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Consumer financial services: The road ahead

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Key developments, future directions


The seismic shifts in the consumer financial services (CFS) regulatory landscape that began in 2017 continued throughout 2018. Additional changes are on the horizon as the new leadership of the Consumer Financial Protection Bureau (CFPB or Bureau) sets out to define future priorities.

As the Trump Administration, Congress and courts continue to rethink and reshape the structure and agenda of the CFPB, and as state regulators react to such changes, companies are dealing with the associated uncertainty regarding the CFS supervisory and enforcement landscape. To help institutions anticipate, adapt and respond to this rapidly evolving regulatory environment, we present a concise retrospective and guide to navigate the road ahead. Amidst the change witnessed over the past several years, and in an environment featuring strong deregulatory rhetoric, it remains paramount to take an intermediate and even long view toward compliance as the ramifications of decisions made today might not become apparent for years. As always, a commitment to best practices, a strong compliance culture and a firm grasp on enduring requirements will serve CFS market participants well.

2018: A time of change

Former Acting Director Mick Mulvaney oversaw a series of notable changes during his tenure at the Bureau, which ran from November 2017 until the confirmation of current Director Kathy Kraninger in December 2018. Former Acting Director Mulvaney initiated a sweeping review of the CFPB’s core processes and procedures, placed a moratorium on its (since resumed) enforcement activities and realigned its enforcement, supervisory and rulemaking priorities. The Bureau reorganized, for example by limiting the functions of the Office of Fair Lending and Equal Opportunity and the Office of Students and Young Consumers to outreach and educational responsibilities. These actions were met with strong opposition from consumer advocacy groups, Congressional Democrats and, in some cases, state regulators.

Although the CFPB adopted a less aggressive enforcement approach overall, the Bureau continued to employ similar legal theories and leverage its broad authority to prohibit unfair, deceptive or abusive acts or practices (UDAAP). The Bureau concurrently dialed down its fair lending enforcement activity to prioritize other areas reflecting higher consumer complaint volumes, such as disclosures and debt collection.

In light of the Bureau’s retrenchment, several state attorneys general (AGs) and regulatory agencies have used, or signaled their intent to use, their enforcement powers, including their ability under the Dodd-Frank Act to enforce violations of federal CFS laws, with many drawing on or otherwise forming special consumer units. Beyond enforcement, state AGs, regulators and legislators are further considering changes to existing laws, regulations and guidance—and enhancing multi-state coordination where feasible—all in the name of filling any perceived voids left by the CFPB.

While several legislative proposals were introduced in 2018 by Republicans to cut back the CFPB’s authority, none gained sufficient traction to pass the Republican-controlled House and Senate. Deep structural reforms are likely not on the horizon with Democrats now in control of the House. Rather, the House Financial Services Committee as chaired by Rep. Maxine Waters (D-CA) is expected to ramp up political pressure on Director Kraninger and scrutinize the Bureau’s strategies and priorities.

The road ahead

Former Acting Director Mulvaney left behind a full agenda, some of which has already been addressed by Director Kraninger. The Bureau recently finalized proposed revisions to its payday lending rule, and is expected to engage in rulemaking to modernize debt collection communications and to clarify the “abusive” prong under its UDAAP authority. The Bureau is also expected to revisit how it treats disparate impact claims under the Equal Credit Opportunity Act (ECOA).

Unlike former Acting Director Mulvaney, Director Kraninger will have the benefit of a full five-year term to develop her vision for the Bureau, albeit against the backdrop of increased congressional oversight and ongoing constitutional challenges to the CFPB’s leadership structure. Notably, comments received from the CFPB’s “Call for Evidence” will allow Director Kraninger to leverage industry insights to implement more substantial and organizational changes at the Bureau going forward.

CFPB structural changes

During his tenure, former CFPB Acting Director Mick Mulvaney brought significant changes to the Bureau’s structure and operations. As the new CFPB Director, Kathy Kraninger will have the benefit of a full five-year term to develop her vision for the Bureau’s strategy and priorities.

Mortgage origination and servicing

In 2018, the CFPB issued multiple rules, and Congress passed legislation, to clarify, revise and update the regulatory framework applicable to the home mortgage origination and servicing market.

Small-dollar loans

In February 2019, the CFPB released the highly anticipated revamp of its Payday Rule, reinforcing its more lenient attitude towards payday lenders. In light of the Bureau’s softer touch, as well as similar developments at the banking agencies, we expect states to step into the void and take further action to curtail payday lending at the state level.

