In a blog post that appeared last week, the CFPB reported on research into various factors considered significant in explaining current credit card interest rates.  The CFPB reported that over 175 million Americans have at least one credit card, half of which carry a balance that continues to accrue increasingly high interest rates.  In an era that has seen the Federal Reserve Bank aggressively raise interest rates to combat inflation, Americans’ increasing reliance upon credit cards to cover every day expenses has sparked renewed interest in the practices of the credit card industry with respect to interest rates and fees charged.

The research collected in the blog post shows credit card interest rates increased following the Great Recession despite a number of industry indicators suggesting the risk of credit card lending has fallen to an all-time low.  The factors presented include (1) record low charge-off rates (the measure of accounts deemed uncollectable after sustained delinquency); (2) a stagnant percentage of subprime cardholders; and (3) historically low prime rates. 

From these factors, the CFPB blog post posits that the recent increase in credit card interest rates compared to significantly lower risk could account for historic profit numbers reported by credit card banks in 2021, 7% annualized return on assets – the largest reported return in over twenty years.  The blog does not mention, however, that the same Federal Reserve Bank’s Report to Congress noted profitability of only 2.4% in the previous year, nor that the same Report ascribes much of the increased profitability to changes in provisioning for loan losses and not to increases in credit card interest rates.

The blog post focusing on these factors is an indication that the CFPB is poised to increase its scrutiny on the credit card industry in the near future.  It is worth noting, however, that the CFPB is prohibited from imposing a usury ceiling under Section 1027(o) of the Dodd-Frank Act.  Despite the fact that the CFPB blog focuses on a topic (interest rates) over which it is powerless to act, and it does not mention credit card late fees, the CFPB has recently announced that it will be reviewing the maximum permitted late charge under the CARD Act.

Another disquieting statement in the CFPB blog is the observation that the high interest rates may be the result of the dominance in the industry of “a few key players” and a symptom of anti-competitive practices.  Whether that is true or not (and the CFPB has not provided any data to corroborate the statement), the CFPB does not have jurisdiction to enforce antitrust laws.  This has not stopped Director Chopra from repeatedly evoking anti-competitive behavior as the root-cause for many results he does not like. 

In Director Chopra’s recent interviews with several news reporting organizations, a persistent theme was the CFPB’s concerns about the entry of big tech companies into financial services, particularly in connection with payments and the companies’ ability to collect and monetize data about consumers.  Those concerns are the focus of a new CFPB report issued last week titled “The Convergence of Payments and Commerce: Implications for Consumers.”

The report explores the implications of recent innovations in the payments space that “may blur the traditional lines of banking and commerce” and focuses on “how large technology platforms and other emerging business models that operate outside of the traditional banking system use peoples’ sensitive spending and transaction data.”  The CFPB observes that many firms operating in the market for retail financial services are moving from seeing their customers’ value as generating revenue from using the firm’s financial products (i.e. interest and fee income) “to the customer as a source of behavioral and financial data to be leveraged and potentially sold to create an additional revenue stream.”  According to the CFPB, this means “in essence [that] the customer’s information could become a revenue source, a ‘lead generator’ for the financial institution, and if that organization so chooses, for other companies that can use the data for their own revenue generation activities.”

The report looks closely at three new product categories or “new use cases”  (“super apps,” buy-now-pay later (BNPL), and “embedded commerce”) and makes the following observations:

