The seismic shifts in the consumer financial services (CFS) regulatory landscape that began in 2017 continued throughout 2018. Additional changes are on the horizon as the new leadership of the Consumer Financial Protection Bureau (CFPB or Bureau) sets out to define future priorities.
As the Trump Administration, Congress and courts continue to rethink and reshape the structure and agenda of the CFPB, and as state regulators react to such changes, companies are dealing with the associated uncertainty regarding the CFS supervisory and enforcement landscape. To help institutions anticipate, adapt and respond to this rapidly evolving regulatory environment, we present a concise retrospective and guide to navigate the road ahead. Amidst the change witnessed over the past several years, and in an environment featuring strong deregulatory rhetoric, it remains paramount to take an intermediate and even long view toward compliance as the ramifications of decisions made today might not become apparent for years. As always, a commitment to best practices, a strong compliance culture and a firm grasp on enduring requirements will serve CFS market participants well.
Former Acting Director Mick Mulvaney oversaw a series of notable changes during his tenure at the Bureau, which ran from November 2017 until the confirmation of current Director Kathy Kraninger in December 2018. Former Acting Director Mulvaney initiated a sweeping review of the CFPB’s core processes and procedures, placed a moratorium on its (since resumed) enforcement activities and realigned its enforcement, supervisory and rulemaking priorities. The Bureau reorganized, for example by limiting the functions of the Office of Fair Lending and Equal Opportunity and the Office of Students and Young Consumers to outreach and educational responsibilities. These actions were met with strong opposition from consumer advocacy groups, Congressional Democrats and, in some cases, state regulators.
Although the CFPB adopted a less aggressive enforcement approach overall, the Bureau continued to employ similar legal theories and leverage its broad authority to prohibit unfair, deceptive or abusive acts or practices (UDAAP). The Bureau concurrently dialed down its fair lending enforcement activity to prioritize other areas reflecting higher consumer complaint volumes, such as disclosures and debt collection.
In light of the Bureau’s retrenchment, several state attorneys general (AGs) and regulatory agencies have used, or signaled their intent to use, their enforcement powers, including their ability under the Dodd-Frank Act to enforce violations of federal CFS laws, with many drawing on or otherwise forming special consumer units. Beyond enforcement, state AGs, regulators and legislators are further considering changes to existing laws, regulations and guidance—and enhancing multi-state coordination where feasible—all in the name of filling any perceived voids left by the CFPB.
While several legislative proposals were introduced in 2018 by Republicans to cut back the CFPB’s authority, none gained sufficient traction to pass the Republican-controlled House and Senate. Deep structural reforms are likely not on the horizon with Democrats now in control of the House. Rather, the House Financial Services Committee as chaired by Rep. Maxine Waters (D-CA) is expected to ramp up political pressure on Director Kraninger and scrutinize the Bureau’s strategies and priorities.
Former Acting Director Mulvaney left behind a full agenda, some of which has already been addressed by Director Kraninger. The Bureau recently finalized proposed revisions to its payday lending rule, and is expected to engage in rulemaking to modernize debt collection communications and to clarify the “abusive” prong under its UDAAP authority. The Bureau is also expected to revisit how it treats disparate impact claims under the Equal Credit Opportunity Act (ECOA).
Unlike former Acting Director Mulvaney, Director Kraninger will have the benefit of a full five-year term to develop her vision for the Bureau, albeit against the backdrop of increased congressional oversight and ongoing constitutional challenges to the CFPB’s leadership structure. Notably, comments received from the CFPB’s “Call for Evidence” will allow Director Kraninger to leverage industry insights to implement more substantial and organizational changes at the Bureau going forward.
CFPB structural changes
During his tenure, former CFPB Acting Director Mick Mulvaney brought significant changes to the Bureau’s structure and operations. As the new CFPB Director, Kathy Kraninger will have the benefit of a full five-year term to develop her vision for the Bureau’s strategy and priorities.
In 2018, the CFPB issued multiple rules, and Congress passed legislation, to clarify, revise and update the regulatory framework applicable to the home mortgage origination and servicing market.
