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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. 

stairs

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.

different kinds of doors

Small-dollar loans

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

US dollar

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.

aerial photography of street roads

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.

US dollar bank notes

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.

credit cards

Payment processing

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“We don’t just work for the government, we work for the people, [for] those who use credit cards, and those who provide those cards.”

Acting CFPB Director Mick Mulvaney1
 

Supervision

Prepaid Card Rule update

The CFPB finalized changes to its rule on prepaid cards (Prepaid Card Rule) in January 2018 and delayed its compliance date to April 2019. The amended rule preserves significant restrictions on credit features and detailed disclosure requirements, while some burdens on industry participants have been alleviated. Notably, the rule now includes: (1) an exception for error resolution and limited liability requirements for unregistered prepaid accounts; (2) more flexibility for credit cards that are linked to digital wallets; (3) an exclusion from the rule for loyalty, award or promotional gift cards; (4) flexibility regarding the pre-acquisition disclosures for certain prepaid accounts; and (5) flexibility in submitting prepaid account agreements to the CFPB.2

Pursuant to the Congressional Review Act (CRA),3 the CFPB is expected to submit a report to Congress containing the rule and any modifications prior to its effective date.4 Because the Prepaid Card Rule does not qualify as a “major rule” under the CRA5 and its original version survived a prior Senate challenge,6 we do not anticipate a push against the amended rule. 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 requirements7 as part of the Bureau’s ongoing review of CFPB regulations.8 

 

Deceptive practices by credit card companies

The CFPB has dedicated a significant portion of its supervisory efforts to address various consumer credit violations, including:

  • Inadequate account-opening disclosures
  • Misrepresentations to consumers as to the availability of free pay-by-phone options10 
  • Misrepresentations to consumers concerning benefits and terms of credit card add-on products, such as the cost and coverage of optional debt cancellation add-on products
  • Failure to comply with billing error resolution and unauthorized transactions
  • Charging overdraft fees on ATM and one-time debit card transactions by misrepresenting to consumers opt-in deposit overdraft protection products

The CFPB also reached out to top retail credit card companies in June 2017 to encourage improved disclosure and transparency in their promotions, especially deferred-interest promotions.11 Moving forward, the CFPB will likely continue to closely monitor unfair and deceptive practices by credit card companies and address deficiencies through rulemaking rather than enforcement.

 

Fair access to credit

In recent years, the CFPB has devoted substantial attention to underserved communities’ fair access to credit. In 2017, the Bureau identified redlining as a primary concern12 and focused on the fair treatment of underserved communities regarding marketing and lending practices, which may also impact payment processors and card companies. The new CFPB leadership recently reaffirmed its commitment to protecting subprime consumers lacking access to credit markets.13 Furthermore, the repeal of the arbitration rule in November 2017 could lead the CFPB to search for other venues to protect consumers, and especially exercise enhanced scrutiny regarding practices affecting vulnerable populations.

9%

Overall average debt increase of cardholding consumers (2015-2017)

 

Data security

The CFPB will likely continue to focus on payment processors’ data security practices. In October 2017, the CFPB issued its principles for protecting consumers who authorize third-party companies to access their financial data to provide a variety of financial products and services.14 Acting Director Mulvaney’s freeze of CFPB’s data collection until the Bureau resolves its own data security deficiencies may indicate a future interest in this topic.

 

Remittance rule

Although not likely a priority,15 the CFPB had noted in its last supervisory report that it would continue to examine both large banks and nonbanks for compliance with Regulation E concerning remittances.16 In March 2017, the CFPB sought public comments in order to assess the effectiveness of the remittance rule.17 No further developments have been announced in this area under the Bureau’s new leadership, and it remains unclear whether the rule will be reconsidered as part of the Bureau’s review of previously issued regulations.18

26%

Debt increase for deep subprime cardholding consumers (2015-2017)

Source: CFPB Credit Card Market Report (2017)

 

Enforcement

In 2017, the Bureau sanctioned two major payment processors that failed to effectively administer and transfer their customers’ accounts, resulting in thousands of consumers left without access to funds stored on their cards for days (or weeks), as well as paychecks or government benefits.19 In addition, the CFPB imposed a US$95 million fine on a leading credit card company that provided consumers in Puerto Rico, the US Virgin Islands, and other US territories with products and services that were inferior to those available in the continental US. Consumers in those territories were charged higher fees and interest rates, offered less advantageous promotional offers, denied credit and required to disburse more money to settle debts.

