The rapid evolution of the banking business has left some aspects of bank regulation in the dust. Banks and credit unions from the largest to the tiniest are subject to regular exams, for example, while some of the largest fintech and bigtech players doing banking business in this country are not.
That is, until now.
In late April 2022 the Consumer Financial Protection Bureau announced it is going to begin conducting examinations of nonbank financial companies that are seen as posing risks to consumers. The bureau has had this ability since it was created by the Dodd-Frank Act of 2010, but it’s been pretty much unused up until now.
“The CFPB believes that utilizing this dormant authority will help protect consumers and level the playing field between banks and nonbanks,” the bureau stated. While CFPB has extensive power to sue companies that cause alleged consumer harm, Director Rohit Chopra said in a statement that being able to quickly conduct an examination of a nonbank provider suspected of posing risks to consumers could “stop harm before it spreads.” He also said it could achieve change without litigation.
If CFPB uses its new tool aggressively, this could change the regulatory balance between banks and fintechs. On the other hand, it would make banking-as-a-service partnerships with banks, especially larger ones, even more attractive. Because if there’s one thing banks understand, it’s being regulated.
The move also reinforces the conviction that CFPB is in expansion mode under Chopra.
In 2022 intensive probes of both big tech firms’ payments activities and fintech firms involved in buy now, pay later services commenced. Chopra’s CFPB has also been targeting firms seen as repeat offenders and emphasizing enforcement for larger firms.
The CFPB announcement appears to have a focus.
“Nonbank banks do not have a bank, thrift, or credit union charter,” it states. “Many today operate nationally and brand themselves as ‘fintechs’.”
An educated guess would suggest that this would line up the firms already undergoing scrutiny in the two probes mentioned for early examination attention.
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CFPB is Picking Up a Rule That Was Gathering Dust
Bankers have long complained that nonbanks, with more liberal or little regulation on their banking activities, compete at an advantage. Calling for a “level playing field” is a meme banks have leaned on for decades, long before fintechs came on the scene.
In a way, CFPB’s move on fintechs and others is a nod to the concept of “functional regulation,” the idea that all companies providing financial services of a particular kind should be regulated in the same way, without regard to charter. The action can be seen as a move to promote competition, which is a Biden administration and CFPB priority, though this comes from concern for consumers, not for the regulatory burden of chartered institutions.
Where Does Blame Fall?:
CFPB's policy change comes at a point when many fintechs rely to some degree on partnerships with regulated financial institutions. It's an open question if a fintech is suspected of consumer harm whether it's BaaS provider will also be implicated.
The change arrives at a time when attitudes towards being regulated are changing. Many companies in the crypto business, for example, welcomed the broad idea of increasing regulation of their firms proposed by the Biden administration.
The authority that CFPB is invoking, interestingly, includes provisions for firms to submit to bureau supervision and examination voluntarily. At the same time that CFPB made its announcement it released a new procedural rule providing some transparency for the process by which it would decide to impose supervision and examination. Normally the details of banking supervision stay behind the scenes. (The new procedural rule covering fintechs and other nonbanks was to be published for comment for 30 days.)
This proposed rule change appears to call for a case-by-case decision process for each nonbank that CFPB wants to supervise and examine, according to an analysis of CFPB‘s announcement by Ballard Spahr LLP.
“By making decisions and orders in such proceedings public, the [proposed rule] will allow the CFPB to send a strong signal to all market participants about certain practices or products it believes present a risk to consumers.”
— Ballard Spahr blog
CFPB already looks at unchartered financial services providers under other aspects of the law and its regulations. For example, all nonbanks in the mortgage, private student loan and payday loan businesses come under CFPB authority regardless of size. Another class of entities supervised by the bureau are “larger participants” that cross established thresholds for activity in consumer credit reporting, debt collection, student loan servicing, international remittances, and auto loan servicing.
There may be a wildcard element in the latest action.
“While ostensibly directed at fintechs, this announcement is broader in scope and is not limited to any particular industry or product type and could be used on virtually any industry participant,” states a blog by Sheppard Mullin Richter & Hampton LLP.
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What Is CFPB Looking For?
The kind of risk that would put a fintech or other company on the bureau’s radar would include potential violations of specific federal consumer financial laws and regulations. In addition, it would include “UDAAP” violations. The abbreviation stands for “unfair, deceptive, or abusive acts or practices.”
CFPB indicated that factors that could trigger a decision to consider asserting authority to supervise and examine a nonbank company would include complaints filed with the bureau. Triggers could also include whistleblowers, other federal as well as state agencies, or information drawn from such other sources as judicial opinions and administrative decisions. Even news reports could be considered ground for deciding to weigh supervision for a company.
In congressional testimony, Chopra spoke of the potential for trouble as old lines continue to blur.
“The United States is lurching toward a consolidated market structure where finance and commerce commingle, fueled by uncontrolled flows of consumer data,” said Chopra. The wide range of data available to Chinese superapps Alipay and WeChatPay concern him as an indication of where things could head in the U.S.
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