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Last month, the Consumer Financial Protection Bureau (CFPB) issued orders to five companies offering buy now, pay later (BNPL) products, asking them to provide information on several topics, including:

  • Business models,
  • BNPL performance metrics,
  • Disclosures and other consumer protections,
  • User demographics, and
  • Data harvesting and monetization.

For more information the CFPB’s inquiry, please see our post covering those orders here.

On January 24, the CFPB issued a notice and request for comment on its BNPL inquiry. The notice seeks comments from any interested parties about BNPL products and provides the following examples of information the CFPB seeks:

  • What is the consumer experience with BNPL products?
  • What are the benefits and risks to consumers from BNPL products?
  • What is the merchant experience with BNPL products?
  • What perspectives do regulators and attorneys general have with respect to BNPL products?
  • Are there ways in which the BNPL market can be improved?

For more information about the notice and request for comment and BNPL generally, the CFPB wrote a blog post in conjunction with the notice.

Comments must be received on or before March 25, 2022.

On January 26, the Consumer Financial Protection Bureau (CFPB or Bureau) announced its request for the public to share its input on “exploitative junk fees charged by banks and financial companies” to form its rulemaking and guidance agenda, along with its enforcement priorities. The CFPB’s press release included a link to its “Request for Information Regarding Fees Imposed by Providers of Consumer Financial Products or Services” (Request for Information).

The press release stated the “‘fee economy’ distorts our free market system by concealing the true price of products from the competitive process,” while the CFPB shared its concerned with inflated fees that greatly exceed the actual cost of the services and back-end fees charged after the fact.

The CFPB noted that in 2019, major credit card companies charged over $14 billion in late fees and bank revenue from overdraft and nonsufficient funds (NSF) fees exceeded $15 million. The press release stated that these fees may distort the true cost of a product and undermine competition.

The CFPB specified that it intends to strengthen competition by reducing junk fees and craft rules, industry guidance, and focus on its enforcement authorities. Specifically, the CFPB requested to hear about the public’s experiences with fees associated with their bank, credit union, prepaid or credit card account, mortgage, loan, or payment transfers regarding:

  • Fees for things believed to be covered by the baseline price of a product or service;
  • Unexpected fees for a product or service;
  • Fees that seem too high for the service; and
  • Fees where it was unclear why they were charged.

Our Take. The CFPB’s Request for Information linked to its press release indicates that the CFPB may attempt to use its unfair, deceptive, or abusive acts and practices (UDAAP) authority as a vehicle to initiate enforcement actions against banks and processors that process payments for entities that do not fully disclose all of the costs that a consumer may incur before purchasing a good or service from the entity. Overdraft fees and alleged merchant processor complicity with businesses purportedly running afoul of consumer financial protection laws were important issues for the CFPB while Rohit Chopra served as the CFPB assistant director under Richard Cordray, and it looks like Director Chopra wants to pick up where the Bureau left off several years ago. Indeed, some of the earlier CFPB enforcement actions concerning UDAAP focused on a merchant or financial institution’s alleged failure to disclose certain consumer costs. The CFPB’s focus on “junk fees” should be viewed as the Bureau exercising similar authority along that same continuum. Banks and processors should continue to be vigilant about reviewing merchant advertising to ensure that the costs of the goods and services are disclosed.

On January 18, the Consumer Financial Protection Bureau (CFPB) filed a proposed final judgment and order in its March 2021 lawsuit against BrightSpeed Solutions, a third-party payment processor, and its founder, Kevin Howard. If the court enters the final judgment and order, both BrightSpeed and Howard will be permanently barred from multiple consumer financial industries, and Howard will be required to pay a $500,000 civil monetary penalty to the CFPB.

Allegations Summary

In its lawsuit, the CFPB alleged that BrightSpeed and Howard violated the Consumer Financial Protection Act (CFPA) and the Telemarketing and Consumer Fraud and Abuse Prevention Act and its implementing rule, the Telemarketing Sales Rule (TSR).

The CFPB alleged that BrightSpeed positioned itself as a third-party payment processor for “high-risk” telemarketing and subsequently processed remotely created check payments (RCCs) for entities that telemarketed antivirus software and technical support services. (An RCC is typically created when the holder of a checking account authorizes a payee to draw a check on the account but does not actually sign the check.)

