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Consumer financial services at a crossroads

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Key developments, possible impacts

Overview

During 2017 and early 2018, the consumer financial services (CFS) regulatory landscape has undergone seismic shifts.

As the Trump Administration, Congress and the courts, in varying ways and to various degrees, rethink and reshape the Consumer Financial Protection Bureau’s (CFPB or Bureau) structure, agenda and approach, companies—notwithstanding the overall deregulatory trend of such activity—likely will experience continued uncertainty regarding the CFS supervisory and enforcement landscape. To help institutions navigate today’s rapidly evolving regulatory environment, we present a concise retrospective and guide for what likely lies ahead. Amidst so much change, and in an environment redolent with deregulatory rhetoric, it is important to take an intermediate and even long view toward compliance as the ramifications of many decisions made today might not become apparent for years. Thus, as always, a commitment to best practices, a strong compliance culture, and a firm grasp on enduring requirements will serve CFS market participants well.

The shifting landscape

Despite a contentious legal battle over the CFPB’s leadership, Acting Director Mick Mulvaney has pressed forward with significant changes to the Bureau’s organization and priorities. For the time being, it appears that the Bureau has recused itself from certain aspects of overseeing the CFS industry, a stark departure from former Director Richard Cordray’s approach.

In less than six months, the new leadership has announced several political appointments to key CFPB positions, and issued no fewer than ten requests for information (RFIs), asking the public to weigh in on nearly every aspect of the Bureau—enforcement, supervision, rulemaking, market monitoring and education activities, among others. In addition to a comprehensive review of all CFPB rules, the Bureau has specifically focused on rolling back requirements under its payday, prepaid card and HMDA-related rules. 

Congress too has joined the fray, striking down the CFPB’s arbitration rule in November 2017. Bills have been introduced to subject the Bureau to Congressional appropriations—a proposal the Trump Administration adopted in its 2019 budget, which Acting Director Mulvaney also underscored as part of his proposed reforms. Other proposals would reconstitute the Bureau as a multi-member, bipartisan commission.

Separately, as our collective memory of the financial crisis fades and as they have become more accustomed to the CFPB as litigant, some courts appear to be less deferential to the CFPB’s enforcement efforts. Companies and institutions are increasingly challenging the Bureau’s civil and administrative actions, rather than swiftly settling.

The current CFPB leadership has also signaled a new approach to enforcement that includes the use of more traditional legal theories, de-emphasizing the broad and aggressive use of the Bureau’s UDAAP authority as an enforcement tool. Among other actions, the CFPB’s decision to remove its fair lending unit from the supervision and enforcement division, as well as its call for local enforcement of consumer protection laws likely will cause states to increase their enforcement activities. Indeed, several state attorneys general (AGs) have already signaled that they will use their enforcement powers, including their ability under the Dodd-Frank Act to enforce violations of federal CFS laws, with many ready to draw on or otherwise forming special consumer units. Beyond enforcement of law, state AGs, regulators and legislators also seem poised to revisit existing laws and regulations and issue guidance, as appropriate—all in the name of filling any void the CFPB might leave in its wake. Multistate coordination among these players remains possible, if not probable, in many instances.

A note on new technologies

Concurrent federal deregulation and increasing state oversight may pose unique challenges for tech, fintech and regtech companies as well as incumbent financial institutions leveraging new technologies. Although the Bureau’s Project Catalyst was designed and has the potential to balance oversight with the need to foster consumer-friendly innovation, the current CFPB leadership has yet to take a position on whether it will revamp this initiative, and if so how—regardless of how it will otherwise address fintech solutions in the CFS market.

Other federal agencies, including the federal banking regulators, have yet to demonstrate how they will strike this balance and manage tech innovation in the CFS sector. States, meanwhile, may seek to clarify and enforce time-tested laws and regulations, while also possibly offering a multiplicity of differing responses. All CFS market participants using or offering innovative approaches and products are thus encouraged to navigate this shifting landscape carefully by ensuring a sound understanding of new technologies, an ability to manage their risks, and an ability to communicate their risk management approach, when and as appropriate, to regulators.

CFPB structural changes

The appointment of Mick Mulvaney as CFPB Acting Director has led to significant changes to the Bureau’s structure and how it operates. 

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Mortgage origination and servicing

In 2017, the CFPB issued several final rules to clarify, revise, and update the regulatory framework applicable to the home mortgage origination and servicing market.

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Small-dollar loans

The CFPB has historically focused on how to address so-called "debt traps" associated with payday lending.

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Student loans

The CFPB has historically focused on both federal and private student loans, with an increasing focus on loan servicing practices.