Notably, the CFPB imposed a US$100 million fine—its largest fine so far—on a major financial institution, whose employees illegally opened more than two million unauthorized deposit and credit card accounts to boost sales figures and reach compensation incentives.20 Initiated in 2016, this enforcement action prompted the Bureau to release a compliance bulletin that same year, which described compliance management steps that supervised entities should take to mitigate risks posed by compensation incentives.20

The FTC has also been an active player in policing industry participants:

  • In June 2017, the FTC and the Florida Attorney General announced a nearly US$5 million settlement regarding an illegal robocall ring in which defendants promised to help consumers lower their credit card interest rates through worthless credit card interest rate reduction programs21
  • In March 2017, the FTC agreed to settle charges with a prepaid card provider for US$53 million,22 in connection with alleged deceptive statements to consumers regarding immediate access to funds stored on their prepaid cards when, in fact, the consumers were subject to substantial delays (e.g., weeks or indefinitely)23

 

Litigation

In December 2017, the US Court of Appeals for the Eleventh Circuit found a payment processor jointly and severally liable for providing substantial assistance to another entity that violated a federal ban on improper telemarking practices. This decision followed a suit filed by the FTC in October 2012 and leaves the payment processor responsible for paying a US$1.7 million judgment with its co-defendants.24

In September 2017, the Attorney General’s Office for the Eastern District of Pennsylvania reached a US$3.6 million settlement with a major national bank and its affiliated payment processor to settle allegations that they illegally debited money for specific telemarketing and internet marketing merchants.25

 

Fintech outlook and payment processing

  • Fintech companies have developed AI-based regtech tools to improve fraud detection, identity theft, compliance with anti-money laundering laws, as well as with Know-Your-Customer requirements 
  • Regulators, however, have yet to accept AI technology as a legally sufficient method of detecting fraud and money laundering
  • Faster payments developments and the use of blockchain technology, still budding, and fintechs that develop around such changes could significantly change this market segment moving forward. Their challenge will also be to assimilate into a highly regulated space

    
    

 