The complaint alleged that BrightSpeed processed RCC payments for over 100 merchant-clients who purported to provide valuable virus software and technical support services, but who instead scammed consumers into purchasing unnecessary and over-priced computer software. The merchant-clients utilized pop-up advertisements, stating that a consumer’s computer was running slowly or was infected with a virus and prompted the consumer to call a number for assistance. Upon calling, the merchant-clients would persuade consumers, often older Americans, to purchase antivirus software or technical support services, some of which were available for free or little to no cost to the public, for prices as high as $2,000. For payment, merchant-clients would have a consumer verbally authorize an RCC that BrightSpeed would process.

The complaint alleged that BrightSpeed and Howard knew about the fraudulent practices of its merchant-clients, but continued to do business with them anyway. Indeed, between 2016 and 2018, nearly 1,000 consumer complaints were lodged about BrightSpeed’s merchant-clients, with many of those complaints being submitted to BrightSpeed along with a request for a refund. Moreover, the originating banks through which BrightSpeed processed the RCCs expressed concerns to BrightSpeed about consumer complaints. Per the CFPB, BrightSpeed failed to implement reasonable controls to vet merchant-clients, and allegedly made false statements to the banks about the degree to which they vetted the merchant-clients and monitored their transactions.

Our Take

This enforcement action and settlement signals the CFPB’s continued Operation Choke Point-like focus on companies that process payments for industries that the CFPB believes present more risks for consumers and the CFPB’s continued commitment to crack down on those who take advantage of populations considered to be vulnerable.

CFPB Director Rohit Chopra said that “BrightSpeed and Kevin Howard profited by helping bad actors scam older adults,” and that “[w]e must do more to ensure our nation’s payments systems are not used to defraud older adults.”

For payment processors, this matter is emblematic of why it is imperative to vet clients, monitor their activity, and take complaints seriously. Key in CFPB’s case that BrightSpeed and Howard continued to process RCCs notwithstanding consumer complaints, concerns expressed by two banks, inquiries from police departments across the country, and a high-payment return rate.

On December 8, 2021, the Consumer Financial Protection Bureau (CFPB) published the 25th edition of its Supervisory Highlights report, which summarized key findings from examinations completed between January 2021 and June 2021. While the report covers a number of areas of consumer finance, it specifically stated the CFPB “is prioritizing mortgage servicing supervision work in light of the increase in borrowers needing loss mitigation assistance this year.” Consistent with this, the report identifies a number of unfair acts or practices allegedly committed by an unspecified number of mortgage servicers. Specifically, it found that one or more mortgage servicer:

  • Charged prohibited late fees and default-related fees to borrowers in CARES Act forbearances;
  • Continued to initiate electronic fund transfers (EFTs) from closed accounts despite receiving notice of the accounts being closed, which resulted in borrowers being charged repeated insufficient funds fees when the preauthorized EFTs failed;
  • Charged borrowers between $3 and $15 more than the actual cost of certain services rendered by a service provider; and
  • Provided inaccurate descriptions of payment and transaction information in borrowers’ online mortgage loan accounts.

It also found that one or more mortgage servicer violated Regulation X and Regulation Z, respectively, by:

  • Failing to meet the time requirement associated with evaluating borrowers’ complete loss mitigation applications and providing a written notice stating the mortgage servicer’s determination of available loss mitigation options; and
  • Applying payments in excess of the amount due to the borrowers’ escrow accounts, as opposed to handling excess payments in accordance with the applicable requirements of Regulation Z.

Finally, it found that one or more mortgage servicer violated the Homeowners Protection Act by “fail[ing] to terminate [private mortgage insurance] on the date the principal balance of the mortgage was first scheduled to reach 78 percent loan-to-value on a mortgage loan that was current.”

For additional information regarding the above findings, along with the CFPB’s findings for other areas of consumer finance, please access a copy of the report by clicking here.

The Consumer Financial Protection Bureau (CFPB) and Department of Justice (DOJ) issued joint letters, restating the federal housing protections afforded to military servicemembers during the COVID-19 pandemic. While some protections have been in place for decades, others reflect pandemic-era relief from landlords and mortgage companies alike.

