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Fintechs question CFPB’s faith in innovation over ‘safe harbors’

Some worry CFPB doesn’t want to appear to be backing individual companies or the financial technology industry as a whole

“Director Chopra continues to block consumers’ access to innovative financial products and services," says Rep. Patrick T. McHenry.
“Director Chopra continues to block consumers’ access to innovative financial products and services," says Rep. Patrick T. McHenry. (Bill Clark/CQ Roll Call file photo)

The Consumer Financial Protection Bureau’s decision to end temporary “safe harbors” for two financial technology companies is raising eyebrows in the community, with some wondering if the agency is committed to promoting financial innovation.

The end to the safe harbors has been described as a mutual parting, but fintech experts worry the CFPB doesn’t want to appear to be lending its imprimatur to individual companies or to the financial technology industry as a whole.

The situation is “frustrating,” said one industry advocate who declined to be named for fear of upsetting officials such as bureau director Rohit Chopra. The industry is starting to ask whether Chopra views fintechs as potentially harmful to consumers, several sources contacted for this story said.

In the first such action, the bureau last month terminated what’s known as a no-action letter that had been granted to Upstart Network Inc., which offers artificial intelligence-generated data that banks can use to make consumer credit decisions, such as whether to grant auto loans.

The no-action letters in this case are essentially a promise by the government not to pursue enforcement as companies develop untested projects. Their use is meant to encourage innovation that benefits consumers, by easing concerns the projects might technically violate some provision.

Revoked letter

The CFPB on June 8 said it was revoking Upstart’s no-action letter, first issued in 2017 and then extended in 2020, because the company informed the bureau in April it wanted to update its AI model. That would need bureau approval.

Upstart described the decision as mutual, done in the name of expediency to avoid being sidelined while waiting for approval.

In the second case, the bureau in June rescinded what it termed “special regulatory treatment” for fintech company Payactiv Inc.

The bureau in 2020 had offered the treatment under what’s known as a regulatory sandbox, similar to a no-action letter in that financial firms receive a temporary safe harbor from legal and regulatory liability.

The treatment allowed Payactiv to test a product that gives employees access to their earned-but-unpaid wages prior to payday. The company contracts with employers to provide the wage-transfer service, recouping the amount through a payroll deduction from the employee’s next paycheck, according to the bureau. The bureau-approved sandbox temporarily shielded Payactiv from legal claims its “earned-wage access” product may violate the Truth in Lending Act.

Both parties characterized the action as mutually advantageous.

Payactiv had sought to withdraw from the sandbox program because it wanted to make some changes to its product without CFPB review, though the bureau had already been considering terminating the sandbox treatment because of “certain statements the company made wrongly suggesting a CFPB endorsement of its products.”

The bureau had launched the programs under the Trump administration, revising its no-action letter system and the compliance assistance sandbox policy.

“Innovation drives competition, which can lower prices and offer consumers more and better products and services,” said Kathleen L. Kraninger, the agency’s director at the time. New products and services can expand financial options, especially to unbanked and underbanked households, giving more consumers access to the benefits of the financial system.”

‘Highly suspicious’

But the CFPB under Chopra has shown little interest in these programs, according to Alan S. Kaplinsky, a partner at national law firm Ballard Spahr LLP, which closely monitors and writes about the CFPB.

“Director Chopra has made it clear by his words and deeds that he is highly suspicious of what some fintechs are doing,” particularly about companies using artificial intelligence to make credit underwriting decisions, Kaplinsky told CQ Roll Call in an email.

Kaplinsky pointed to one of Chopra’s first actions as CFPB director, in which the bureau ordered companies such as Amazon.com Inc., Apple Inc., Facebook Inc., Alphabet Inc.’s Google, PayPal Holdings Inc., and Square Inc. to provide information on their payment systems and how they manage customers’ personal financial data.

In a statement accompanying the order, Chopra said he was concerned about competition and privacy at the growing interest by “Big Tech” in payments.

“I think that he believes that compliance is not at the top of the mind for fintechs,” Kaplinsky said.

A fintech industry expert who wanted to remain anonymous said the bureau is labeling firms as “predatory” rather than encouraging dialogue with them. Inflammatory language coming from a top federal regulator puts the U.S. further behind in the development and deployment of consumer-friendly financial innovations, the expert observed.

“The fintech industry isn’t saying it doesn’t want to be regulated, but it does want to know what the rules of the road are,” the person said.

Office repurposed

Adding to the confusion, the CFPB in May announced it was shutting down its Office of Innovation, which had been launched during the Trump presidency, and replacing it with a new Office of Competition and Innovation, which the bureau said would be part of a “new approach to help spur innovation in financial services by promoting competition and identifying stumbling blocks for new market entrants.”

The bureau said it was moving away from its prior focus on “an application-based process to confer special regulatory treatment on individual companies.”

The bureau said it had reviewed its no-action letter and compliance sandbox programs and concluded the initiatives were “ineffective.” Yet, later in May, the CFPB’s press office told Ballard Spahr the bureau hasn’t rescinded its no-action letter and compliance assistance sandbox programs and that the agency is still considering new and previously submitted applications.

“Calling programs ineffective that an agency plans to continue strikes us as an odd way of doing business,” Kaplinsky commented in the June 7 edition of his firm’s Consumer Finance Monitor blog. He wrote that while the CFPB may continue to process new applications, he expects the bureau’s “disparagement” of the programs “will lead most companies to reassess whether filing an application is worth the investment of time, effort, and cost required to do so.”

The CFPB declined to comment on this story directly, referring to its prior statements regarding Upstart, Payactiv, and the new Office of Competition and Innovation.

Chopra’s actions on Upstart and Payactiv have raised concerns on Capitol Hill.

“Director Chopra continues to block consumers’ access to innovative financial products and services. Rescinding legal safe harbors under the guise of consumer protection only creates more uncertainty for businesses and their customers,” said Rep. Patrick T. McHenry, R-N.C., the ranking member of the House Financial Services Committee. Chopra’s actions “will stifle innovation and limit consumer choice at a time when they can least afford it,” he wrote in an email to CQ Roll Call.

McHenry said Republicans in Congress, who could gain a majority in the House in the midterms elections, will “hold Director Chopra’s CFPB accountable for harming consumers, while offering thoughtful solutions that embrace the critical role technology and innovation play in our 21st Century financial system.”

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