In February 2019, the CFPB released the highly anticipated revamp of its Payday Rule, reinforcing its more lenient attitude towards payday lenders. In light of the Bureau’s softer touch, as well as similar developments at the banking agencies, we expect states to step into the void and take further action to curtail payday lending at the state level.
In 2018, the CFPB shifted away from student lending supervision and enforcement. We anticipate this trend to continue in the year to come, with states seeking to fill any voids left by the Bureau.
In 2018, the CFPB continued to pay attention to the auto finance industry, with a particular focus on indirect (dealer-arranged) auto lenders and unfair or abusive loan servicing practices.
The CFPB has traditionally not prioritized marketplace lenders in its supervisory and enforcement efforts. As a result, state regulators have increasingly sought to fill any perceived voids left by the Bureau.
Payment processing
The CFPB continued to be active in the consumer payments space in 2018, while the Federal Reserve and market participants considered the future of payment processing, including the development of faster payment systems.
The CFPB continued to be active in the consumer payments space in 2018, while the Federal Reserve and market participants considered the future of payment processing, including the development of faster payment systems.
Today, our payment system is again at a crossroads. There is a growing gap between the transaction capabilities we need and expect in the digital economy—fast, convenient, and accessible to all—and the underlying settlement capabilities.”
Federal Reserve Board Governor Lael Brainard1
The increased prevalence of overdraft fees, high cost small dollar credit, and check cashing has cost our constituencies tens of billions of dollars that a real time payments system would help ameliorate.”
Reps. Cedric Richmond (D-LA), Gregory Meeks (D-NY), Joyce Beatty (D-OH) and Dwight Evans (D-PA) on behalf of the Congressional Black Caucus2
The CFPB finalized changes to its prepaid card rule in January 20183 and delayed the rule’s compliance date to April 2019.4 The amended rule preserves significant restrictions on credit features and detailed disclosure requirements, while some burdens on industry participants have been alleviated. Notably, the amended rule now includes: (1) an exception for error resolution and limited liability requirements for unregistered prepaid accounts; (2) more flexibility for credit cards that are linked to digital wallets; (3) an exclusion from the rule for loyalty, award or promotional gift cards; (4) flexibility regarding the pre-acquisition disclosures for certain prepaid accounts; and (5) flexibility in submitting prepaid account agreements to the CFPB.5
In October 2018, the Bureau released a five-year look-back report on its 2013 remittance rule (Remittance Rule).6 The Remittance Rule requires remittance transfer providers to disclose consumers costs, fees and other information; provide cancellation and refund rights; investigate disputes; and remedy certain errors.7 The Bureau’s report concludes that the Remittance Rule “did not lead to a large increase in prices,” but may have created some upward pricing pressure.8 The Bureau indicated that the report will inform any potential future rulemaking to amend the Remittance Rule,9 although we do not expect such a rulemaking in the near term.
In November 2018, the CFPB and the FRB jointly proposed amendments to Regulation CC, which generally regulates the US check clearing system, to implement a statutory requirement to adjust for inflation the amount of funds depository institutions must make available to their customers.10 The joint proposal also reopened for public comment the agencies’ 2011 proposal on certain fund-availability amendments to subpart B of Regulation CC (Subpart B), which they jointly administer.11 The proposal would revise requirements specifying the schedules within which banks must make funds available for withdrawal and rules regarding exceptions to the schedules, disclosure of funds availability policies and payment of interest.12 In September 2018, the FRB adopted changes to Regulation CC that reflect the evolution of the check collection process from largely paper-based to virtually all electronic, and include new indemnities related to electronically created items and remote deposit capture.13
In the credit card space, CFPB examinations typically assess advertising and marketing, account origination, account servicing, payments and periodic statements, dispute resolution and the marketing, sale and servicing of credit card add-on products.14 In recent examinations, the Bureau has generally found supervised entities in compliance with applicable consumer financial laws.15 In 2018, however, the Bureau did find that certain supervised institutions failed to meet their obligations under the Truth in Lending Act (TILA) and Regulation Z when conducting periodic re-examinations to assess whether it is appropriate to reduce an account’s APR(s), and is likely to focus on this issue in future examinations.16