  • Super apps. These apps originated in China with WeChat and Alibaba and provide “a comprehensive ecosystem where users can find almost anything they need so users can stay engaged within a single app.”  The financial services offered by these apps include bill payment, person-to-person payments, insurance, and investments.   These apps “are essentially the ‘internet in an app.’”  In the U.S., instead of the “internet in an app” approach, the more targeted “bank in an app” approach is gaining traction.  Beyond mobile banking apps, this approach combines additional services related to financial services and payments to add value and retain users.  (The PayPal wallet is cited as an example of the U.S. super app.)  While super apps can be a valuable tool for consumers, “they can potentially be exploited to take advantage of consumers who aren’t fully aware of what it is that they have, and what it is that they have agreed to.”
  • BNPL.  This product was initially offered by BNPL providers partnering with individual merchants.  Consumers interacted with BNPL on the merchant partners’ website checkout pages and providers earned revenues from merchant discount fees.  Recently, BNPL providers have moved to a “lead generation” model by selling advertising space on their own apps to merchants who pay referral or affiliate fees to acquire customers, with the referral fees potentially exceeding ten percent of the transaction amount (which is several times higher than the average merchant discount fees charged in the initial BNPL model).  The newer model allows BNPL providers to use virtual debit and credit cards to make any merchant a BNPL merchant because consumers can use one-time virtual cards issued within a BNPL app at almost any merchant that accepts standard card payment methods.  The app allows a BNPL provider to track a consumer’s digital footprint and use a consumer’s purchase history to craft a personal browsing experience.
  • Embedded commerce.  This concept allows shopping to occur directly on the website or app of a social media feed rather than through traditional ad-based links to a merchant’s website.  It creates an opportunity for a social media provider to capture and sell transaction data without consumers’ awareness that their data is being monetized and increases the risk of an unwanted purchase by enabling a transaction to occur with very little activity from the consumer.  

According to the CFPB, the emerging risk in payments is “the potential that consumer financial data and behavioral data are used together in increasingly novel ways.”  The CFPB sees the closer integration of financial services providers and non-financial companies such as social media and e-commerce that is being driven by technology as creating more opportunities for companies to aggregate and monetize consumer financial data.  In the CFPB’s view, more data creates more opportunities for such data to be misused, and with “the prevalence of machine learning and algorithmic optimization in modern business,” companies have more capability “to leverage consumer financial data to achieve outcomes that may take significant financial advantage of consumers that may result from automated decision-making with limited transparency.”  The CFPB states that it “intends to carefully monitor and scrutinize these practices for potential fair lending risks, as well as the risks of unfair, deceptive, or abusive practices.”

The other emerging risks in payments highlighted by the CFPB is the potential impacts of “scale and market power.”  The CFPB is concerned that the “new use cases” will create “a new generation of dominant incumbents,” similar to how the Chinese market has evolved.  As an example, it suggests that big tech companies “may leverage massive installed consumer bases to quickly gain scale in new payment businesses” and thus “concerns about the market powers of these companies would then be extended into the payments space.”  Another CFPB example is that “a concentrated BNPL or embedded payments in a social medial market may be able to extract excess fees from merchants due to unique structural advantage arising from data and scale.”  In our view, whatever the merits of these concerns about potential anti-competitive effects, they would seem to be more appropriately addressed by the FTC rather than the CFPB.  (Director Chopra has previously raised concerns about competition that seem more properly in the FTC’s purview than that of the CFPB.)

The CFPB concludes the report by noting that it expects to issue a report on its findings from its BNPL monitoring orders and “will determine whether regulatory interventions are appropriate.”  It also notes that it seeks to mitigate the potential consequences of big tech firms moving into the real-time payments space.   

In a blog post published last week, the CFPB reported that since the beginning of 2022, it has been collecting data from supervised institutions on their overdraft and non-sufficient fund (NSF) practices and intends to use the information to identify institutions for further examination and review.  The CFPB also plans to provide feedback to each institution and share the information with other regulators but will not make the information publicly available. The CFPB has supervisory authority as to banks and credit unions with more than $10 billion in assets.  

To obtain the data, the CFPB has sent a questionnaire to more than 20 institutions. (The questionnaire is linked to the blog post).  The questionnaire seeks information for the period April 1, 2021 through March 31, 2022 regarding accounts that were open as of March 31, 2022 and regarding accounts that were closed as of that date.  In February 2022, the CFPB published a table showing the overdraft/NSF practices of the 20 banks with the most overdraft/NSF revenue through the first three quarters of 2021.  The information in the table was based on publicly available information.