Student loans

In 2018, the CFPB shifted away from student lending supervision and enforcement. We anticipate this trend to continue in the year to come, with states seeking to fill any voids left by the Bureau.

Auto finance

In 2018, the CFPB continued to pay attention to the auto finance industry, with a particular focus on indirect (dealer-arranged) auto lenders and unfair or abusive loan servicing practices.

Marketplace lending

The CFPB has traditionally not prioritized marketplace lenders in its supervisory and enforcement efforts. As a result, state regulators have increasingly sought to fill any perceived voids left by the Bureau.

Payment processing

The CFPB continued to be active in the consumer payments space in 2018, while the Federal Reserve and market participants considered the future of payment processing, including the development of faster payment systems.

Marketplace lending

The CFPB has traditionally not prioritized marketplace lenders in its supervisory and enforcement efforts. As a result, state regulators have increasingly sought to fill any perceived voids left by the Bureau.

13 min read

[The CFPB] must ensure that the marketplace is innovating in ways that enhance both choice and the needs of the consumers.”
CFPB Director Kathy Kraninger1

You can make a strong argument . . . that new technology actually offers new and innovative ways to protect consumers.”
Former CFPB Acting Director Mick Mulvaney2

The decision to consider applications for special purpose national bank charters from innovative companies helps provide more choices to consumers and businesses, and creates greater opportunity for companies that want to provide banking services in America.”
OCC Comptroller Joseph Otting3


Federal regulators

The CFPB does not have direct supervisory or regulatory oversight over marketplace lending generally, and the Bureau has not demonstrated a specific focus on marketplace lenders in recent years. However, industry participants remain subject to consumer financial protection laws enforced by the Bureau, and the CFPB’s supervision and guidance on lending issues also generally applies to marketplace lending. For instance, the CFPB issued its first (and to this point only) no-action letter in September 2017 to a marketplace lending platform that uses automated models for underwriting unsecured, non-revolving credit.4 We expect the Bureau to issue additional no-action letters going forward, especially in light of the CFPB’s December 2018 proposed guidance, intended to give companies greater certainty about the level of enforcement and supervisory relief they can receive from the Bureau.5 At the same time, it is possible that the CFPB may clarify certain related positions (e.g., small-dollar loan payday issues) and, in doing so, provide more clarity to marketplace lenders in an effort to increase subprime consumers’ access to credit.6

We also note that the Bureau issued a request for information regarding the use of alternative data (i.e., information not traditionally used by credit bureaus when calculating a credit score) to assess creditworthiness in February 2017,7 which would affect marketplace lenders, especially new fintech entrants and online platforms. The CFPB acknowledged in 2018 that the initiative is ongoing but has not provided any updates.8 In December 2018, the GAO issued a report encouraging the CFPB, FDIC, OCC and Federal Reserve Board (FRB) to provide clarification concerning lenders’ use of alternative data.9

The FDIC and the OCC have highlighted certain risks involved in developing relationships between supervised financial institutions and third-party lenders. In March 2017, the FDIC updated its Compliance Examination Manual on Third Party Risk to address such concerns, including how to manage and minimize associated risks.10 Throughout 2018, the FDIC did not indicate whether it intends to finalize its 2016 proposed guidance outlining the risks to FDIC-supervised banks that may be associated with third-party lending.11 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.12

Although federal agencies have not traditionally been at the forefront in overseeing marketplace lenders, they could become more proactive should the OCC begin to license fintechs as special-purpose national banks or the FDIC resume chartering industrial loan companies (ILCs), assuming marketplace lenders seek to obtain such charters.13


The 115th Congress, which concluded in January 2019, considered several notable bills that would have affected marketplace lenders, none of which ultimately became law. Specifically, the House passed three bills that would have substantially benefited marketplace lenders. The CHOICE Act and the Protecting Consumers’ Access to Credit Act, passed by the House in June 2017 and February 2018, respectively, were intended to overturn the Second Circuit’s decision in Madden v. Midland Funding.14 If enacted, the bills would have made interest rates on loans valid so long as they were valid at the time the loan was originated—regardless of whether the loans were later sold, assigned or transferred to a third party that could not have originated such a loan under otherwise applicable state usury laws.15 The MOBILE Act would have allowed online lenders to obtain a borrower’s personal information from a scanned driver’s license image.16 Other proposed legislation would have established guidelines for when parties to a bank/nonbank partnership would be considered the “true lender” in consumer loan transactions.17 We expect that some of these bills may serve as the starting point for legislative proposals in the current 116th Congress.

