Trades Praise CFPB’s Plan to Regulate Fintechs

Credit union trade groups took the rare step this week of applauding an action of the CFPB.

The CFPB announced April 25 that it will begin exercising its authority to regulate non-bank financial companies, particularly fintechs, that pose risks to consumers.

Director Rohit Chopra said in a news release that the CFPB was using its dormant authority over nonbanks to help protect consumers and level the playing field between banks and nonbanks.

“Given the rapid growth of consumer offerings by nonbanks, the CFPB is now utilizing a dormant authority to hold nonbanks to the same standards that banks are held to,” Chopra said. “This authority gives us critical agility to move as quickly as the market, allowing us to conduct examinations of financial companies posing risks to consumers and stop harm before it spreads.”

Chopra asked for public comments on a related procedural rule, and on Tuesday he got them from CUNA and NAFCU.

The groups, which frequently complain about the compliance burdens of the CFPB’s consumer protection actions, made clear in their comments that the CFPB protects those doing the right thing from suffering a competitive disadvantage from those who might not be.

Alexander Monterrubio, CUNA’s senior director of advocacy and counsel for consumer protection, wrote that “CUNA appreciates the CFPB bolstering its oversight of nonbanks in consumer financial services.”

“Credit unions are concerned about the growing influence of unsupervised entities offering financial products to consumers designed to be glossy, heavily marketed, tech-savvy alternatives to traditional banking services,” Monterrubio wrote.

He continued, “These business models of nonbank providers often rely on avoiding accountability and prudent regulation. We agree that there is a benefit to consumers in the Bureau supervising these entities and subjecting them to the same standards as traditional financial institutions.”

Both groups, like the CFPB, recognized the benefits of technological and business innovations that fintechs can provide. But, Monterrubio wrote, “the absence of effective regulatory oversight creates an uneven playing field that materially disadvantages traditional service providers.”

“Credit unions and other well-established providers are heavily regulated for safety and soundness and compliance with consumer protection laws and regulations. This is often not the case for many nonbanks,” Monterrubio wrote.

James Akin, NAFCU’s regulatory affairs counsel, wrote that fintech companies pose a risk of “regulatory arbitrage” – essentially designing a business to dance around regulations and supervision to gain a competitive advantage.

Akin cited as “a prime example” fintechs that offer Buy Now, Pay Later services to online merchants using a pay-in-four model. That arrangement is just one payment short of being subject to the federal Truth in Lending Act’s rules on consumer lending terms and disclosures.

Although Akin said this regulatory avoidance is “troublingly,” he wrote that “consumers are unlikely to be aware of the absence of these protections and will view these products or others as an equally safe alternative to traditional financial products and services.”

Tech savvy young consumers increasingly prefer an “a la carte” style of banking, Akin wrote.

“Disaggregation of payments, lending and deposit-taking activities without a corresponding update to the bureau’s supervisory framework for nonbank fintechs could expose consumers to greater risk by making it more difficult to prevent violations of consumer financial law before they occur,” Akin wrote.

And another irksome pattern is that when credit unions employ a fintech to provide a particular service, members usually will contact the credit union if things go wrong.

“Members prefer contacting their credit union when they have problems with third party payment services, such as an unauthorized peer-to-peer (P2P) transfer, despite the credit union having minimal connection to the underlying transaction on the third party’s platform,” Akin wrote.

The CFPB’s authority could apply to CUSOs, but NAFCU and CUNA asked the CFPB to let the NCUA continue to be their regulator.

“We strongly recommend the Bureau focus its supervisory resources on influential fintechs and other entities that are not currently subject to the authority of a federal banking regulator,” Monterrubio wrote. “(The) NCUA’s historically active oversight of CUSOs clearly renders bureau oversight redundant and duplicative.”