Monthly Fintech 5 Newsletter - December 2024
1) CFPB Proposes Rules To Limit Sale Of Consumer Information By Data Brokers
On 12/3, the CFPB proposed a rule limiting the sale of personal identifiers, like Social Security Numbers and phone numbers, which are collected by companies and ensure that financial data is only shared for “legitimate purposes.” The proposed rule would amend Regulation V, which implements the Fair Credit Reporting Act. The rule provides that data brokers that sell information about a consumer’s credit history, credit score, debt payments, income or financial tier generally are consumer reporting agencies selling consumer reports. In summary, the rule would treat data brokers like credit bureaus, protect personal identifiers, and require clear consumer consent for data sharing. This rule would apply to data brokers that many fintechs use like Plaid, Argyle, and Pinwheel. If the rule is enacted as is, data brokers and the companies that use them will have new reporting, recordkeeping, and compliance requirements related to data and consumer privacy to contend with. This will likely drive up compliance costs and business costs. In preparation, anyone utilizing a data broker should review the rule and evaluate their costs and reporting requirements moving forward. Comments are due by March 3, 2025.
2) DC AG Sues Fintech Over EWA Marketing
On 11/19, the DC Attorney General sued EarnIn for allegedly violating the District of Columbia Consumer Protection Procedures Act by deceptively marketing its earned wage access (“EWA”) product and related features. Specifically, the lawsuit takes aim at the company’s version of expedited delivery called “Lightning Speed”, default tipping options in its mobile app, and—of greatest concern to the industry—whether these transactions are loans subject to local credit regulations. According to the complaint, the cost of the Lightning Speed fees drives the average interest rate to 300%, contrary to the advertisements which say no interest. Further, the AG alleges that these fees result in “interest rates” violating the District’s usury cap. This is of particular note since claims of unlicensed lending and usury violations brought by a regulator or through a class action can result in severe financial penalties and, in some cases, criminal liability. EarnIn has denied all allegations raised in the lawsuit. While an action brought by a single attorney general in one jurisdiction should not be viewed as a trend, it is a development companies in the EWA space should monitor carefully.
3) CFPB Finalizes Rule Allowing Supervision Of Fintech Payment Companies
On 11/21, the CFPB finalized a rule allowing the CFPB to supervise nonbank companies that facilitate at least 50 million digital funds transfer and payment app transactions annually. As part of this oversight, CFPB will now conduct an examination process of these nonbank companies, including many peer-to-peer applications. The examination process includes review of the entity’s compliance policies, processes, and procedures; documents and records; test transactions and accounts; and compliance management system. The CFPB has already begun supervising Google Payments (although Google is contesting the Bureau’s authority) as a nonbank person engaging in a consumer financial product. The rule will take effect on January 9, 2025. While the Bureau is currently focusing on the largest players such as Google, many companies of varying sizes may already, or may soon, exceed the 50 million transaction threshold triggering supervisory authority. Companies that might become subject to the CFPB’s supervisory authority should assess their level of preparedness, similar to the exercise many banks undergo when crossing the $10 billion asset threshold that exposes depositories to ongoing CFPB examination.
4) Fallout From Synapse Collapse Continues In Fintech Partnership World
On 11/12, Synapse’s trustee report was released as part of its bankruptcy proceedings. Since Synapse collapsed in April, over 100 fintechs who relied on the BaaS provider to connect to Evolve Bank & Trust have been left scrambling to reconcile program funds associated with Synapse. Reports have identified somewhere between $65 and $95 million shortfalls between bank-held funds and amounts owed to fintech users. With users locked out of their money, regulators have increased scrutiny of BaaS providers and bank-fintech partnerships. Meanwhile, the FDIC proposed an “FBO account” recordkeeping rule placing greater expectations on partner banks. In the wake of the Synapse fiasco and a series of consent orders against partner banks for alleged lack of oversight of their fintech relationships, as well as the expected increase in state enforcement in reaction to the change in administration, we have seen a material uptick in scrutiny and regulatory compliance expectations from prospective bank partners, investors and creditors.
5) OCC Comptroller Speaks About Regulation And Chartering Regime For Fintechs
On 11/20, Acting Comptroller of the OCC Michael J. Hsu testified before the Committee on Financial Services following the release of the Bank Supervision Operating Plan for 2025. In his testimony, Comptroller Hsu discussed Synapse’s collapse, which left fintech consumers unable to access their money, noting how neither Synapse nor any of the fintechs were regulated or supervised by federal banking agencies. The testimony highlighted previous federal regulatory action and pointed to the patchwork of regulatory requirement and state-level regulations creating industry confusion and gaps. Ultimately, Comptroller Hsu called for a dual system mimicking the dual banking systems that “would provide the guardrails necessary to close regulatory gaps, protect consumers, and promote more responsible innovation and competition.” While a dedicated “dual” banking system for fintechs would likely not become reality for some time (if ever), recent events highlighted by the Comptroller and the change in administration may indicate that the time is ripe for more well-developed fintechs to consider seeking a bank charter under the current regulatory regime.
This article is for general information purposes and is not intended to be and should not be taken as legal advice.
Download a PDF copy of our monthly Fintech 5 Newsletter here.
Questions?
If you’d like to discuss any of these issues or have any questions, please reach out to Partner and head of the Fintech group, Chris Napier.
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