FinTech Law TL;DR (Jan 10)
BNPL Inquiry - Credit Complaints - LendUp
Hi all 👋,
January has been fairly quiet on the FinTech regulatory front but, whew, the last few weeks of December were, uhh, busy. There’s a lot we could dig into, so I’m saving a few items for later…
BNPL CFPB Inquiry
The CFPB announced an inquiry into the “risks and benefits” of buy now, pay later (BNPL), and asked for info from five of the biggest BNPL providers.
The CFPB highlighted a few concerns worth skimming:
Lenders normally see an applicant’s debts and repayments on credit reports…but BNPL obligations and payments currently don’t show up in credit reports (more news on that below, though). So consumers may be able to take on excessive debt.
BNPL providers are engaging in regulatory arbitrage. The best example is that if your customers repay in 4 or fewer installments, you generally don’t trigger credit disclosures and protections required by the Truth in Lending Act. Are these sorts of triggers still meaningful in a world with BNPL?
What disclosures are made?
How are BNPL providers responding to customers? Super important in financial services, since customers can be calling about things like stolen identities or erroneous credit reports.
Who is using BNPL? If BNPL is used primarily by low-income consumers, that’s a big red flag…
Are BNPL providers complying with state laws?
What fees are there?
The big Q for BNPL is, simply: is it an alternative to credit, or just a new name for it? Probably a bit of both, but the CFPB’s inquiries will hopefully shed more light.
I also think that a lot of the past year was about new administrations un-doing the prior admin’s work. But we’re likely entering a phase where regulators start to focus on new areas, and this BNPL inquiry is a great example.
For more, Patrick McKenzie has a recent BNPL post that mostly takes the “alternative to credit” view, as well as Alex Johnson’s post from this morning.
Credit Report Complaints
The CFPB released a report on 2021 complaints against credit reporting agencies (CRAs). And, uhh, it doesn’t put the big three (Equifax, Experian, TransUnion) in a good light.
Some examples findings from the report:
Consumers complain more to the CFPB about inaccurate info on their reports than any other problem.
The big three CRAs are closing complaints faster but with less relief; the big three reported giving relief in less than 2% of complaints, compared to 25% in 2019.
CRAs have an obligation to respond to claims submitted via an authorized third party. But third parties can also be used to abuse and engage in fraud. So the CRAs seem to not be responding if they suspect complaints were submitted by third parties.
Not a great look but, then again, the big three CRAs weren’t exactly in a good light to start with…
Fed Up with LendUp’s Lending
To resolve a CFPB suit, LendUp agreed to stop making any new loans and must forgive existing loans.
The order is based on illegal and deceptive marketing, like:
Falsely representing consumers would get access to larger loans at lower rates.
Violating a 2016 CFPB order that prohibited them from misrepresenting the benefits of borrowing from LendUp.
Failing to provide adverse action notices and/or providing accurate denial reasons.
LendUp also has to pay a $100K civil penalty “based on [their] demonstrated inability to pay.”
The inability to collect your loans is, uhh, one of the worst possible penalties a FinTech lender can have. Lesson: if the CFPB has already dinged you with an order, you probably should button your operations the hell up.
Seems like a windfall for borrowers, but as some have noted, those forgiven loans will be treated as surprise taxable income.
McWilliams Resigns
Last edition, we talked about the drama over the FDIC’s Democratic board members wanting to push forward review of M&A standards over the objections of the board’s Chair, Jelena McWilliams.
Welp, McWilliams has submitted her resignation as Chair of the FDIC.
Looks like that drama was an attempt to oust McWilliams after all. She was the only Republican appointee on the board, and called it a “hostile takeover” in a WSJ op ed.
Martin Gruenberg, one of the Dem members of the FDIC’s board, will act as interim Chair of the board. He’s previously served as Chair twice.
After McWilliams’ resignation is effective Feb. 4, that means there’ll be two vacancies and three Dems on the FDIC’s board. Some reasonable expectations: more bank partner (i.e., FinTech) scrutiny, higher standards for stablecoin activity, and more climate considerations.
Consumer Pandemic Finances
The CFPB released a report on consumer finances during the pandemic. I’m glossing over details here (e.g., the time frames compared), but some highlights:
Overall, consumer finances improved sharply at the start of the pandemic, and continued to improve afterwards, likely due to COVID stimulus.
Credit card debt fell across most income, education, and geographic groups when the pandemic hit, and generally increased and decreased as cash assistance programs started and stopped.