Treasury is a strong supporter of such legislation. In a 2018 report, Treasury encouraged Congress to codify the “valid when made” doctrine and clarify that the existence of a service or economic relationship between a bank and a fintech in a lending partnership does not affect the role of the bank as the “true lender” of the loans made through such partnership.18 Many states take the opposite view. In June 2018, a coalition of 21 state AGs wrote to congressional leaders opposing this Madden-fix and true lender legislation,19 and the Conference of State Bank Supervisors announced its opposition to true lender legislation in May 2018.20

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Federal regulators

In early 2018, a federal court ruled in favor of the CFPB in a 2013 action brought 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, but approved only a fraction of the relief sought.21 The Bureau has appealed the reduced penalty, arguing that it would set a bad precedent for the market.22 The Bureau did not bring any new marketplace lending enforcement actions in 2018, and we expect the CFPB will likely maintain the status quo for marketplace lenders, especially because such lenders represent a relatively low number of consumer complaints submitted to the Bureau.23

In March 2018, the FDIC announced a settlement with a New Jersey bank and its nonbank partner in a lending arrangement for unfair and deceptive practices under the FTCA and violations of TILA and the Electronic Fund Transfer Act (EFTA). The FDIC exercised jurisdiction over the nonbank partner on the basis of it being an institution-affiliated party of the supervised bank.  Each party was subject to a fine, and US$20 million was reserved for customer restitution.24

The FTC also took action against marketplace lenders in 2018. In April 2018, the FTC charged a prominent marketplace lender with violating the FTCA and Gramm-Leach-Bliley Act (GLBA) by falsely promising consumers they would receive a loan with no hidden fees, when the company in fact deducted significant up-front fees.25 In addition, in October 2018, the FTC reached a settlement with a marketplace lender and its affiliate over allegations that the lender had deceptively advertised inflated amounts that student loan borrowers would save from refinancing loans.26

State regulators

State financial regulators have sought to protect consumers from unlicensed online marketplace lenders.  Consistent with actions brought by Massachusetts and New Hampshire authorities in early 2018 and 2017,27 the Vermont Department of Financial Regulation fined an online marketplace lender in December 2018 for operating without a license.28

In March 2018, NYDFS sent an online survey to marketplace lenders operating in New York in an effort to gather information regarding their business practices, and subsequently published a report in July 2018.29 NYDFS indicated that, in many cases, it considers the nonbank online lender, rather than the bank, to be the “true lender” in such partnership arrangements.30 Accordingly, NYDFS might pursue cases against marketplace lenders going forward.

In another 2018 development, the administrator of the Colorado Uniform Consumer Credit Code expanded its suits against two marketplace lenders by adding as defendants certain securitization trusts that had acquired loans from the defendants.31 In each case, Colorado is arguing that the marketplace lender, rather than its bank partner, was the “true lender.”32

State AGs

Unlike state regulators, state AGs did not appear to focus on marketplace lenders in their 2018 enforcement efforts. In light of the Bureau’s recent call for states to take the lead in enforcing consumer protection laws, we expect that state AGs may more actively bring enforcement actions against this market segment in the future.33


Class action litigation

In May 2018, a clothing retailer filed a putative class action lawsuit against a marketplace lender asserting violations of Massachusetts usury, false advertising and unfair competition laws, as well as two federal Racketeer Influenced and Corrupt Organizations Act34 claims.35 The lender has moved to compel arbitration. In other cases, plaintiffs are suing marketplace lenders and their bank partners to void loan agreements that include arbitration and choice-of-law provisions.36

Moving forward, increased state enforcement actions may also contribute to increased class action litigation targeting marketplace lenders.


Fintech outlook

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. Fintech lenders typically operate through (1) a bank partnership, in which the bank originates a loan sourced and serviced by the fintech, or (2) a direct lender model, which requires the fintech to be licensed in each state in which it does business (or, perhaps in the future, seek a federal option such as the FDIC’s ILC designation or the OCC’s special purpose national bank charter).37 As in other market segments, these innovative approaches and business models may yield significant benefits to subprime consumers, but also may raise novel, or at least significant, fair lending and financial inclusion considerations. Fintech lenders represented 36 percent of the unsecured consumer loan market in 2017 and are not expected to dwindle moving forward.38  


2019 outlook

  • We expect that state regulators, especially the NYDFS, will continue to keep a close eye on marketplace lenders and pursue “true lender” challenges to marketplace lending bank partnerships.
  • Use of alternative data will likely remain a hot topic for federal regulators following the GAO’s report encouraging regulatory clarification concerning lenders’ use of alternative data.
  • While the Trump administration and many in Congress support Madden-fix and true lender legislation, strong opposition from the states makes the legislative path uncertain.