Pencil Erasers

Auto finance

The CFPB has previously targeted the auto finance industry, with a particular focus on indirect (dealer-arranged) auto lenders and unfair or abusive loan servicing practices.

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Marketplace lending

The CFPB has traditionally not prioritized  marketplace lenders in its supervisory and enforcement efforts. The new CFPB leadership is expected to maintain the status quo and rely on state attorneys general to oversee industry participants.

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Payment processing

The CFPB finalized its Prepaid Card rule in October 2017. It remains unclear, however, whether the CFPB’s new leadership will leave the rule intact, or instead seek to further delay or alter the rule’s requirements as part of the Bureau’s ongoing review of CFPB regulations.

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Marketplace lending

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Supervision

Federal regulators

Although the CFPB does not have direct supervisory or regulatory oversight over marketplace lending generally, industry participants remain subject to consumer financial protection laws enforced by the Bureau. While no specific focus on such lenders was noted in the past years, the CFPB’s supervision and guidance on lending issues also generally applies to marketplace lending. For instance, the CFPB issued its first (and only) No-Action Letter in September 2017 to a marketplace lending platform that uses automated models for underwriting unsecured, non-revolving credit.3 However, in light of the Bureau’s recent interest in consumers with subprime or deep subprime credit histories, we expect the CFPB to shift its supervisory focus to marketplace lenders in an effort to ease subprime consumers’ access to credit markets.4 We also note that the Bureau issued a request for information regarding the use of alternative data to assess creditworthiness in February 2017,5 which would affect marketplace lenders, especially new fintech entrants and online platforms. Although the new CFPB leadership acknowledged that this initiative is ongoing, it did not provide any update regarding such request.6 

The FDIC and the OCC have also highlighted certain risks involved in developing relationships between supervised financial institutions and third-party lenders. In March 2017, the FDIC updated its Examination Manual to address such concern, including how to manage and minimize associated risks.7 In June 2017, the OCC issued additional guidance for managing operational, compliance, reputation, strategic, and credit risk presented by third-party business relationships of national banks and federal savings associations.8 

Although federal agencies have not been at the forefront in overseeing marketplace lenders, they could become more proactive should the OCC begin to license special-purpose national banks or the FDIC resume chartering ILCs and should marketplace lenders seek to obtain such charters.

“The Second Circuit [Madden] decision has caused considerable uncertainty and risk for many types of bank lending programs. Being able to offer consistent terms nationwide is vital to scaling the Marketplace lending business, which in turn allows lenders to access cheaper investment capital and then pass the savings on to the borrowers.”

House Financial Services Committee  Chairman, Rep. Jeb Hensarling (R-TX)1

 

Congress

In 2017, Congress considered several bills that could affect marketplace lenders. Notably, the House passed three bills that, if successful in the Senate, would substantially benefit marketplace lenders. The CHOICE Act and the Protecting Consumers’ Access to Credit Act, passed by the House in June 2017 and February 2018 respectively, would legislatively overturn the Second Circuit’s decision in Madden v. Midland Funding.9 If enacted, it would make interest rates on loans valid so long as they were valid at the time the loan was originated—regardless of whether the loan is later sold, assigned or transferred to a third party that could not have originated such a loan under state usury laws.10 The MOBILE Act, passed in January 2018, would allow online lenders to obtain a borrower’s personal information from a scanned image of his/her driver license.11 Other bills have also been proposed, offering additional ways to change the Madden holding.12 

 

Enforcement

CFPB

The CFPB has not prioritized enforcement of the marketplace lending industry. In 2017, no new enforcement actions were introduced; instead (as described above), the Bureau issued its first No-Action Letter to an online lender.13 A federal court also resolved an action brought in 2013 by the Bureau against an online loan servicer that employed unfair, deceptive and abusive servicing practices by executing automatic debits from customers’ accounts and violating state usury laws. Although the Court sided with the Bureau, it only approved a fraction of the relief sought.14 

Moving forward, we expect the CFPB to maintain the status quo for marketplace lenders, especially because such lenders represent a relatively low number of consumer complaints submitted to the Bureau.15 The CFPB’s new leadership is likely to rely on state AGs to police marketplace lenders—as the former CFPB leadership did.16 

 

State regulators

By contrast, state financial regulators have actively sought to protect consumers from unlicensed online marketplace lenders. The New Hampshire Department of Banking was particularly active in this space, reaching several settlements with industry participants for operating without a required license.17 In March 2018, the Massachusetts Division of Banks also obtained a settlement with an online marketplace lender on similar grounds.18 