Before COVID, Black consumers had lower financial well-being and were more likely to have difficulties paying expenses than non-Hispanic white consumers; that difference persisted during the pandemic.
Consumers were more likely to report income drops, hour reductions, or unemployment during COVID compared to before. But those with a significant income drop were less likely to have difficulties paying expenses during COVID compared to pre-COVID.
Despite all of this, many consumers facing hardship did not receive assistance. For example, “[s]ixty two percent of consumers who reported difficulty paying their rent did not receive rental assistance.”
Elsewhere:
🤔 Equifax will be the first credit reporting agency to include a BNPL tradeline, and Experian and TransUnion have similar plans.
📝 Here’s interesting research showing that the presence of minority directors on the Federal Reserve’s regional bank boards correlates with increased lending to underserved groups.
📝 The Boston Fed released a study looking at why credit scores increased for low credit households when COVID hit. Looks like it wasn’t due to pandemic forbearance, but mainly because credit card utilization dropped.
Also of interest from the study: credit scores seem to be affected more by credit card loans than others (auto, mortgages), both pre- and during pandemic.
🚨 In response to the CFPB’s Big Tech payments inquiry from October, most response letters so far point the finger at Zelle’s use for fraud.
🤦 Back in December Square changed its name to Block…and H&R Block is suing them for trademark infringement. Related: Facebook paid $60M for various trademark rights to “Meta” from the FinTech sponsor bank Metabank.
👏 Treasury awarded $8.7B to increase lending to small and minority-owned businesses.
✉️ The CFPB and DOJ issued two joint letters reminding landlords and mortgage services about military borrower rights.
🤩 Cash App is offering free tax filings. And, of course, “[y]our refund arrives up to 2 days faster if you deposit it into Cash App.” Looks like Credit Karma acquisition is a great cross-sell opportunity…
🌍 The OCC released draft principles for climate-related financial risks for large banks.
😮 Petal’s cofounders are caught in a suit that claims they stole the business idea from someone that they froze out of the business. There are some, uhh, not great emails involved.
📝 The CFPB released a blog post encouraging tech workers to whistleblow potential financial discrimination and other misconduct. They specifically cite examples like discriminatory AI underwriting.
🕵️♀️ PayPal, Zelle, Cash App, and other third-party settlement platforms will report goods and services transactions of $600 or more to the IRS in 2022 (vs. $20K before). The change comes from the American Rescue Plan Act of 2021.
🏫 The Dept of Ed has further paused student loan repayments 90 days until May 1.
🧐 FTC Chair Lina Khan is setting her sights on companies that make it hard to unsubscribe:
If you click to subscribe, you should be able to click to cancel. FTC has made clear that to comply with the law, businesses must ensure sign-ups are clear, consensual, and easy to cancel. You can file a complaint at: reportfraud.ftc.govNEW: Cancelling a Planet Fitness membership requires jumping through so many hoops, it’s like a workout in itself. But not for long. Under @LinaKhanFTC, the FTC is cracking down on companies that use deceptive tactics to lock customers into subscriptions. https://t.co/Jgbe4oXLtpMore Perfect Union @MorePerfectUS
Elsewhere (crypto):
📝 Freddie Mac issued a bulletin to guide institutions that want to sell mortgages to Freddie Mac. The bulletin generally excludes crypto’s use in qualifying mortgages. Two examples:
A borrower’s income paid in crypto can’t be used to qualify for the mortgage.
Crypto must be exchanged for USD if it’s needed for the mortgage.
🚫 The SEC rejected two more spot BTC ETFs (Kryptoin and Valkyrie) and deferred its decision on two more (Grayscale and Bitwise) until Feb.
✉️ The National Credit Union Administration issued a letter saying national credit unions aren’t prohibited from engaging in crypto activities.
🍿 CoinDesk and Tether are in court, fighting over whether the NY Attorney General’s office can release documents about Tether’s reserves in response to a CoinDesk FOIA request.
⚖️ The CFTC fined DeFi market Polymarket $1.4M for offering binary prediction market services without being registered with the CFTC1.
Sui Generis (Fun Finds)
Here’s a confidence-inspiring Reuters piece about the COBOL Cowboys that keep bank systems running:
“The risk is ‘not so much that an individual may have retired . . . . He [or she] may have expired.’”
As either a Designated Contract Market, or Swap Execution Facility.