The data sought by the CFPB includes:

  • Number of accounts opted into and not opted into Regulation E overdraft services as of March 31, 2022.
  • The amount of overdraft coverage provided across accounts opted into and not opted into Regulation E overdraft services as of March 31, 2022.  (For purposes of the questionnaire, “overdraft coverage” means “the dollar amount of an individual transaction for which the consumer lacked sufficient account balance and which the institution paid, casing the consumer’s account balance to become negative.”  By way of example, if a $100 transaction made by a consumer with a $50 account balance was paid by the institution and resulted in a negative $50 account balance, the amount of overdraft coverage provided would be $50.)
  • Total overdraft and NSF fees and per account average of overdraft and NSF fees assessed on accounts opted into and accounts not opted into Regulation E overdraft services.
  • Percentage of open and closed accounts with more than 6 and more than 12 overdraft and/or NSF fees per year (for opted in accounts and for accounts not opted in).
  • Share of active checking accounts that are opted into overdraft programs for ATM and one-time debit transactions

The questionnaire also asks about the per transaction amount of overdraft and NSF fees, grace periods for making a deposit to avoid overdraft or NSF fees, transaction and account balance thresholds for assessing overdraft fees, limits on the number of overdraft or NSF fees charged per day, balance used (available or ledger balance) for assessing overdraft or NSF fees, and whether overdraft or NSF fees are charged for debit card transactions that authorize against a positive balance but settle against a negative balance.

The CFPB comments that it is “encouraged” that some banks are changing their overdraft and NSF programs and plans to evaluate how these changes are being implemented.  It also comments “[m]any banks have yet to improve their practices.”

In addition to discussing “rent-a-bank schemes” in her keynote address last week at the Consumer Federation of America’s 2022 Consumer Assembly, CFPB Deputy Director Zixta Martinez discussed overdraft practices.  Observing that “[o]verdraft practices can seem more like a maze than a service,” she commented:

As many consumers have learned, to correctly predict the occurrence of overdraft fees, customers must master the intricacies of an arcane payments system.

Banks penalize their customers based on intricate details, outside consumers’ control, such as the difference between authorization and settlement, the amount of time a credit may take to show up in the account, the use of one kind of balance over another for fee calculation purposes, or the order of transaction processing across different types of credit and debits. Even a savvy customer trying to shop for the best checking account would have a hard time parsing it all because she’d have to know the unknowable.

She characterized overdraft fees as fees that “challenge [consumers’] ability to remain banked.”  According to Ms. Martinez, “Because overdraft fees heavily impact many consumers who are already struggling to stay afloat, the fees can drive them into involuntary account closures—and deeper into debt.”  She stated that “[t]he market will not solve this failure [arising from anti-competitive behavior]on its own, and citing the CFPB’s commitment “to returning vigorous competition to this market,” stated that the CFPB “continue[s] to evaluate using the range of our tools to ensure the checking account market works well for consumers.”

We recently published a blog about the OCC’s proposed rule “National Banks and Federal Savings Associations as Lenders” (the “Proposed Rule”), which would clarify that a bank (or savings association) is properly regarded as the “true lender” when, as of the date of origination, it is named as the lender in a loan agreement or funds the loan.  We also published a separate blog discussing a comment submitted to the OCC by Ballard Spahr in support of the Proposed Rule.

We have now reviewed a sampling of the numerous comments filed with respect to the Proposed Rule.  Many strongly support the bright-line approach of the Proposed Rule; others are supportive but provide suggestions and request adjustments, others request added elements, and still others adamantly oppose the Proposed Rule, and in some cases, oppose any form of “true lender” rule.

The comment period for the Proposed Rule closed on September 3, 2020.  The comments can be viewed on the website, which is reporting the filing of over 700 comments on the Proposed Rule (with 548 having been posted as of the date of this blog).  In contrast, “only” 63 comments were received last year on the OCC’s now final Valid-When-Made (“Madden-fix”) rule.  The high number of comments on the new Proposed Rule likely is attributable in part to the submission of hundreds of identical or similar form comments and e-mails disparaging the Proposed Rule and in part, we think, to the greater importance of the “true lender” issue than the Madden issue, which is relatively easier to address through careful loan program structuring.

Comments supporting the Proposed Rule recognize that, coupled with the OCC’s recently adopted Madden-fix rule, it would eliminate confusion, uncertainty and legal risk for banks and their counterparties and increase financial inclusion and nationwide availability of credit on reasonable terms.  They note the importance of access to credit at this time, particularly in the face of the economic crisis caused by COVID-19.  Supporters point out the Proposed Rule would result in strong and consistent supervision of bank-fintech partnerships across the country, ensuring fairness and compliance with applicable laws, and note the Proposed Rule would keep the costs of credit down and encourage innovation.

