What To Expect from the CFPB

How much attention will the payments industry draw from the regulator and its new director? History would indicate the industry won’t be ignored.

PayPal Holdings Inc.’s win earlier this year in its lawsuit against the Consumer Financial Protection Bureau and its prepaid rule may have appeared to push back on some of the agency’s authority. But, as a primary regulator of the payments industry, now under a new presidential administration, the CFPB is likely to be a bit more active than it has recently been.

In the payments industry, those abiding by the regulations or seeking to make changes in generally accepted ways may find little is changing—unless they end up in the CFPB’s crosshairs.

The almost 10-year-old agency is charged with monitoring consumer financial markets and enforcing the rules in its domain. Perhaps its most well-known effort in payments enforcement was Operation Choke Point, an initiative during the Obama Administration to target payment processors as a way to punish clients seen as having violated regulations. That has since ceased.

But the agency, which had been less assertive under the Trump Administration, now is under the wings of a new Democratic one. Expectations now are that the CFPB will ratchet up its enforcement activity, especially once a permanent director is confirmed. Rohit Chopra, currently a commissioner at the Federal Trade Commission, is President Joe Biden’s nominee for the job. As of mid-March, he had not yet been confirmed.

“We’re waiting like everyone else to see if Chopra gets confirmed,” says Brian Tate, chief executive and president of the Innovative Payments Association. The IPA is a Washington, D.C.-based trade group. “I suspect he will be more focused on enforcement and oversight.”

‘Fair And Effective’

With Congressional attention diverted by President Trump’s second impeachment and Senate trial and the intricate negotiations over the $1.9-trillion American Rescue Plan Act earlier this year, federal leadership approvals are running a bit behind.

Though the CFPB has no confirmed director, “it’s fair to say [the agency is] going to be more active than in the previous administration,” says Scott Talbott, senior vice president of government affairs at the Electronic Transactions Association. “I would expect increased oversight and increased investigations in general.”

Thad Peterson, senior analyst at Boston-based Aite Group, mirrors that opinion. “With a Democratic Administration under the leadership of a president who was involved when the CFPB was created, we should expect that there will be greater scrutiny of existing policies and practices, and, potentially, re-instatement of policies dropped during the previous administration,” Peterson says. He notes that more in the way of specifics are not available because it’s very early in the Biden Administration.

Tate’s organization is keenly attuned to the CFPB’s prepaid rule. San Jose, Calif.-based PayPal filed suit against the CFPB and the prepaid rule in December 2019, arguing against what is saw as the agency’s expansive definition of digital wallets as prepaid products.

In a ruling issued a year later, a judge said the CFPB overstepped its authority when it implemented the final, 1,600-page rule. Tate says the CFPB has signaled it will appeal. For now, the rule remains on the books and Tate advises companies to continue to abide by it, despite PayPal’s win in a dispute over a small section of the rule.

Hints of what may be on the CFPB’s radar for the next four years come from Chopra’s March 2 testimony before the U.S. Senate Committee on Banking, Housing, and Urban Affairs. “In the mortgage market, fair and effective oversight can promote a resilient and competitive financial sector, and address the systemic inequities faced by families of color,” Chopra told senators.

Consumer payments, at least directly, didn’t get as much attention, though Chopra mentioned debt collection.

“Congress has entrusted the Consumer Financial Protection Bureau with carefully monitoring markets to spot risks, ensuring compliance with existing law, educating consumers, and promoting competition,” Chopra said. “This not only helps to protect Americans from fraud and other unlawful conduct, it also ensures that law-abiding businesses, regardless of size, can compete.”

Broad Themes

Chopra’s testimony provides some insight, Talbott says. “As we look at the Biden administration and his regulatory appointees, we’re beginning to see the trees coming into focus,” he says. Already, a couple of broad themes are emerging, he says. “One is a pro-consumer approach, which we support. Another is income inequality and diversity.”

The absence of a confirmed Biden nominee in charge of the CFPB makes speculation about the agency’s direction more imprecise than if one was in place. “If you look at his confirmation hearing, he had a number of other things he touched on,” Talbott says, that were not directly payments-related.

Still, the CFPB hasn’t shuttered its enforcement activities. Just in March, the agency sued third-party payment processor BrightSpeed Solutions Inc. and its founder for, allegedly, knowingly processing payments for companies engaged in Internet-based technical-support fraud. The CFPB said BrightSpeed was founded in 2015 and wound down operations in 2019.

“What that lawsuit says to payment processors is, if you knowingly help a vendor engage in a fraud, we’re going to pursue you, we’re going to hold you accountable,” Talbott says. “I would expect more of the same.”

That could mean the two agencies with the most payments industry oversight—the Federal Trade Commission and the CFPB—will both be active.

The payments industry changed in the four years of the Trump Administration. New products have emerged, fintechs have gained greater prominence, and consumer behavior has been modified, some of it perhaps permanently, because of the Covid-19 pandemic. All this in the more than four years since the 2016 election.

“First and foremost, the market is expanding and competition is a good thing,” the IPA’s Tate says. “The end user is the beneficiary. We now have more ways for people to access their money and be in the system. It allows them to manage their day-to-day financial lives better.”

‘Potential Changes’

Regulators, too, especially if they train their sights on payments, will need educating on the new ways consumers can interact with the payments industry, Tate adds.

“We believe there will be more oversight,” he says, with potential for more changes. “Regulators are trying to keep up” with the scope of change in payments over the past five years, Tate says. That promises a more active role for organizations like the IPA, he argues. “We would like to educate them,” he says.

That could entail reviewing rules to ensure they align with current payment products and services. “They will have to learn more about the companies and their products on the market,” Tate says. “And determine if the regulations on the books now are the right ones. And, if not, what are the potential changes. That’s what people don’t know right now.”

Other regulators may also touch on payments by, for example, reviewing technology policy, which tends to have some payments involvement. “We don’t know if that carries over to fintechs,” Talbott says. The hope is that a positive environment for continued development and deployment of fintech services can be created, he says.

Returning to the CFPB and its prepaid rule, Tate says if the ruling favoring PayPal is ultimately upheld—and that’s a ways off; the CBPB hasn’t formally filed an appeal—the agency may re-regulate. If the PayPal verdict is overturned, the rule remains in effect.

Other financial services, such as payday lending and arbitration, could be issues for the CFPB, too, Tate says, adding, “We really have to wait until Chopra gets confirmed and see what his agenda is.”