Many fintech companies tout their ability to use non-traditional tools to promote financial access for underserved and unbanked communities. Banks may even partner with fintech companies to help reach new customers within such communities.
These financial inclusion efforts dovetail with corporate environmental, social, and governance, which continues to grow in importance.
Despite their laudable goals, however, these fintech companies may be subject to even greater regulatory risks, particularly from the Consumer Financial Protection Bureau. Recent announcements from this consumer protection watchdog highlight the need to develop appropriate policies and procedures to avoid regulatory action.
Defining Discrimination in Financial Services
The CFPB’s consumer protection mission has focused on the same communities targeted by ESG efforts since its inception. In the last year, the CFPB took significant steps toward a broader consumer protection approach to fair lending and potential discrimination, following a decade of traditional fair lending examinations pursuant to the Equal Credit Opportunity Act.
In March 2022, the CFPB announced that it had updated its exam manual to address discriminatory practices by expanding the definition of unfair, deceptive, or abusive acts and practices, or UDAAP, under the Dodd-Frank Act. Under this new definition, discriminatory practices may meet the criteria for “unfairness” even if they do not involve “credit” as required by the ECOA.
For example, if a customer is denied access to a product or is harassed in a discriminatory manner by a debt collector, the financial company involved may have violated the prohibition against UDAAP. The exam manual update also announced the CFPB’s intent to examine decision-making in “advertising, pricing, and other areas” to ensure that consumer-facing companies are “testing for and eliminating unfair and illegal discrimination.”
This expansion of the CFPB’s authority under the UDAAP doctrine may allow the CFPB to pursue discrimination claims against a wider range of financial services markets such as credit servicing, collections, consumer reporting, payments, remittances, deposits, and digital wallets.
Even traditional ECOA actions may be expanding. In May 2022, the CFPB released an advisory opinion announcing its view that the ECOA’s consumer protections apply to discriminatory practices after the initial credit decision. The CFPB opined that the ECOA prohibits lenders from lowering credit limits for certain borrowers’ accounts or subjecting certain borrowers to more aggressive collections practices on a prohibited basis, such as race. The advisory opinion also emphasizes the requirement for lenders to provide “adverse action notices” explaining unfavorable decisions against both applicants and existing borrowers.
Impact on Fintechs
Contemporaneously, the CFPB announced that it will invoke its dormant authority under the Dodd-Frank Act to “hold nonbanks to the same standards …[as] banks…” Until recently, the CFPB only exercised examination authority over a limited number of non-bank financial service companies that were either identified in the DFA or by CFPB rulemaking as a “larger participant” in a particular market.
In April 2022, the CFPB announced its intent to use a forgotten clause of the DFA to supervise non-banks or fintechs without rulemaking if there is reasonable cause to believe the company “poses risks to consumers.” As part of this new process the CFPB may publicly announce that a fintech “poses risk to consumers” even before an exam takes place. This new authority is not specific to any consumer financial product or service, allowing the CFPB to regulate a variety of fintech companies.
Increased examinations will provide more opportunities for investigations and public enforcement actions against fintech companies. This is exactly the kind of activity that financial services stakeholders want to see. In a rare partnership, the Center for Responsible Lending and the Consumer Bankers Association recently joined forces to petition the CFPB to increase oversight over buy now pay later (BNPL) companies and fintechs.
That same day, the CFPB issued a report on BNPL with a statement from Director Rohit Chopra directing his staff to ensure that these BNPL fintech companies, “adhere to many of the baseline protections that congress has already established for credit cards.”
Why It Matters
The CFPB is poised to redouble its enforcement and supervisory efforts. Expansion of its authority and its recent interpretations of ECOA and UDAAP provide it with additional tools to regulate potential discrimination.
While these increased efforts will be felt across various industries, fintechs that promote financial inclusion are likely to fall under greater regulatory scrutiny due to their stated focus.
If the CFPB finds that a fintech has engaged in discriminatory practices with these new tools, it has the power to impose steep monetary penalties and injunctions, and require full redress of those affected.
The CFPB’s recent expansions of authority over fintechs and definitions of UDAAP and ECOA are likely first steps in a wave of supervisory and enforcement activity. Fintech companies that focus on financial inclusion or ESG efforts should take note. Regulatory risks of unfair, deceptive, or abusive acts or practices have become more complex. Companies should consider developing appropriate compliance structures to manage those risks.
This article does not necessarily reflect the opinion of The Bureau of National Affairs, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Melissa Baal Guidorizzi is an Orrick partner and previously served eight years with the CFPB, including as senior counsel for policy and strategy for the agency’s enforcement.
Carolyn Frantz is senior counsel at Orrick and heads the firm’s ESG practice.
David Devich is a law clerk at Orrick.