Other state regulators have also taken notice and sought to gauge the risks associated with a growing marketplace lending industry. In March 2018, the New York Department of Financial Services (NYDFS) sent an online survey to marketplace lenders operating in New York in an effort to gather information regarding their business practices, including lending practices, interest rates and costs charged, and related consumer complaints and investigations. A report will follow by July 1, 2018.19 A similar initiative was undertaken by the FTC,20 as well as by the California Department of Business Oversight (DBO) in December 2015,21 the latter highlighting the industry’s significant growth rate and corresponding risks to consumer financial protection, while also stressing the need to implement a regulatory structure that works effectively for marketplace lenders.22 Although enforcement action has yet to materialize, state regulators’ interest may signal a shift in focus.

"I do not doubt the sincerity of the good actors that may be trying to navigate difficulty the Madden ruling potentially caused [but the CHOICE Act] will go much further to allow other parties . . . to evade or outright disregard state-level laws."27

 

State AGs

Unlike state regulators, state AGs did not appear to focus on marketplace lenders in their 2017 enforcement efforts, with the exception of the Colorado AG, who filed two actions against industry participants that charged illegal delinquency fees and used an illegal “choice of law” provision.23 In light of the Bureau’s recent call for states to take the lead in enforcing consumer protection laws, we expect that state AGs will more actively enforce this space in the future.24 

 

Class action litigation

In March 2017, a leading industry participant avoided a class action brought in the District Court for the Southern District of New York for charging usurious interest rates and successfully compelled arbitration.25 In August 2016, a California federal court approved a US$2.4 million settlement in a class action lawsuit against a leading online marketplace lender over allegations that the online lender ran hard inquires on credit reports in violation of FCRA.26

Moving forward, increased state involvement may also lead to increased class action litigation targeting marketplace lenders.

 

Fintech outlook and marketplace lending

Fintechs in this space have principally focused on pairing borrowers with lenders online, and built AI-based scoring algorithms used to evaluate alternative data sources to assess creditworthiness and price loans. As in other market segments, these innovative approaches may yield significant benefits to subprime consumers, but also may raise novel fair lending and financial inclusion considerations.

    
    

 