The Independent Community Bankers of America, a trade association representing community banks, endorses the clear, unambiguous standard set forth in the Proposed Rule.  Other supporters explained that the Proposed Rule would make better borrowing alternatives available to more consumers.  For example, the Marketplace Lending Association, a trade association for banks and companies that cap rates at 36% per annum on their loans, wrote: “without access to affordable credit, consumers will be in danger of being ensnared in high cost or predatory debt traps.”

Supporting comments cite the OCC’s clear authority to adopt the Proposed Rule and the alignment of the Proposed Rule with the OCC’s congressionally established responsibilities to assure the safety and soundness of banks, compliance with laws and regulations, fair access to financial services, and fair treatment of customers by the institutions and other persons subject to its jurisdiction.  The Receivables Management Association observed that the OCC is ideally situated to understand the nuances of the credit industry, and the importance of efficiency on the industry’s ability to provide affordable credit to fuel economic and job growth.

An academician at the Mercatus Center at George Mason University said “The OCC’s proposal is fair, is economically sound, and protects consumers, and the OCC should finalize it.  In doing so, the OCC can help restore clarity and certainty to credit markets, strengthen banks’ ability to enter into partnerships, and improve access to credit to the benefit of banks, their nonbank partners, consumers, and society more broadly.”

While many comments supported the Proposed Rule without revision, other generally supportive comments suggested that elements should be added to the final rule or should be addressed in Supplementary Information.  For example, the Marketplace Lending Association (“MLA”) “strongly supports” the proposal, believes it is an important compliment to the Madden-fix regulation and recognizes that Federal law does not give the OCC the authority to establish interest caps for particular types of loans.  Still, the MLA proposes that the OCC should provide guidance to the effect that APRs above 36% constitute a “red flag” triggering scrutiny.

Avant, LLC, a fintech that recently settled the State of Colorado’s challenge to its lending program, expressed strong support for the “simple and straightforward” bright-line test proposed by the OCC.  It noted that the Proposed Rule would eliminate the need for the fact-intensive multi-factor analyses that many courts have used to determine the true lender when applying a “predominant economic interest” test.  According to Avant, this test can lead to myriad outcomes and continues to create uncertainty, thereby making credit unavailable to consumers who need it the most.  However, Avant noted the recent settlement of the Colorado litigation and suggested it would be beneficial for the OCC to consider the “safe harbor” included in the Colorado settlement as it looks to further define bank partnership standards.  According to Avant, this would promote credit availability while deterring abusive lending programs.

Cross River Bank, another settling party in the Colorado true lender litigation, also expressed the belief that the settlement’s framework can serve as a nationwide model to promote responsible access to affordable credit for those families most in need.  While the Bank supports the OCC’s proposed criteria, it urges the OCC to develop a system that effectively weeds out predatory and abusive lending practices and proffers recommendations for criteria that should be added either in the rule or through supervisory standards.

Other comments, while generally supportive, express concerns about coverage or other issues.

We would characterize the reaction of some of the leading trade groups as lukewarm.  The American Bankers Association supports the idea of the OCC making a “true lender” rule but thinks the Proposed Rule is too broad.  It offers to work with the OCC and other agencies to create a better rule.  The U.S. Chamber of Commerce supports the OCC’s efforts to remove ambiguity in the definition of a “true lender” but also thinks the suggested two-pronged test is too broad.  It specifically asks the OCC to clarify that a “loan” does not include a retail installment contract and “funding” does not refer to warehouse funding.  The Consumer Bankers Association supports the Proposed Rule but suggests additional considerations to add strength, and, like the Chamber, advocates carve-outs for indirect auto lending and mortgage warehouse lending.  Likewise, the Mortgage Bankers Association generally supports the Proposed Rule but asks the OCC to add language to ensure warehouse lenders are not “true lenders.”  By the same token, the American Financial Services Association said the OCC should clarify that “funding a loan” under the Proposed Rule excludes banks purchasing retail installment contracts (RICs) from automobile dealerships.