1 Mick Mulvaney, Memo to CFPB Staff (Jan. 23, 2018), https://www.documentcloud.org/documents/4357880-Mulvaney-Memo.html
2 CFPB, Executive Summary of the 2018 Prepaid Amendments (Jan. 25, 2018), https://s3.amazonaws.com/files.consumerfinance.gov/f/documents/cfpb_prepaid_executive-summary_2018-amendments.pdf.
3 5 U.S.C. §§ 801 et seq. 
4 CFPB, Rules Concerning Prepaid Accounts Under the Electronic Fund Transfer Act (Regulation E) and the Truth in Lending Act (Regulation Z), at 198 (Jan. 25, 2018), https://s3.amazonaws.com/files.consumerfinance.gov/f/documents/cfpb_prepaid_final-rule_2018-amendments.pdf.
Id. 
6 Lisa Lambert, U.S. Consumer Watchdog’s Prepaid-Card Rule Survives Congress Challenge, Reuters (May 11, 2017), https://www.reuters.com/article/us-usa-congress-prepaid/u-s-consumer-watchdogs-prepaid-card-rule-survives-congress-challenge-idUSKBN1872XO.
Gabriel T. Rubin, CFPB Moves to Revise Rules on Prepaid Cards, Mortgage Data, The Wall Street Journal (Dec. 22, 2017), https://www.wsj.com/articles/cfpb-moves-to-revise-rules-on-prepaid-cards-mortgage-data-1513955931.
8 CFPB, Request for Information Regarding the Bureau’s Adopted Regulations and New Rulemaking Authorities (Mar. 14, 2018), https://files.consumerfinance.gov/f/documents/cfpb_rfi_adopted-regulations_032018.pdf.
CFPB Supervisory Highlights, Issue 16 (Summer 2017), https://s3.amazonaws.com/files.consumerfinance.gov/f/documents/201709_cfpb_Supervisory-Highlights_Issue-16.pdf.
10 CFPB further issued a Phone Pay Fee CFPB Bulletin 2017-01.
11 CFPB, Consumer Financial Protection Bureau Encourages Retail Credit Card Companies to Consider More Transparent Promotions (Jun. 8, 2017), https://www.consumerfinance.gov/about-us/newsroom/consumer-financial-protection-bureau-encourages-retail-credit-card-companies-consider-more-transparent-promotions. 
12 CFPB Supervisory Highlights, Issue 13 (Fall 2016), at 27-31, http://files.consumerfinance.gov/f/documents/Supervisory_Highlights_Issue_13__Final_10.31.16.pdf. Redlining is defined as intentionally discouraging prospective applicants in minority neighborhoods from applying to credit.
13 CFPB, Semi-Annual Report, at 5 (Apr. 2, 2018), https://files.consumerfinance.gov/f/documents/cfpb_semi-annual-report_spring-2018.pdf.
14 CFPB, Consumer Protection Principles: Consumer-Authorized Financial Data Sharing and Aggregation (Oct. 18, 2017), https://files.consumerfinance.gov/f/documents/cfpb_consumer-protection-principles_data-aggregation.pdf.
15 CFPB’s last substantial look at the Remittance Rule was conducted in winter 2016. See CFPB Supervisory Highlights, Issue 10 (Winter 2016), at 11-14, https://files.consumerfinance.gov/f/201603_cfpb_supervisory-highlights.pdf.
16 CFPB Supervisory Highlights, Issue 16 (Summer 2017), at 23-24, https://s3.amazonaws.com/files.consumerfinance.gov/f/documents/201709_cfpb_Supervisory-Highlights_Issue-16.pdf.
17 CFPB, We Are Seeking Comment On Our Plan For Assessing The Remittance Rule (Mar. 17, 2017), https://www.consumerfinance.gov/about-us/blog/cfpb-seeks-comment-its-plan-assessing-remittance-rule
18 CFPB, Request for Information Regarding the Bureau’s Adopted Regulations and New Rulemaking Authorities (Mar. 14, 2018), https://files.consumerfinance.gov/f/documents/cfpb_rfi_adopted-regulations_032018.pdf.
19 CFPB, CFPB Orders Mastercard and UniRush to Pay $13 Million for RushCard Breakdowns That Cut Off Consumers’ Access to Funds (Feb. 1, 2017), https://www.consumerfinance.gov/about-us/newsroom/cfpb-orders-mastercard-and-unirush-pay-13-million-rushcard-breakdowns-cut-consumers-access-funds.
20 CFPB, Compliance Bulletin 2016-03, Detecting and Preventing Consumer Harm from Production Incentives (Nov. 28, 2018), https://www.consumerfinance.gov/policy-compliance/guidance/implementation-guidance/cfpb-compliance-bulletin-2016-03-detecting-and-preventing-consumer-harm-from-production-incentives.
21 FTC, FTC, Florida Attorney General Close the Book on Robocall Ring That Pitched U.S. Consumers Worthless Credit Card Rate Reduction Programs (Jun. 5, 2017), https: www.ftc.gov/news-events/press-releases/2017/06/ftc-florida-attorney-general-close-book-robocall-ring-pitched-us.
22 FTC, NetSpend Settles FTC Charges (Mar. 31, 2017), https://www.ftc.gov/news-events/press-releases/2017/03/netspend-settles-ftc-charges.
23 FTC, FTC Charges Prepaid Card Company Deceptively Marketed Reloadable Debit Card (Nov. 10, 2016), https://www.ftc.gov/news-events/press-releases/2016/11/ftc-charges-prepaid-card-company-deceptively-marketed-reloadable.
24 Fed. Trade Commission v. WV Universal Management, LLC, et al., No. 16-17727 (11th Cir. Dec. 13, 2017), http://media.ca11.uscourts.gov/opinions/pub/files/201617727.pdf.
25 Dep’t of Justice, U.S. Attorney’s Office Eastern District of Pennsylvania, U.S. Attorney Announces $3.6 Million Settlement With Bank Accused Of Consumer Fraud (Sept. 28, 2017), https://www.justice.gov/usao-edpa/pr/us-attorney-announces-36-million-settlement-bank-accused-consumer-fraud.

 

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