Not Just Another Week for the CFPB
Rohit Chopra is smiling. A new lease on the CFPB's life, followed by new enforcement, new rules, and new energy in its war on late fees.
On Tuesday, in an experimental Substack-only post, we covered the report that led to the resignation of now-former FDIC Chair Martin Gruenberg. So it’s only fitting that we shift over to the next regulatory agency today, which for us happens to be the CFPB, and see what’s going on with them. And boy, there is quite a lot. In fact, for the first two developments, this is going to require us to once again go to the timeline-style approach we used when we gave you all the summary of what happened with the CFPB’s late fee case. So buckle up and let’s dive right in:
The End of the $8 Late Fee Saga (Maybe Not?) and a New Lease on Life for the Bureau (aka The CFPB’s $8 Late Fee Rule Part 3 and The Supreme Court Considers the CFPB’s Future Part 2)
Let’s recap where things stood with both of these cases, the last we checked:
* All the initial developments and twists and turns are here for the late fee case. The last update was that the Fifth Circuit court sent the case back to the Northern Texas District Court to rule, in a whopping four days before the rule was supposed to go into effect.
* For the CFPB itself fighting for its existence, there wasn’t much activity after our last post on this topic, although an article by our favorite American Banker writer Kate Berry checked in with a number of legal experts on the state of the CFPB including our friend Alan Kaplinsky, and the article had flagged the Court as not deciding on their future until the end of June. (Obviously, things changed - more on that later). But one thing they all pointed out was that the CFPB likely would begin going on a tear of actions if and when they got the victory in the Supreme Court.
The setup is important, because the \cases are quite intertwined. Let’s go back to May 3:
May 3: The CFPB’s attempt to get the case transferred to DC (again) fails, with the Fifth Circuit ruling that the decision must be made by the original court that obtained the case (Northern District of Texas). This isn’t really a huge change, but more reiteration of what they had already decided a few days before this on May 1.
May 10: Judge Mark Pittman, the same judge who attempted to transfer the case to DC, brings some degree of closure (for now) by essentially ruling that the fee change cannot be considered until the CFPB’s status in the Supreme Court case is resolved. So he issues an injunction to pause the fee from going into effect. But his decision rips on the Fifth Circuit for sending the case back to him, showing he clearly takes umbrage at them overruling his initial decision to send the case to DC.
Pittman helpfully creates a visual timeline as well, showing we are not the only fans of timelines having to do with this case:
May 15: The CFPB tries to clean up loose ends ahead of the Supreme Court decision by going on the offensive; they go back to the Fifth Circuit recognizing that technically the original appeal to the Fifth Circuit is still open and the Chamber might try to leapfrog past the district court injunction to get the fee rule dismissed outright. The argument they make in this note to the Fifth Circuit is quite the opposite; that given the injunction, there is nothing left to appeal.
May 16: The Supreme Court, in a 7-2 decision, rules that the CFPB’s funding is in fact constitutional, handing them a new lease on life. All eyes turn back to the late fee case, which literally stated that the rule needed to be paused until the future of the CFPB was decided. Now that it is, what happens next? The Chamber immediately writes to the Fifth Circuit, likewise anticipating the CFPB might go to the district court and basically asking them to remind all parties that if the injunction is dismissed, the case can still come to them (unclear if this is actually true!)
May 17: The CFPB continues the offensive, basically asking the Northern District to formally declare them victors by revoking the injunction. So now it has two outstanding requests to both the district court and the appeals court (Fifth Circuit) – the Chamber/industry also has a request out to the appeals court, for what it’s worth. It also responds to the Chamber’s kind request to the Fifth Circuit by sending a kind request of their own also asking that the appeals court clarify that they will in fact, let the district court’s decision stand. This is absolutely hilarious at this point.
May 18: The Fifth Circuit responds to all the wooing and dismisses the Chamber’s/industry’s appeal, essentially “leaving it to Pittman to work out, in the first instance, how to deal with the implications of the Supreme Court‘s CFPB funding decision” (in the words of Chris Geidner aka LawDork, without whose stellar coverage we could not construct this timeline). They also add that the mandate dismissing the appeal won’t take effect until July 9.
May 20: The CFPB writes to the Fifth Circuit asking them to reconsider the mandate effective date, making the point that the district court aka Pittman may now essentially be unable to make a fully authoritative decision as long as the effective date hangs over him.
And that is where we stand. One thought I have on this is that it might actually benefit all parties to take a breather until July, but the Fifth Circuit has put all the onus on Pittman, someone who clearly did not want to hear this case, to make a decision. Will he revoke the injunction? Will he make an ultimate decision on the rule? Will he send the court to DC? The saga continues, while consumers continue to rack up late fees and banks continue to remain unsure of whether or not to invest time and resources preparing to implement these necessary changes.
SoLo Funds
One immediate effect of the Supreme Court ruling was that the CFPB, re-energized, went right to the enforcement forum. The day after receiving the Supreme Court’s ruling, the Bureau filed a lawsuit against SoLo Funds, a P2P lending platform that has targeted lower income communities, but has faced a barrage of issues for years. We won’t go too much into the consent order itself, but you can read it at the link here (it’s a 33 page read).