The CFPB has devoted substantial attention to underserved communities’ fair access to credit. In its spring 2018 semi-annual report17 and December 2017 report on the consumer credit card market,18 the Bureau highlighted significant problems faced by non-prime borrowers seeking to obtain a credit card. In January 2019, the Bureau issued a request for information19 about aspects of the consumer credit card market to inform its biannual review of the market required by the Credit Card Accountability Responsibility and Disclosure Act of 2009 (CARD Act).20
The CFPB will likely continue to focus on payment processors’ data security practices. In a statement made shortly after assuming leadership of the Bureau21 in December 2018, Director Kraninger said that she will focus on data security and privacy, particularly with respect to information collected by the Bureau. Director Kraninger’s words echoed previous statements on data security priorities by former Acting Director Mulvaney.22
The European Union’s General Data Protection Regulation, which carries the potential for substantial fines (up to the greater of €20 million or four percent of worldwide revenue), came into force in May 2018 and generally applies to payment processors and other institutions that advertise and provide products or services to European Union customers.23 In addition, California adopted the California Consumer Privacy Act of 2018 (CCPA),24 which creates compliance responsibilities for most businesses that collect personal information about California residents.25
The CFPB found that a large financial institution violated TILA by failing to reevaluate and reduce the APRs for certain consumer credit card accounts and failing to have reasonable written policies and procedures in place to conduct the required APR re-evaluations.26 Pursuant to a consent order with the institution, the Bureau required restitution of US$335 million for affected consumer accounts.27
In a January 2019 action, the Bureau entered into a consent order with a bank for violations of the EFTA and the Consumer Financial Protection Act by failing to properly stop preauthorized electronic fund transfers and failing to initiate and conduct adequate error resolution investigations.28 The Bureau also found that the bank engaged in unfair acts or practices by reopening closed consumer deposit accounts in certain circumstances without providing timely notice.29 The CFPB imposed a US$3.5 million fine and required consumer redress payments in excess of US$12 million.30
The FTC has also continued to actively police participants in the payments industry:
In June 2018, the Supreme Court issued its decision in Ohio v. Am. Express Co., holding that provisions in American Express’s merchant contracts that restrict merchants from encouraging the use of other cards did not violate the Sherman Act.34 The Court found that the plaintiffs failed to show that the provisions had anticompetitive effects.
In November 2018, the FRB sought public comment on potential actions to facilitate real-time interbank settlement of faster payments through the development of: (1) a 24x7x365 faster payments real time gross settlement (RTGS) system and/or (2) a liquidity management tool to enable transfers between Federal Reserve accounts 24x7x365 to facilitate faster payments.35 The proposal follows a multi-year initiative by the Federal Reserve to engage with industry and other stakeholders to upgrade and enhance the nation’s payment system, which resulted in the publication of final recommendations of the Faster Payments Task Force in 2017.36 The FRB’s proposal follows the 2017 launch of an RTGS system for faster payments by The Clearing House Payments Company, LLC.37 Same-day settlement via the automated clearing house (ACH) system became available in 2017, and NACHA adopted new rules in 2018 to expand the availability of same-day ACH.38
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Consumer financial services: The road ahead
1 Federal Reserve Board Governor Lael Brainard, Supporting Fast Payments for All (Oct. 3, 2018), https://www.federalreserve.gov/newsevents/speech/brainard20181003a.htm.
2 Tiffany D. Cross, Black Lawmakers Press Fed on Real-Time Payments, The Beat DC (Oct. 31, 2018), https://www.thebeatdc.com/blog/2018/10/31/black-lawmakers-press-fed-on-real-time-payments.
3 CFPB, Prepaid Accounts under the Electronic Fund Transfer Act (Regulation E) and the Truth in Lending Act (Regulation Z) (Feb. 13, 2018), https://www.govinfo.gov/content/pkg/FR-2018-02-13/pdf/2018-01305.pdf.
