CFPB Taskforce Report: What You Need to Know
Also: SoFI Investor Deck Teardown & A Shameless Plug
Hey all,
This isn’t “Political Science Weekly,” so I’ll try to keep my comments on last week’s jaw-dropping events at the Capitol brief. American democracy, imperfect as it may be, is facing existential questions about its ability to meet the challenges of the day.
We shouldn’t make the mistake of thinking that on January 20 these problems will go away. Setting aside public policy preferences for a moment; Trump is more a symptom of what ails the body politic, rather than cause, and it’s clear that “Trumpism” as a ‘governing’ philosophy won’t disappear when he leaves office.
Why should business leaders care about this at all? To quote Judy Samuelson, founder of the Aspen Institute Business and Society Program:
“A business can’t succeed in a failed society, so executives should be thinking about society first. That means employees and customers, communities and global supply chains — and effects now and later.”
All Americans, especially business, political, and civil society leaders, need to take a long, hard look at how we got here, and debate and implement reforms, before it’s too late.
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The Most Interesting Parts From that 900 Page CFPB Taskforce Report
Given the plethora of non-fintech news last week, you may have missed this mammoth report put out by the CFPB’s Taskforce on Federal Consumer Financial Law. The report is split into two volumes. The first volume weighs in at a hefty 798 pages and focuses more on the history and background of consumer credit markets and consumer protection law.
The second volume is a more manageable 100 pages (I actually read it all!), and focuses on the taskforce’s recommendations in 19 categories, including alternative data, competition, equal access to credit, financial inclusion, fintech regulation, and small dollar credit (among other topics).
Given the source of the report (CFPB helmed by a Trump appointee) and the membership of the taskforce, it’s unlikely to have any traction in a Biden CFPB or Democratically-led Congress.
Consumer advocates sued to block the CFPB from acting on recommendations of the report, and Senator Sherrod Brown (D-Ohio), set to become the Chairman of the Senate Banking Committee, said:
“Congress can and should give no weight or consideration to this propaganda masquerading as independent, agency research.”
Former CFPB sources and public policy experts I spoke with largely agreed that the report would be dead-on-arrival in a Biden administration.
That said, it reinforces topics and challenges that won’t disappear with the current administration, even if it reads like a Republican / libertarian wishlist at times.
It’s also notable for advocating changes that the incumbent banking establishment is opposed to, namely, a national, non-depository charter for fintechs and payment companies.
Here are the most fintech-relevant, interesting, and occasionally shocking quotes and recommendations from the report.
Alternative Data
Alternative data, in the context of the report, includes both cash-flow data and consumer account data not commonly reported to bureaus (eg utility, cell phone payments) - basically, everything except for health care accounts.
The report is bullish on the opportunity for alternative data, citing its potential to reduce cost and increase speed and accuracy - particularly for thin/no file applicants. The report argues that regulators shouldn’t restrict new sources of consumer data and points to concerns of liability under FCRA as a blocker to innovation here.
Specific recommendations
Clarify FCRA’s application to data aggregators & use of alternative data
The Bureau, Congress, and other federal and state regulators should identify and eliminate unnecessary or undue restrictions on the ability of consumer reporting agencies to report payment and cash-flow data
Exercise caution in restriction of the use of nonfinancial alternative data
Most shocking quote
“Even reporting negative information from alternative sources provides a net benefit to consumers, because it is likely a signal of the overall creditworthiness of these consumers, thereby making the market more efficient”
Fostering Competition
Among other things, this section questions if the $10 billion threshold in Dodd-Frank “artificially stunts the growth of financial service providers” and advocates for a process or requirement for streamlined bank account switching (similar to phone number portability or the Current Account Switch Service in the UK).