Perhaps no one has been on their case longer than our friend Jason Mikula of Fintech Business Weekly. If you want a summary of why SoLo Funds got here and why this shouldn’t be a surprise, here is Jason’s writing on the matter over the last 3 years that give a good illustration of how this has been coming for some time and should absolutely not be a surprise:
February 2021 – “'Tips' & 'Donations' Can Reach 1,916% APR on Small Loans”
December 2021 – “"Certified B Corp" Still Charging Over 1,000% APR”
May 2022 – “Techstars-backed Solo Funds Sued for Unlicensed Lending, Deceiving on "Tips," 4,280% APR” (the regulator involved here was the Connecticut Banking Commissioner)
May 2023 – “California, DC Cite SoLo Funds For Deception, Illegal Interest Rates Disguised as "Donations"
April 2024 – “SoLo Funds Appears To Botch Tech Transition, Leaving Users Unable To Access Funds For More Than Five Days”
I’d imagine the last incident was the final straw for the CFPB based on complaints that began pouring through that I personally witnessed in realtime. If you look at the Twitter replies to the SoLo account, some of which are now difficult to find since SoLo ended up deleting a bunch of their tweets some of which seemed to make light of the outage, there are users of the platform who still to this day (over one month later) cannot access their accounts – lenders and borrowers.
Of course, the company put out a statement saying they vowed to fight the CFPB, which is something that to be frank I’ve never seen before, and is probably the worst thing you can do. Having a good dialogue with regulators is absolutely the first thing that a company that is subject to any regulatory jurisdiction should be doing, and being combative is probably not the way to go. When you have not one, not two, not three, but four regulators (3 state and 1 federal) coming after you, it’s probably you not them.
I will add that I’ve been a fan of Rodney Williams (one of the cofounders) for a long time. I attended the MPC conference in Chicago in 2019 and was blown away by him when he presented the product from his other company Lisnr, which leverages ultrasonic noise to achieve communication between devices rather than Bluetooth. I am sure he had the best of intentions when launching SoLo. But it is absolutely critical to get compliance right, especially in your early lifecycle as a company, and if you’re having trouble, ask for help.
When you have a situation where Bloomberg posts an appearance by you on their network, and all the replies are angry customers, that’s a harbinger of bad things to come.
New Requirements for BNPL Providers
In the last of the barrage of news concerning the Bureau this past week, yesterday they put out an interpretive rule that implemented some existing Reg Z requirements onto BNPL providers. The rule is open to comments until August 1, and will likely go into effect sometime after the review of feedback.
What does the rule actually say? Several things to point out, based on our independent read of the 64-page document:
· The opening summary statement is pretty clear, without any legalese – “This interpretive rule’s legal analysis states that lenders that issue digital user accounts that consumers use from time to time to access credit products to purchase goods and services are “card issuers” under Regulation Z, including when those products are marketed as Buy Now, Pay Later (BNPL). Such lenders are “card issuers” because such digital user accounts are “credit cards” under Regulation Z. Traditional BNPL products are closed-end loans payable in four or fewer installments without a finance charge, used to make purchases on credit. Consequently, BNPL loans are subject to some, but not all, of Regulation Z’s credit card regulations.” The bureau goes onto acknowledge that BNPL companies don’t fit in the definition of open-end or closed-end lenders, so they take some time to define what applies, and what doesn’t.
· What’s required going forward for BNPL providers?
o Investigating credit disputes (as a reminder, under Reg Z the dispute must be acknowledged within 30 days and then investigated 90 days after that)
o Providing refunds on voided or returned purchases – this isn’t really referenced directly in Reg Z, but is almost certainly in response to the horror stories shared by consumers regarding trying to get their funds back from BNPL providers long after having resolved the goods received situation with the merchant.
o Certain disclosures – namely, having to send monthly billing statements and all the components that come with it (i.e. Schumer box).
· What isn’t required for BNPL providers?
o Penalty fee limits – from an outsider’s perspective, this would have been nice to see some reform on. This is arguably one of the most predatory aspects of BNPL loans, as many providers charge up to 25% of the purchase price of the good in late fees. I’m guessing the CFPB has had enough drama with late fees in its battle in the Chamber and decided to let the matter rest for another day.
o Ability to repay calculations don’t apply – another area that I’d argue would have actually been beneficial to allow application of. One of the biggest issues in the space is that the lack of credit checks allows consumers to go nuts on shopping and then get screwed over when they can’t repay the bill. Essentially, some form of requiring ability to pay check would have helped protect consumers from themselves, in a sense.
· The CFPB goes on to expand on the original TILA/Reg Z regulation’s definition of “credit card” and honing in on the usage of the term “device,” even going as far as citing the Merriam-Webster dictionary (you can feel how energized they clearly are!). From their perspective, a device can be “a BNPL digital user account that a consumer can use through websites, mobile apps, browser extensions, or integrations with merchant websites or mobile apps to access BNPL credit for the purchase of goods and services.”
We’ll keep an eye on the comments for this one as they come in.
Conclusion
With the CFPB’s existence fully assured, you can bet there will be a ton coming out from their world this summer. Stay tuned for an update from us this weekend where we announce a huge milestone in our newsletter’s history on how you can keep up with the latest regulatory developments that go beyond just our publication.