One of the letters addresses the handling of servicemembers’ and veterans’ loan accounts after entering a COVID-19 hardship forbearance. CFPB received several complaints, stating that mortgage servicers are (1) reporting accounts to credit reporting agencies as delinquent despite the forbearance, (2) sending incorrect or confusing communications, and (3) improperly requiring lump sum payments for reinstatement. The letter highlights various mortgage and foreclosure protections afforded to servicemembers, including the right to forbearance for up to 180 days pursuant to the CARES Act and Regulation X’s temporary procedures, allowing borrowers to be reviewed for loss mitigation before the start of foreclosure proceedings. The letter further reminds mortgage servicers that under the Servicemembers Civil Relief Act (SCRA), a creditor must obtain a court order prior to foreclosing on a mortgage.

The second letter reminds landlords that under the SCRA, the military community is entitled to early lease termination upon receipt of new orders and eviction protections, including a requirement that landlords must obtain a court order prior to eviction. The letter further explains that Congress recently expanded lease protections under the SCRA to include a servicemember’s “stop movement order” related to the COVID-19 pandemic. This change permits servicemembers to terminate their leases not only when they are ordered to relocate, but also when they are instructed to remain in place.

The Consumer Financial Protection Bureau (CFPB) has a new target: overdraft fees. In a December 1 press call, CFPB Director Rohit Chopra targeted the use of overdraft fees in the consumer banking industry, claiming that some banks are “hooked on exploitative junk fees that can quickly drain a family’s bank account.” The CFPB, he said, is “considering a range of regulatory interventions to help restore meaningful competition in this market.”[1]

Chopra’s comments came after the CFPB released two research reports investigating the use of overdrafts fees within the banking industry. The first indicated that in 2019 alone, overdraft and other nonsufficient fund fees generated over $15 billion in revenue for consumer banks, with large banks (those with assets over $10 million), collecting three-quarters of the total revenue reported. Relying on information gathered from 2015 to the present, the report also indicated that reliance on overdraft fees has been growing slowly but steadily across the board.[2]

The second report provided industry-wide data regarding overdraft policies, practices, and outcomes, focusing in particular on banks and credit unions with assets under $10 billion. It concluded that although these smaller institutions typically charged lower fees, they generated a comparable amount of revenue per account as their larger peers.[3]

Based on these findings, Chopra announced that his agency would be “enhancing its scrutiny of banks that are heavily dependent on overdraft fees.” Specifically, CFPB plans to “take action” against institutions with unlawful overdraft policies and “prioritize examinations” of banks that are heavily reliant on such fees, with the goal of creating industry-wide transparency about the use of fees, and preventing what Chopra described as a “race to the bottom.” Chopra also indicated that the agency wants to see how technology can help push the American banking industry toward an era of “open banking infrastructure,” which would allow consumers to “vote with their feet” by easily switching banks and ditching those that charge excessive fees.

The CFPB’s announcement came on the same day that Capital One, the sixth largest U.S. retail bank, announced that it would eliminate overdraft fees for retail customers beginning in the new year.[4] Organizations like the National Consumer Law Center and Consumer Federation America have lauded this move, arguing that overdraft fees disproportionally affect a small number of vulnerable consumers. Chopra, for his part, said that he is not “holding out hope” that other large institutions will follow suit.

Based on the CFPB reports and Chopra’s comments, banks should expect increased attention from regulators and the media, especially if other banks decide to follow in Capital One’s footsteps. Further, the CFPB’s new regulatory priority will presumably help foster an environment in which fintech companies, third-party apps, and other industry disruptors will continue to grow in popularity and generate pressure for industry-wide change.

 

 

[1] For a full transcript of Chopra’s comments, see Rohit Chopra, Director, Consumer Prot. Fin. Bureau, Prepared remarks of CFPB Director Rohit Chopra on the Overdraft Press Call (Dec. 1, 2021), available at https://www.consumerfinance.gov/about-us/newsroom/prepared-remarks-cfpb-director-rohit-chopra-overdraft-press-call/.