4 Id. at 6364.
5 CFPB, Executive Summary of the 2018 Prepaid Amendments (Jan. 25, 2018), https://s3.amazonaws.com/files.consumerfinance.gov/f/documents/cfpb_prepaid_executive summary_2018-amendments.pdf.
6 CFPB, Remittance Rule Assessment Report (Oct. 2018), https://s3.amazonaws.com/files.consumerfinance.gov/f/documents/bcfp_remittance-rule-assessment_report.pdf.
7 CFPB, Electronic Fund Transfers (Regulation E) (May 22, 2013), https://www.govinfo.gov/content/pkg/FR-2013-05-22/pdf/2013-10604.pdf.
8 CFPB, Remittance Rule Assessment Report (Oct. 2018), at 93, https://s3.amazonaws.com/files.consumerfinance.gov/f/documents/bcfp_remittance-rule-assessment_report.pdf.
9 Id. at 3.
10 CFPB and FRB, Availability of Funds and Collection of Checks (Regulation CC) (Dec. 10, 2018), https://www.federalreserve.gov/newsevents/pressreleases/files/2018-25746.pdf.
11 CFPB and FRB, Availability of Funds and Collection of Checks (Mar. 25, 2011), https://www.govinfo.gov/content/pkg/FR-2011-03-25/pdf/2011-5449.pdf.
12 12 C.F.R. § 229.10-229.21.
13 FRB, Availability of Funds and Collection of Checks (Sept. 17, 2018), https://www.govinfo.gov/content/pkg/FR-2018-09-17/pdf/2018-20029.pdf.
14 CFPB Supervisory Highlights, Issue 17 (Summer 2018), at 5: https://s3.amazonaws.com/files.consumerfinance.gov/f/documents/bcfp_supervisory-highlights_issue-17_2018-09.pdf.
15 Id.
16 Id. at 5-6.
17 CFPB, Semi-Annual Report of the Bureau of Consumer Financial Protection (Spring 2018), https://s3.amazonaws.com/files.consumerfinance.gov/f/documents/bcfp_semi-annual-report-to-congress_spring-2018.pdf.
18 CFPB, The Consumer Credit Card Market (Dec. 2017), https://s3.amazonaws.com/files.consumerfinance.gov/f/documents/cfpb_consumer-credit-card-market-report_2017.pdf.
19 CFPB, Request for Information Regarding Consumer Credit Card Market (Jan. 31, 2019), https://www.govinfo.gov/content/pkg/FR-2019-01-31/pdf/2019-00487.pdf.
20 See 15 U.S.C. § 1616(a).
21 ABA Banking Journal, Data Security, Privacy to Be Early Focus of CFPB's Kraninger (Dec. 11, 2018), https://bankingjournal.aba.com/2018/12/data-security-privacy-to-be-early-focus-of-cfpbs-kraninger/.
22 Yuka Hayashi, New CFPB Chief Curbs Data Collection, Citing Cybersecurity Worries, The Wall Street Journal (Dec. 4, 2017), https://www.wsj.com/articles/new-cfpb-chief-curbs-data-collection-citing-cybersecurity-worries-1512429736; Glenn Thrush, Mulvaney, Watchdog Bureau's Leader, Advises Bankers on Ways to Curtail Agency, The New York Times (Apr. 24, 2018), https://www.nytimes.com/2018/04/24/us/mulvaney-consumer-financial-protection-bureau.html.
23 See White & Case Technology Newsflash, Everything Your Business Should Know About the Impending GDPR (Feb. 26, 2018), https://www.whitecase.com/publications/article/everything-your-business-should-know-about-impending-gdpr; White & Case Technology Newsflash, GDPR Handbook: Unlocking the EU General Data Protection Regulation (Sept. 13, 2018), https://www.whitecase.com/publications/article/gdpr-handbook-unlocking-eu-general-data-protection-regulation.
24 California Consumer Privacy Act of 2018, Cal. Civ. Code § 1798.198(a) (2018).
25 See White & Case Technology Newsflash, A Slice of GDPR in California? (Sept. 7, 2018) https://www.whitecase.com/publications/article/slice-gdpr-california; White & Case Technology Newsflash, CCPA and GDPR: Comparison of certain provisions (Sept. 7, 2018), https://www.whitecase.com/publications/article/ccpa-and-gdpr-comparison-certain-provisions.