1 Rachel Witkowski, Bill to Unwind Madden Ruling Clears House, But Senate Is Question Mark, American Banker (Feb. 14, 2018), https://www.americanbanker.com/news/bill-to-unwind-madden-ruling-clears-house-but-senate-is-question-mark?tag=00000156-32ff-d79b-a377-3effa4570000.
2 Id.
3 CFPB, No-Action Letter to Upstart, Inc., (Sept. 14, 2017), https://files.consumerfinance.gov/f/documents/201709_cfpb_upstart-no-action-letter.pdf
4 CFPB, Semi-Annual Report, at 5 (Apr. 2, 2018), https://files.consumerfinance.gov/f/documents/cfpb_semi-annual-report_spring-2018.pdf.
5 CFPB, Request for Information Regarding Use of Alternative Data and Modeling Techniques in the Credit Process, 82 Fed. Reg. 11183 (Feb. 21, 2017), https://www.gpo.gov/fdsys/pkg/FR-2017-02-21/pdf/2017-03361.pdf
6 CFPB, Semi-Annual Report, at 13 (Apr. 2, 2018), https://files.consumerfinance.gov/f/documents/cfpb_semi-annual-report_spring-2018.pdf
7 FDIC, Compliance Examination Manual, Third Party Risk (Mar. 2017), https://www.fdic.gov/regulations/compliance/manual/7/vii-4.1.pdf.
8 OCC, Bulletin 2017-21 (Supplementing Bulletin 2013-23) (Jun. 7, 2017), https://www.occ.treas.gov/news-issuances/bulletins/2017/bulletin-2017-21.html
9 Madden v. Midland Funding, LLC, 786 F.3d 246 (2d Cir. 2015).
10 H.R. 10 (Financial CHOICE Act of 2017), 115th Cong. (Jun. 26, 2017); H.R. 3299 (Protecting Consumers’ Access to Credit Act of 2017), 115th Cong. (Jul. 19, 2017). 
11 H.R. 1457 (MOBILE Act of 2017), 115th Cong. (Mar. 9, 2017).
12 See, e.g., H.R. 4439 (Modernizing Credit Opportunities Act), 115th Cong. (Nov. 16, 2017) (amending several federal laws to circumvent the Madden ruling); H.R. 3760 (Protecting Consumers from Unreasonable Credit Rates Act of 2017), 115th Cong., (Sept. 13, 2017) (establishing a federal usury limit of 36%); S. 1642 (Protecting Consumers’ Access to Credit Act of 2017), 115th Cong. (Jul. 27, 2017) (considering interest rates on loans valid so long as they were valid at the time the loan was originated, regardless of whether or not the loan is later sold, assigned, or transferred to a third party).
13 CFPB, No-Action Letter to Upstart, Inc., (Sept. 14, 2017), https://files.consumerfinance.gov/f/documents/201709_cfpb_upstart-no-action-letter.pdf.
14 Consumer Fin. Prot. Bureau v. CashCall, Inc. et al., case no. 2:15-cv-07522 (N.D. Cal. Sept. 25, 2015).15 CFPB, Monthly Complaint Report, Vol. 24 (Jun. 2017), https://s3.amazonaws.com/files.consumerfinance.gov/f/documents/201706_cfpb-Monthly-Complaint-Report-50-State.pdf.
16 See CFPB, Prepared Remarks of CFPB Director Richard Cordray at the National Association of Attorneys General (Feb. 26, 2014), https://www.consumerfinance.gov/about-us/newsroom/prepared-remarks-of-cfpb-director-richard-cordray-at-the-national-association-of-attorneys-general
17 See In re Klarna Inc., case no. 17052 (Nov. 8, 2017), https://www.nh.gov/banking/orders/enforcement/documents/17-052-co-20171108.pdf; In re RockLoans Marketplace LLC, case no. 17-071 (Oct. 24, 2017), https://www.nh.gov/banking/orders/enforcement/documents/17-052-co-20171108.pdf; In re Upstart Network, Inc., case no. 16-034 (Dec. 20, 2016), https://www.nh.gov/banking/orders/enforcement/documents/16-034-co020161220.pdf; In re Prosper Funding LLC and Prosper Marketplace, Inc., case no. 16-035 (Nov. 23, 2016), https://www.nh.gov/banking/orders/enforcement/documents/16-035-co-20161123.pdf.
18 In re LendingClub Corp., et al., 2018-0001 (Mar. 12, 2018), https://www.mass.gov/consent-order/lendingclub-corporation-and-springstone-financial-llc
19 NYDFS Sends Survey Request To Online Lenders, The National Law Review (Mar. 21, 2018), https://www.natlawreview.com/article/nydfs-sends-survey-request-to-online-lenders. The NYDFS initiative follows two bills introduced in the New York Assembly and Senate, directing the financial regulator to issue an online lending report by April 15, 2018. See NY A.08938, Gen. Assemb. (Jan. 8, 2018); NY S.07294, Gen Assemb. (Jan. 5, 2018).
20 FTC, A Survey of 15 Marketplace Lenders’ Online Presence (Jun. 9, 2016), https://www.ftc.gov/system/files/documents/public_events/944193/a_survey_of_15_marketplace_lenders_online_presence.pdf
21 California Dep’t of Business Oversight, California DBO Announces Inquiry into ‘Marketplace’ Lending Industry (Dec. 11, 2015), dbo.ca.gov/Press/press_releases/2015/DBO%20Inquiry%20Announcement%2012-11-15.pdf.
22 California Dep’t of Business Oversight, Summary Report Of Aggregate Transaction Data (Apr. 8, 2016), dbo.ca.gov/Press/press_releases/2016/Survey%20Response%20Summary%20Report%2004-08-16.pdf. See also California Dep’t of Business Oversight, California Online Lending Grows by More Than 930% Over Five Years (Apr. 8, 2016), dbo.ca.gov/Press/press_releases/2016/Survey%20Response%20Release%2004-08-16.pdf. 
23 Colorado v. Marlette Funding LLC, case no. 1:17-cv-00575-PAB-MJW (D. Colo. Mar. 3, 2017); Meade v. Avant of Colorado LLC, case no. 1:17-cv-00620-WJM-STV (D. Colo. Mar. 9, 2017).
24 Rachel Witkowski, AGs, Not CFPB, Should Take Greater Role On Enforcement: Mulvaney, American Banker (Feb. 28, 2018), https://www.americanbanker.com/news/ags-not-cfpb-should-take-greater-role-on-enforcement-mulvaney.
25 Bethune v. LendingClub Corp. et al., case no. 1:16-cv-02578 (S.D.N.Y. Apr. 6, 2016).
26 Heaton v. Social Fin., Inc., case no. 3:14-cv-05191 (N.D. Cal. Aug. 10, 2016).
27 Id House Financial Services Committee, Ranking Member, Rep. Maxine Waters (D-CA) 

 

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