[2] See Consumer Prot. Fin. Bureau, Data Point: Overdraft/NSF Fee Reliance Since 2015—Evidence from Bank Call Reports (Dec. 2021). 2020 provided an exception to this general rule, as banks experienced a decline in overdraft/NSF fee revenue during the COVID-19 pandemic. Id. at 7.

[3] See Consumer Prot. Fin. Bureau, Data Point: Checking Account Overdraft at Financial Institutions Served by Core Processors (Dec. 2021).

[4] See Press Release, Capital One, Capital One Eliminates Overdraft Fees for Customers (Dec. 1, 2021), https://www.capitalone.com/about/newsroom/eliminating-overdraft-fees/.

On December 16, the Consumer Financial Protection Bureau (CFPB) issued orders to five companies offering buy now, pay later (BNPL) products. BNPL programs are designed to allow consumers to purchase goods and to defer payment over a short term with little to no interest, but with the potential for fees in the event of nonpayment. The CFPB noted that BNPL saw “explosive growth” through the holiday shopping period.

In connection with its duty to monitor consumer financial markets, the CFPB can require market participants to submit information to inform its monitoring. In its release, the CFPB noted that its inquiry focuses on the following topics:

  • Potential accumulation of debt by BNPL users;
  • Potential applicability or non-applicability of a range of consumer financial protection laws; and
  • Data collection, behavioral targeting, and data monetization practices of BNPL providers.

However, the order goes more in-depth. The 20 questions included with the order are broken down into the following categories:

  1. Description of Products
  2. Business Model/Metrics
    1. Total transactions initiated and unique users
    2. Minimum, maximum, and median number of installments on transactions
    3. The number of participants and the amounts of specific numbers of transactions
    4. Company financial information, including merchandise volume among certain types of goods and/or services, and customer payment option information
    5. Underwriting practices
    6. Fee practices, including fees charged to consumers and merchants
    7. Participating merchant vetting
    8. Virtual card usage
  3. Loan Performance Metrics
    1. Any use of third-party servicers
    2. Credit reporting, including information on loan stacking
    3. Returns and refunds
    4. Delinquencies, charge-offs, and payment extensions
    5. Defaults and collections
  4. Consumer Protections
    1. Disclosure practices, including disclosures given in user agreements and in the user experience
    2. State licensing practices
  5. User Contacts and Demographics
    1. Number of users contacting the provider about items, such as credit reporting complaints and difficulty modifying payment amounts or dates
    2. Age, gender, and income information for users generally, users that default, and consumers that are declined BNPL products
  6. Data Harvesting
    1. Types of data collected, including specific data field information and each data field’s purpose for collection
  7. Data Monetization
    1. The use of data for cross-selling purposes, targeted advertising, or third-party sharing, and the specifics of the data used

It’s safe to say BNPL is firmly within the view of both regulators and legislators. These orders follow last month’s hearing before the House Financial Services Committee’s Task Force on Financial Technology, where panelists were asked in-depth questions about BNPL products and practices. For more information on this hearing, please see our blog post here.

On November 29, the Consumer Financial Protection Bureau (CFPB) settled a lawsuit by the National Association of Consumer Advocates (NACA) challenging the formation and operation of the Taskforce on Federal Consumer Financial Law (the Taskforce). The Taskforce was formed in October 2019 by then-CFPB Director Kathy Kraninger to examine the existing consumer financial services legal and regulatory environment, and to report the Taskforce’s recommendations for improving and strengthening consumer financial laws and regulations. In January 2021, the Taskforce released a two-volume report of its recommendations, some of which included:

  • Authorizing the CFPB to issue licenses to nondepository institutions that provide lending, money transmission, and payments services;
  • Considering the benefits and costs of preempting state law where conflicts can impede the provision of products and services, such as the regulation of fintech companies engaged in money transmission;
  • Identifying competitive barriers and making appropriate recommendations to policymakers and regulators for expanding access to the payments systems by nonbank providers;
  • Exercising caution (a recommendation for the Bureau, Congress, and other federal and state regulators) in restricting the use of nonfinancial alternative data; and
  • Imposing monetary award limitations on class actions under the Fair Credit Reporting Act (FCRA).