Consumer financial services: The road ahead


1 Kate Berry, New CFPB Chief's Memo to Staff: Enforce Law, But Don't Presume Guilt, American Banker (Jan. 3, 2019), https://www.americanbanker.com/news/new-cfpb-chiefs-memo-to-staff-enforce-law-but-dont-presume-guilt.
2 Yuka Hayashi, CFPB Wants to Help Launch New Fintech Products, The Wall Street Journal (July 18, 2018), https://www.wsj.com/articles/cfpb-wants-to-help-launch-new-fintech-products-1531953587.
3 OCC, OCC Begins Accepting National Bank Charter Applications From Financial Technology Companies (July 31, 2018), https://www.occ.gov/news-issuances/news-releases/2018/nr-occ-2018-74.html.
4 CFPB, No-Action Letter to Upstart, Inc., (Sept. 14, 2017), https://files.consumerfinance.gov/f/documents/201709_cfpb_upstart-no-action-letter.pdf.
5 CFPB, Policy on No-Action Letters and the BCFP Product Sandbox (Dec. 13, 2018), https://www.govinfo.gov/content/pkg/FR-2018-12-13/pdf/2018-26873.pdf.
6 CFPB, Semi-Annual Report, at 5 (Apr. 2, 2018), https://files.consumerfinance.gov/f/documents/cfpb_semi-annual-report_spring-2018.pdf; CFPB, Semi-Annual Report, at 5 (Nov. 9, 2018), https://s3.amazonaws.com/files.consumerfinance.gov/f/documents/bcfp_semi-annual-report-to-congress_spring-2018.pdf.
7 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.
8 CFPB, Semi-Annual Report, at 13 (Apr. 2 2018), https://files.consumerfinance.gov/f/documents/cfpb_semi-annual-report_spring-2018.pdf.
9 United States Government Accountability Office, Finance Technology: Agencies Should ProvideClarification on Lenders' Use of Alternative Data (Dec. 2018), https://www.gao.gov/assets/700/696149.pdf. Treasury made a similar recommendation in a July 2018 report. See Treasury, A Financial System That Creates Economic Opportunities: Nonbank Financials, Fintech, and Innovation, at 138 (July 2018), https://home.treasury.gov/sites/default/files/2018-08/A-Financial-System-that-Creates-Economic-Opportunities---Nonbank-Financials-Fintech-and-Innovation.pdf.
10 FDIC, Compliance Examination Manual, Third Party Risk (Mar. 2017), https://www.fdic.gov/regulations/compliance/manual/7/vii-4.1.pdf.
11 FDIC, Examination Guidance for Third-Party Lending (July 29, 2018), https://www.fdic.gov/news/news/financial/2016/fil16050a.pdf.
12 OCC, Bulletin 2017-21 (Supplementing Bulletin 2013-23) (June 7, 2017), https://www.occ.treas.gov/news-issuances/bulletins/2017/bulletin-2017-21.html.
13 The OCC announced in July 2018 that it would begin accepting applications for national bank charters from fintech companies engaged in the business of banking. See OCC, OCC Begins Accepting National Bank Charter Applications From Financial Technology Companies (July 31, 2018), https://www.occ.treas.gov/news-issuances/news-releases/2018/nr-occ-2018-74.html.
14 Madden v. Midland Funding, LLC, 786 F.3d 246 (2d Cir. 2015).
15 H.R. 10 (Financial CHOICE Act of 2017), 115th Cong. (June 26, 2017); H.R. 3299 (Protecting Consumers' Access to Credit Act of 2017), 115th Cong. (July 19, 2017)
16 H.R. 1457 (MOBILE Act of 2017), 115th Cong. (Mar. 9, 2017).
17 H.R. 4439 (Modernizing Credit Opportunities Act), 115th Cong. (Nov. 16, 2017).
18 Treasury, A Financial System That Creates Economic Opportunities: Nonbank Financials, Fintech, and Innovation, at 93-94 (July 2018), https://home.treasury.gov/sites/default/files/2018-08/A-Financial-System-that-Creates-Economic-Opportunities---Nonbank-Financials-Fintech-and-Innovation.pdf.
