as part of a “whole-of-government effort” to promote financial market competition. In an effort to identify obstacles facing consumers who want to refinance or easily switch providers, the Bureau sent letters to the CEOs of the nation’s largest credit card companies asking for explanations of how they furnish data to credit reporting agencies regarding the exact monthly payment amounts made by borrowers (covered by InfoBytes here). The Bureau reported that “[c]onsumers reasonably expect that they will receive competitively priced credit based on their ability to manage and repay their credit obligations,” but warned that “this is impaired if actual payment amount information is being suppressed by major credit card companies.” Chopra added that the Bureau is also working to “identify[] impediments to refinancing in other markets, including mortgages and auto,” and is “accelerating its work to implement a required rulemaking on personal financial data rights” to help promote competition and switching by providing consumers more control of their data.
Chopra also highlighted an initiative to reduce junk fees. As previously covered by InfoBytes, the Bureau has requested comments from the public on fees associated with consumers’ bank accounts, prepaid or credit card accounts, mortgages, loans, payment transfers, and other financial products that are allegedly not subject to competitive processes to ensure fair pricing. The Bureau also issued an advisory opinion last month stating its interpretation that Section 808 of the FDCPA and Regulation F generally prohibit debt collectors from charging consumers “pay-to-pay” fees, also commonly known as convenience fees, for making payments online or by phone to make sure debt collectors are not “disadvantaged by those that impose unlawful fees” (covered by InfoBytes here). A rulemaking process has also begun to address credit card late fees and late payments and card issuers’ revenue and expenses (covered by InfoBytes here).
Additionally, Chopra discussed Bureau efforts to identify roadblocks facing small financial institutions and new entrants when challenging larger, more dominant players. Specifically, the Bureau issued orders to six large U.S. technology companies seeking information and data on their payment system business practices (covered by InfoBytes here). According to Chopra’s statement, the “information will help the CFPB shed light on how they will decide who they kick off their platform and how they will use the data of individual consumers and any competing businesses.” The Bureau is also working with community banks to understand the impact of major core services providers on their business (covered by InfoBytes here).
Brainard stresses need for crypto regulation
On July 8, Fed Vice Chair Lael Brainard warned that “[r]ecent volatility has exposed serious vulnerabilities in the crypto financial system.” Speaking before a Bank of England conference, Brainard explained that while crypto-assets are presented as a “fundamental break from traditional finance,” they are still susceptible to leverage, settlement, opacity, and maturity and liquidity transformation risks. The recent bankruptcy of a prominent crypto hedge fund and failed projects in the cryptocurrency space demonstrate that the crypto ecosystem faces many of the same challenges that are well known from traditional finance, she said. Brainard acknowledged that a “digital native form of safe central bank money could enhance stability by providing the neutral trusted settlement layer in the future crypto financial system,” but she also stressed that it is important “that the foundations for sound regulation of the crypto financial system be established now before the crypto ecosystem becomes so large or interconnected that it might pose risks to the stability of the broader financial system.” Novel crypto products often come with new risk factors, she said, adding that it may also be difficult “to distinguish between hype and value.” A strong regulatory framework that imposes “guardrails for safety and soundness, market integrity, and investor and consumer protection will help ensure that new digital finance products, platforms and activities are based on genuine economic value and not on regulatory evasion,” Brainard stated. She also noted that strong regulatory guardrails would also help investors and developers build “a resilient digital native financial infrastructure” and help banks, payments providers, and fintech companies “improve the customer experience, make settlement faster, reduce costs, and allow for rapid product improvement and customization.”
Treasury releases fact sheet on digital asset international engagement
On July 7, the Secretary of the Treasury released a Fact Sheet on the Framework for International Engagement on Digital Assets. The Fact Sheet was delivered to President Biden, as directed in the Executive Order on Ensuring Responsible Development of Digital Assets (E.O.) and in consultation with the Secretary of State, the Secretary of Commerce, and the heads of other relevant agencies. The E.O. outlined an interagency approach to address the risks and harness the potential benefits of digital assets and their underlying technology, and directed the Administration to promote the “development of digital asset and central bank digital currencies (CBDC) technologies consistent with [the Treasury’s] values and legal requirements.” According to the announcement, “the framework is intended to ensure that, with respect to the development of digital assets, America’s core democratic values are respected; consumers, investors, and businesses are protected; appropriate global financial system connectivity and platform and architecture interoperability are preserved; and the safety and soundness of the global financial system and international monetary system are maintained.” The announcement also noted that “a history of robust engagement provides a strong foundation for expanded, strategic engagement going forward” and highlighted other key international engagements.
Yellen stresses importance of stablecoin regulatory framework
On June 30, U.S. Treasury Secretary Janet Yellen discussed stablecoin risks during a meeting of principals representing the President’s Working Group (PWG) on Financial Markets in addition to the OCC, FDIC, and the CFPB, where she reiterated her call for a regulatory framework for stablecoins. Participants discussed developments since the release of a stablecoin report issued by the PWG, OCC, and FDIC last November (covered by InfoBytes here). The report noted that stablecoins may be more widely used in the future as a means of payment, which Yellen said at the time could increase “risks to users and the broader system.” The report also recommended that Congress promptly enact legislation to address the risks of payment stablecoins and ensure that payment stablecoins and payment stablecoin arrangements are subject to consistent and comprehensive federal oversight.
According to Treasury’s readout, Yellen “emphasized how recent events have underscored the urgent need to ensure that stablecoin arrangements are subject to a federal framework on a consistent and comprehensive basis” and “highlighted the need to continue to constructively engage in serious legislative efforts to promptly put in place a regulatory framework for stablecoins that would address current and future risks, such as those related to runs, safety and soundness, consumer protection, the payment system, and the concentration of economic power, while complementing existing authorities with respect to market integrity, investor protection, and illicit finance.” She also “commended the steps that individual agencies have taken within the scope of their mandates and authorities.”