Many comments opposing the Proposed Rule were filed by banks, state authorities, special interest groups, academics and others.  These comments reflected common themes, including assertions that: (1) the OCC lacks authority to adopt the Proposed Rule; (2) the Proposed Rule would deprive states of authority to regulate non-bank lenders; (3) the Proposed Rule would go beyond the preemption authority granted by the NBA; (4) the Proposed Rule is “arbitrary and capricious”; (5) the Proposed Rule’s adoption process violates the APA; (6) the Proposed Rule would support predatory lending and “rent-a-bank” schemes and therefore would be harmful to consumers and small businesses; and (7) the Proposed Rule might have an anti-competitive effect on other state-licensed non-bank lenders.  Many comments advocated for positions beyond the scope of the Proposed Rule, proposing that the OCC adopt national consumer lending rate caps at 21% or 36%, or asking the OCC to reconsider the previously adopted Madden-fix rule.

A 78-page comment opposing the rule jointly submitted by the Center for Responsible Lending, the National Consumer Law Center and several others makes many of the same points these groups originally made in opposing the OCC’s Madden-fix rule.  Likewise, an opposing comment submitted by Professor Adam Levitin restates many of the same arguments made in his earlier comment on the OCC’s Madden-fix Rule.

Unsurprisingly, the New York Department of Financial Services, which is participating in lawsuits attacking the OCC and FDIC Madden-fix rules, also submitted a comment opposing the Proposed Rule, saying the rule would sanction “rent-a-charter” schemes and would allow unregulated nonbank lenders to “exploit the bank’s ability to issue loans without regard to state usury caps” and “launder loans through banks as an end-run around consumer-protective state usury limits.”  The comment includes a not-so-veiled litigation threat: “If the OCC acts outside the scope of its authority and finalizes this rule, NYDFS will take all appropriate steps necessary to protect consumers and small businesses in New York.”

Comments on the Proposed Rule submitted by members of Congress and State AGs predictably followed party lines.  A letter highly critical of the Proposed Rule was signed by 24 of the 25 Democratic State AGs (all except the Delaware AG) – and no Republican AGs.  The letter expressed the opinion that the OCC’s proposed bright-line true lender rule would enable increased predatory lending, payday lending and “rent-a-bank schemes.”  The Democratic AGs also opine that the proposed two-pronged standard will produce contradictory results and that the OCC failed to comply with Dodd-Frank and the APA.  These AGs ask that the Proposed Rule be withdrawn in its entirety.

Also, a letter opposing the Proposed Rule was sent two weeks after the close of the comment period by eight Democratic Senators (including Elizabeth Warren and six other members of the Senate Banking, Housing and Urban Affairs Committee).  The letter criticizes the OCC for a “pre-financial crisis approach” in “broadly applying federal preemption to undermine state consumer protection laws.”  It claims that the Proposed Rule does not meet the preemption requirements of Dodd-Frank and questions why the OCC has abandoned its Bush-era opposition to “rent-a-bank schemes”.

By contrast, all 26 House Financial Services Committee Republicans wrote the OCC and the FDIC in support of the rulemaking.  This letter expresses concerns that “the uncertainty surrounding this issue … casts doubt on loans made under the bank-fintech partnership model and could reduce the availability of credit in affected areas, as was the case in states impacted by the Madden decision which deviated from valid when made.”  The letter further states:

As you well know, third-party loan originations are subject to the same supervisory scrutiny as a bank-originated loan when there is a bank-fintech relationship…. [W]e believe the OCC and FDIC have the obligation and the necessary statutory authority to promulgate rules to clarify which entity is the “true lender” under the National Bank Act and the Federal Deposit Insurance Act, respectively.  Clarity on this issue would be timely now that the valid when made question has been settled and would foster a robust, competitive, nationwide lending marketplace.  The need for consumers and small businesses to have access to these lines of credit is only exacerbated by the COVID-19 pandemic and the associated economic slowdown.

We hope that the OCC will sift through the multitude of comments, identify constructive and helpful input, and move forward to finalize its Proposed Rule in a form that will enhance the ability of the industry to provide affordable credit to American consumers with appropriate protections and guidelines under the supervision of the OCC.  Ultimately, however, the fate of the OCC true lender rule, like much in our lives, will probably depend on the outcome of the upcoming elections.