26 CFPB, Consent Order in the Matter of Citibank, N.A., 2018-BCFP-0003 (June 29, 2018), https://s3.amazonaws.com/files.consumerfinance.gov/f/documents/bcfp_citibank-na_consent-order_2018-06.pdf.
27 Id. at 13.
28 CFPB, Consent Order in the Matter of USAA Federal Savings Bank, 2019-BCFP-0001 (Jan. 3, 2019), https://s3.amazonaws.com/files.consumerfinance.gov/f/documents/bcfp_usaa-federal-savings-bank_consent-order.pdf.
29 Id. at 2.
30 Id. at 21-27
31 FTC, FTC Gives Final Approval to Settlement with PayPal Related to Allegations Involving its Venmo Peer-to-Peer Payment Service (May 24, 2018), https://www.ftc.gov/news-events/press-releases/2018/05/ftc-gives-final-approval-settlement-paypal-related-allegations; FTC, Decision and Order In the Matter of Paypal, Inc. (May 23, 2018), https://www.ftc.gov/system/files/documents/cases/1623102-c4651_paypal_venmo_decision_and_order_final_5-24-18.pdf.
32 FTC v. Elec. Payment Sols. of Am. Inc., 2018 U.S. Dist. LEXIS 129201 (D. Ariz. 2018), https://www.ftc.gov/system/files/documents/cases/electronic_payment_solutions_
proposed_consent_jdgmnt_dynasty_and_mihilli.pdf.
33 FTC, Two Defendants Settle Allegations in 'Money Now Funding' Credit Card Charge Laundering Scheme (Dec. 11, 2018), https://www.ftc.gov/news-events/press-releases/2018/12/two-defendants-settle-allegations-money-now-funding-credit-card.
34 Ohio v. Am. Express Co., 138 S. Ct. 2274 (U.S. 2018), https://www.supremecourt.gov/opinions/17pdf/16-1454diff_6579.pdf; U.S.C. §§ 1–7.
35 Federal Reserve System, Potential Federal Reserve Actions to Support Interbank Settlement of Faster Payments, Request for Comments (Nov. 15, 2018), https://www.govinfo.gov/content/pkg/FR-2018-11-15/pdf/2018-24667.pdf.
36 Faster Payments Task Force, The U.S. Path to Faster Payments (Jan. 2017), https://fasterpaymentstaskforce.org/.
37 The Clearing House, The RTP Network Turns 1: TCH's Commitment to Faster Payments (Nov. 25, 2018), https://www.theclearinghouse.org/payment-systems/articles/2018/11/rtp-network-turns-1-11-25-18.
38 NACHA, NACHA Marks the Completion of the Third Phase of Same Day ACH (Mar. 16, 2018), https://www.nacha.org/news/nacha-marks-completion-third-phase-same-day-ach; NACHA, Same Day ACH Will be Enhanced to Meet ACH End-User Needs (Sept. 14, 2018), https://www.nacha.org/news/same-day-ach-will-be-enhanced-meet-ach-end-user-needs.
39 See White & Case Alert, Agencies Encourage Banks to Innovate in BSA/AML Compliance (Dec. 7, 2018), https://www.whitecase.com/publications/alert/agencies-encourage-banks-innovate-bsaaml-compliance.
40 Financial Innovation Now, Comment Letter Regarding Potential Federal Reserve Actions to Support Interbank Settlement of Faster Payments, Docket No. OP–1625 (Dec 14, 2018), https://www.federalreserve.gov/SECRS/2018/December/20181219/OP-1625/OP-1625_121418_133155_441345478200_1.pdf.
41 American Bankers Association, Comment Letter Regarding Potential Federal Reserve Actions to Support Interbank Settlement of Faster Payments, Docket No. OP–1625 (Dec. 10, 2018), https://www.federalreserve.gov/SECRS/2018/December/20181213/OP-1625/OP-1625_121018_133026_493653101591_1.pdf.
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