Fintech Focus: CFPB Updates FAQs, Reviews Buy Now, Pay Later Companies, and Fintech Loans | Cooley LLP
The Consumer Financial Protection Bureau (CFPB) has remained busy as we head into the last week of 2021. The agency has posted updated FAQs regarding the Electronic Funds Transfer Act (EFTA) and the Regulation E, ordered five buy now, pay later (BNPL) information and shut down the lending business of a major venture capital-backed fintech lender.
Updated Electronic Funds Transfer FAQs
The CFPB has updated its Electronic funds transfer faqs December 13, 2021. These FAQs are posted as âCompliance Helpâ. Compliance aids, according to a policy statement published by the CFPB in the Federal Register in early 2020, are non-binding decisions designed to clarify the requirements of existing rules and statutes for compliance professionals, stakeholders of industry and the public.
The updated FAQ focuses on four topics related to Electronic Funds Transfers (EFTs):
- What transactions are covered
- Which establishments are covered
- Resolving errors
- Troubleshooting for unauthorized EFTs
There are several new interpretations since the FAQ’s last update in June 2021. Many of the new interpretations applicable to person-to-person (P2P) payment providers are noteworthy and appear to be inconsistent with long-held interpretations of regulation industry E.
First, the CFPB suggests that a P2P payment can be an EFT, which is defined by Regulation E as “any transfer of funds initiated via an electronic terminal, telephone, computer or magnetic strip for the purpose of ordering, ” instructing or authorizing a financial institution to debit or credit a consumer’s account. 12 CFR Â§ 1005.3 (b) (1). According to the FAQ, an EFT can include P2P debit card pass-through payments initiated through a payment service provider that does not have a consumer account, on the basis that that provider can still be a âfinancial institutionâ for the purposes of an EFT. The FAQ explains that this is in part because non-account P2P payment or bill payment service providers are considered financial institutions if the provider issues an access device and agrees to provide EFT services. . The FAQ appears to characterize a âmobile walletâ as an access device, but does not further define or describe what would make it an access device. It is important to note that if an entity is considered a financial institution under Regulation E, that entity has error resolution obligations if a consumer informs the financial institution of an error.
Second, the FAQ explains that, in a more restricted set of circumstances, a non-bank P2P provider will also be considered a service provider if both of the following conditions apply:
- It delivers an access device through which a consumer can access an account with an account-keeping establishment.
- There is no agreement between the non-bank P2P payment provider that issues the access device and the financial institution that holds the account.
The FAQ further explains that an Automated Clearing House (ACH) agreement alone is not sufficient, “[h]However, an ACH agreement combined with another agreement to process payment transfers – such as an ACH agreement whereby members specifically agree to honor others ‘debit cards’ would be.
BNPL is subject to increased surveillance by CFPB
Last week the CPFB placed orders with five companies that offer BNPL products with the aim of collecting information on the various BNPL products on the market, the use of the products by consumers and the business practices of companies. The CFPB has indicated that it plans to publish the findings and aggregate information obtained from the companies’ responses. It should be noted that the CFPB coordinates its efforts with state agencies, the rest of the Federal Reserve system and its international partners in Australia, Sweden, Germany and the Financial Conduct Authority of the United Kingdom.
The orders to be filed are not surveillance orders, but market surveillance orders that the CFPB has issued as part of its mandate to “monitor the risks for consumers in the offer or provision of financial products or services to consumers, including the evolution of markets for those products or services. “In fact, it is the second round of market surveillance orders issued to fintech companies since October, and companies should expect this authority to continue to be used by CFPB director Rohit Chopra.
The CFPB had previously indicated an interest in BNPL products, and the orders confirm the CFPB’s focus on these products and the companies that offer them. Concretely, the CFPB deals with three main aspects of the BNPL market:
- That these products can lead to the accumulation of debt by consumers due to the potential ease of obtaining BNPL products, the inherent challenges for consumers in keeping up with payment schedules on multiple purchases from multiple companies, and the potential for charges.
- That there are potential compliance gaps. (The agency said it is seeking information to determine whether businesses are complying sufficiently with consumer protection laws, and is concerned that some protections that currently apply to other forms of credit may not applicable to BNPL products.)
- That the data collection, behavioral targeting and data monetization practices of BNPL companies can create potential risks for consumers.
Based on the generic CFPB decree, he is looking for additional information in several areas:
- A description of the BNPL products offered.
- Business models and metrics, including transaction metrics, volume, payment methods, and fees.
- Practices relating to service, credit reports, returns and refunds, delinquencies, defaults, debt collection and write-offs.
- Consumer protection, including state licensing.
- How often and by what method do users contact the company regarding various issues and user demographics.
- How data is collected and stored, and the purposes associated with collecting the data.
- How BNPL’s product data is monetized.
The orders of the CFPB follow a letter sent by the Senate Banking Commission to Chopra which urges the CFPB to review and oversee BNPL products in order to address the potential for harm to consumers.
CFPB closes lending operations of VC-backed fintech lender
A fintech lender settled a September 2021 CFPB lawsuit alleging that the lender continued to engage in certain marketing activities in violation of a 2016 CFPB order. The lawsuit also alleged that the lender had engaged in certain fair loan violations. The lender agreed to stop making new loans, stop collecting some outstanding loans, and pay a fine.
CFPB said the lender offers a variety of consumer loans and advises consumers that making timely payments and taking free classes offered on the lender’s website would allow them to receive lower interest rates. on future loans and access larger loan amounts. The lawsuit argued that repayment and participation in free classes did not lead to more favorable rates or access to larger loans. Further, the CFPB argued that the lender failed to provide timely and accurate notice of adverse action, in violation of the Equal Credit Opportunity Act.
In one CFPB press release on the issue, noted Chopra that the lender “was backed by some of the biggest names in venture capital,” and this coercive measure indicates that a company’s popularity with investors will not influence CFPB oversight decisions.