Monthly Fintech 5 Newsletter - January 2025
1) CFPB Sues Zelle and Large Bank Owners for Failing to Control Deposit Account-Related Fraud with Implications for Neobanks and Fintechs
On December 20, the CFPB announced a lawsuit against Early Warning Services which operates Zelle, Bank of America, JPMorgan Chase, and Wells Fargo (“Defendants”) for alleged unfair practices in connection with the processing of consumer claims of unauthorized transactions and fraud. The CFPB asserts the Defendants violated the Consumer Financial Protection Act’s prohibition on unfair, deceptive or abusive acts or practices (“UDAAP”) on Zelle by failing to take timely, appropriate, and effective measures to prevent, detect, limit, and address fraud. Of note, the lawsuit strongly suggests the CFPB is taking the position that consumer claims of unauthorized transactions on a deposit account that can be properly rejected by a financial services company under the black-letter language of Regulation E (where the company finds the transaction was authorized under a technical reading of the regulation thereby placing liability on the consumer for the transaction) still gives rise to UDAAP liability where the transaction involves third-party fraud against the consumer, the company was notified by the consumer in time for the company to act, and the company could have blocked the transaction if it chose to. In other words, if the financial services company can stop the transactions by returning or blocking them such that neither the consumer nor the company absorbs the cost of the transaction, it may incur liability under the CFPB’s theory if it declines to do so even where Regulation E permits the company to place liability on the consumer. For more information, see our analysis here.
2) CFPB Signals Card Reward Programs Which Fall Short on Rewards May be Subject to Regulatory Action
On December 18, the CFPB published a circular warning that covered persons who “offer, provide, or operate credit card rewards programs, and their service providers” may violate prohibitions against unfair, deceptive, or abusive acts when earned rewards are devalued. When these programs deflate or devalue the accrued rewards, the CFPB warned that these practices may be considered “bait-and-switch” and could violate the Consumer Financial Protection Act. Further warnings about potentially deceptive acts included cancelling rewards based on discretionary language, revoking rewards when an issuer unilaterally closes an account, and sign-up offers that are denied based on hidden conditions. While the guidance is in the context of credit card rewards, the reasoning would apply to any rewards program offered in connection with a financial product or service.
3) Bipartisan House Task Force Releases AI Report
On December 17, the Bipartisan House Task Force on Artificial Intelligence delivered its report focused on guiding principles, key findings, and recommendations for artificial intelligence (“AI”) adoption in the years to come. The 273-page report covers a number of topics including financial services and government regulators. Within financial services, key findings relate to the use of AI for regulatory filings, regulatory examinations, investigations, and predictive money laundering abilities. Recommendations for Congress included ensuring regulators increase AI expertise, allowing regulators to experiment with AI, and ensuring these regulations do not create burdens that keep small firms from using AI tools. The report highlighted how AI can expand access to financial products and services in underbanked and underserved communities. Recommendations included fostering environments where financial services firms can “responsibly adopt the benefits of AI technology”, calling on Congress to examine the benefits and risks of AI in financial services to ensure existing consumer and investor protections. The report also warned of data security and quality concerns, calling on Congress to ensure laws like FCRA and GLBA are appropriately updated in tandem with advancing technology.
4) CFPB Releases Overdraft Lending Loophole Rule
On December 12, the CFPB announced a final rule updating overdraft requirements under Regulations Z and E. The amendments apply to overdraft services provided by banks with $10 billion or more in assets, preserving the status quo for smaller institutions. The rule gives three options for overdraft programs offered by larger institutions: 1) cap overdraft fees at a fixed, $5 “breakeven” fee; 2) implement a higher fee based on a prescribed calculation meant to set the fee at an amount representing the actual cost to the institution of paying overdrafts; or 3) assess fees at preexisting levels but provide TILA and MLA disclosures to consumers as if the service were a traditional credit product. This would close the 1969 exemption which excluded overdraft services from TILA for larger institutions. Following the announcement of this rule, a group of banks immediately challenged the rule in the U.S. District Court for the Southern District of Mississippi. In their lawsuit, the plaintiffs challenged the scope of CFPB’s actions and highlighted prior guidance. Litigation notwithstanding, the rule is set to take effect in October 2025.
5) Andrew Ferguson Announced as FTC Chair
On December 10, President-elect Trump announced FTC Commissioner Andrew Ferguson as his choice for the next FTC Chair. Following the announcement, Commissioner Ferguson signaled his intentions to continue to focus on enforcement against technology companies, albeit from a different lens than in the past, in a statement on X: “At the FTC, we will end Big Tech’s vendetta against competition and free speech.” Commissioner Ferguson is one of many tech policymakers announced, with National Economic Council tech policy adviser Gail Slater announced to head the DOJ’s antitrust department, venture capitalist David Sacks named as adviser on AI and cryptocurrencies, and current FCC Commissioner Brendan Carr nominated as FCC Chair. Although Commissioner Ferguson has expressed skepticism of certain enforcement actions taken by the FTC against financial services companies in the past, we view his appointment as a moderate choice.
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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