NACA filed its lawsuit in June 2020, alleging that the CFPB violated the Federal Advisory Committee Act (FACA) in the formation and operation of the Taskforce by, among other things, failing to meaningfully consult with the General Services Administration and failing to post preliminary findings in the Federal Register. The CFPB fought the lawsuit during former Director Kraninger’s tenure, but in the settlement, the CFPB now admits that the Taskforce was subject to FACA and that the CFPB failed to comply with FACA’s requirements. In the settlement, the CFPB also agreed to release certain Taskforce records and to put a disclaimer on the report that it was developed in violation of FACA.

The CFPB’s near-180-degree shift on the Taskforce and its report give an indication of the CFPB’s willingness, under current Director Rohit Chopra, to distance itself from its work in the Trump administration. It’s worth keeping an eye on what else the CFPB seeks to change about its past as Director Chopra continues to spread his influence at the Bureau.

On November 10, a group of Democratic senators sent a letter to Consumer Finance Protection Bureau (CFPB) Director Rohit Chopra, requesting that the CFPB take a proactive stance in its regulation of consumer reporting agencies (CRAs). The group, led by Sen. Brian Schatz (D-HI) and which includes Sens. Elizabeth Warren (D-MA) and Sherrod Brown (D-OH), specifically asked the CFPB to evaluate errors and ensure equity in credit reporting.

The letter begins by citing prior studies, including one from the Federal Trade Commission, that show that there is a significant amount of consumers — up to 1/3 of participants in one survey — who have indicated that they’ve found at least one error in their credit report. The letter then cites the CFPB’s recent report on credit report disputes (which we wrote about here) to show that errors in credit reporting can “exacerbate the racial wealth gap.”

In noting that Dodd-Frank gave the CFPB supervisory, rulemaking, and enforcement authority over the largest nationwide CRAs, the senators urged the CFPB to take immediate action on these matters. Some suggested actions include:

  • Evaluating persistent errors in credit reporting and how CRAs consistently fail to resolve these errors, especially by failing to devote sufficient personnel and resources for dispute resolution — a shortcoming the CFPB could remedy using its supervisory authority.
  • Creating an ombudsperson position at the CFPB to facilitate the dispute resolution process and help ensure accuracy.
  • Requiring nationwide CRAs to instead match all nine digits of a consumer’s Social Security number, especially in the aftermath of the CFPB’s disputes report.
  • Requiring nationwide CRAs to perform periodic accuracy audits on information furnishers.
  • Reviewing the potential to codify provisions of the nationwide CRAs’ settlement with 31 state attorneys general that delayed reporting of medical debt for six months and removed debts paid by insurance.
  • Requiring CRAs to address the potential for algorithmic bias and to provide reports in Spanish and other languages for consumers with limited English proficiency.

The letter concludes by noting that this is not an exhaustive list of credit reporting concerns, and that the senators would like to hear more from Director Chopra on his agenda related to credit reporting.

Last month, industry saw the Consumer Financial Protection Bureau (CFPB) issue a number of compliance aids in anticipation of two CFPB Debt Collection Final Rules becoming effective on November 30. On October 1, the CFPB issued the Debt Collection Rule FAQs, which contained questions and answers pertaining to limited-content messages and telephone call frequency.

Then, on October 29, the CFPB expanded the FAQs to include questions and answers to assist debt collectors in providing consumers with “validation information.” The expanded FAQs also include a section specifically addressing the special rule for providing validation information for certain residential mortgage debt. On this same day, the CFPB issued a new compliance aid titled, “Debt Collection Rule: Disclosing the Model Validation Notice Itemization Table.” This new compliance aid:

  • Discusses the validation information contained within the model validation notice’s itemization table;
  • Outlines how a debt collector may complete the itemization table; and
  • Includes example itemization tables for different debt types.

In addition to the above resources, the CFPB on October 18 issued a Spanish translation for the model validation notice. Use of this document “by a debt collector who provides or has provided a consumer with the model English-language validation notice provides a safe harbor for the Rule’s requirement that any translations be complete and accurate.”

With the effective date of the new CFPB Debt Collection Final Rules fast approaching, we encourage industry to review and assess these recent compliance aids to help inform their debt collection compliance strategies. All of the above resources, along with additional resources for the new final rules, may be accessed on the CFPB’s compliance resources webpage for debt collection.