19 Letter from the 21 Attorneys General to Majority Leader McConnell, Minority Leader Schumer, Chairman Crapo and Ranking Member Brown (June 27, 2018), https://www.consumerfinancemonitor.com/wp-content/uploads/sites/14/2018/07/AG-Madden-letter.pdf.
20 Letter from the Conference of State Bank Supervisors to The Honorable Trey Hollingsworth (May 18, 2018), https://www.csbs.org/csbs-opposes-true-lender-bill-hr-4439.
21 Consumer Fin. Prot. Bureau v. CashCall, Inc. et al., case no. 2:15-cv-07522 (N.D. Cal. Sept. 25, 2015).
22 Evan Weinberger, Reduced CashCall Penalty Would Set Bad Precedent, CFPB Says, BNA.com (Oct. 19, 2018), https://www.bna.com/reduced-cashcall-penalty-n57982093185/.
23 CFPB, Consumer Response Annual Report, January 1–December 31, 2017 (Mar. 2018), https://s3.amazonaws.com/files.consumerfinance.gov/f/documents/cfpb_consumer-response-annual-report_2017.pdf.
24 FDIC, FDIC Announces Settlement with Cross River Bank, Teaneck, New Jersey, and Freedom Financial Asset Management, LLC, San Mateo, California, for Unfair and Deceptive Practices (Mar. 28, 2018), https://www.fdic.gov/news/news/press/2018/pr18021.html.
25 FTC, FTC Charges Lending Club with Deceiving Consumers (Apr. 25, 2018), https://www.ftc.gov/news-events/press-releases/2018/04/ftc-charges-lending-club-deceiving-consumers-0. The complaint, amended as of November 22, 2018, is available here: https://www.ftc.gov/system/files/documents/cases/lendingclub_corporation_first_amended_complaint.pdf.
26 FTC, Online Student Loan Refinance Company SoFi Settles FTC Charges, Agrees to Stop Making False Claims About Loan Refinancing Savings (Oct. 29, 2018), https://www.ftc.gov/news-events/press-releases/2018/10/online-student-loan-refinance-company-sofi-settles-ftc-charges.
27 See, e.g., In re RockLoans Marketplace LLC, case no. 17-071 (Oct. 24, 2017),; 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; In re LendingClub Corp., et al., 2018-0001 (Mar. 12, 2018), https://www.mass.gov/consent-order/lendingclub-corporation-and-springstone-financial-llc.
28 Vermont Department of Financial Regulation, Stipulation and Consent Order In the Matter of Upstart Network, Inc. (Dec. 27, 2018), http://www.dfr.vermont.gov/reg-bul-ord/upstart-network-inc.
29 NYDFS, Online Lending Report (July 11, 2018), https://www.dfs.ny.gov/reportpub/online_lending_survey_rpt_07112018.pdf.
30 Id. at 28-29.
31 Allison Bisbey, Colorado Raises the Stakes in Lawsuit Against Marketplace Lenders, Asset Securitization Report (Dec. 27, 2018), https://asreport.americanbanker.com/news/colorado-raises-the-stakes-in-lawsuit-against-marketplace-lenders.
32 Meade v. Avant of Colorado, LLC, 307 F. Supp. 3d 1134 (D. Col. 2018); Meade v. Marlette Funding LLC, 2018 U.S. Dist. LEXIS 46814 (D. Col 2018).
33 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.
34 18 U.S.C. §§ 1961–1968.
35 Barnabas Clothing, Inc. et al. v. Kabbage, Inc. et al., No. 18-3414 (C.D. Cal. filed Apr. 24, 2018).
36 Small Business Borrower Sues Kabbage, PYMNTS.com (Nov. 1 2017), https://www.pymnts.com/news/b2b-payments/2017/ma-smb-sues-kabbage-celtic-bank-under-usury-law/.
37 U.S. Department of the Treasury, A Financial System That Creates Economic Opportunities: Nonbank Financials, Fintech, and Innovation, at 87-88 (July 2018), https://home.treasury.gov/sites/default/files/2018-08/A-Financial-System-that-Creates-Economic-Opportunities---Nonbank-Financials-Fintech-and-Innovation.pdf.
38 Hannah Levitt, Personal Loans Surge to a Record High, Bloomberg (July 3, 2018), https://www.bloomberg.com/news/articles/2018-07-03/personal-loans-surge-to-a-record-as-fintech-firms-lead-the-way.


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