Specific recommendations
The Bureau should study ways to ease changing financial institutions and promoting competition, such as the feasibility of allowing consumers to port checking account numbers to a new bank
The Bureau should research the effect of state creditor licensure laws for covered entities and whether the burden and time for licensing approval create unwarranted barriers to entry
States should consider eliminating or streamlining licensing requirements for providers of financial services to avoid anti-competitive barriers to entry
Most shocking quote
“As an additional step, states can consider eliminating or significantly streamlining license requirements”
Consumer Empowerment
Specific recommendations
The Bureau should explore research methodologies that reveal more about when and how to intervene in consumer financial education, including incorporating credit and financial education issues in ongoing longitudinal panel studies such as the PSID
The Bureau should conduct research to understand how consumers actually make decisions, assess how well their decision processes work, consider how decision processes might be improved, and determine how to disseminate the findings to consumers
Most shocking quote
“The literature has not found evidence that many financial literacy efforts are consistent or reliable at improving consumer financial well-being.”
Disclosures
If there’s one theme in the taskforce’s discussion of disclosures, it’s around “streamlining” them. While consistent disclosures are key to enabling consumers to compare products, I would argue they don’t solve problems of financial education/financial inclusion nor are a substitute for supervisory nor enforcement actions.
Specific recommendations
To make disclosures more useful, the disclosures mandated by Congress and the Bureau should consist of only the minimum information consumers need to make an informed decision and to verify they received the product terms promised
The Bureau should revise credit advertising disclosure requirements in Regulation Z, especially eliminating or streamlining advertising trigger terms
Most shocking quote
“Even product features that may seem highly suspect in most circumstances, such as no- or low-documentation loans, have their place in serving consumer needs, as numerous consumers who are self-employed or gig workers have discovered.”
Enforcement
The main arguments put forth on enforcement are around increasing transparency (defining consumer harm, making public why CFPB did or did not pursue a given enforcement action) and avoiding ‘regulation by enforcement.’
Specific recommendations
Make a policy statement of how CFPB defines consumer harm
Begin publishing “Enforcement Highlights” similar to existing Supervisory Highlights that provide transparency on why decided to do an enforcement action or not
Most shocking quote
“Regulation-by-enforcement is poor public policy and, despite the Bureau’s occasional condemnation of it, the practice continues to occur.”
Financial Inclusion
The most novel taskforce recommendation is around fostering the ability of immigrants to the US to leverage credit history from their home country.
The rest of the recommendations are basically a deregulatory fantasy, including repealing the CARD Act’s prohibition on marketing to 18-21 year olds and repealing regulation of debit interchange fees -- under the guise that these moves would improve financial inclusion.
Specific recommendations
The Bureau should study how to facilitate creditor access to credit report information about recent immigrants
Congress should consider repeal of the restrictions on marketing credit cards to consumers age 21 and under
Congress should repeal the CARD Act’s restrictions on fees for unsecured subprime credit cards
Congress should repeal the provision in Section 1075 of the Dodd-Frank Act that imposes price controls on debit card interchange fees due to its adverse impact on access to free or low-fee banking accounts
Most shocking quote
“Historically the most notorious obstacle to financial inclusion was usury ceilings, which made it uneconomical for providers to offer credit to many higher-risk and lower-income consumers.”
Fintech Regulation
The boldest recommendation here -- and perhaps in the entire report -- is that the CFPB, not the OCC, should be the one to issue non-depository charters (eg “fintech” or “payments” charters).
Brian Brooks, Acting Comptroller of the Currency, was quick to defend the OCC’s turf as the agency empowered to issue national charters to companies engaged in lending, payments, or deposit taking.
Unsurprisingly, the taskforce also argues for greater ability of fintechs to preempt state laws, specifically for money services business (MSBs).
Specific recommendations
Congress should authorize the Bureau to issue licenses to non-depository institutions that provide lending, money transmission, payments services. Licenses should provide that these institutions are governed by the regulations of their home states, even when providing services to consumers located in other states
The Bureau should consider the benefits and costs of preempting state law in some specific cases in which the potential for conflict can impeded provisions of valuable products and services
Most shocking quote
“…the Taskforce recommends that Congress either authorize the Bureau to issue federal charters or licenses to non-bank FinTech companies engaged in payments, remittances, or lending services, or clarify the authority of the OCC”
Small Dollar Credit
Since the CFPB’s creation, small-dollar credit has been a key focus area. The taskforce recognizes the challenges slow payments and settlement processes cause consumers and highlight the opportunity for faster payments to reduce consumers’ need for small-dollar credit.
But the taskforce’s recommendations are, shall we say, a departure from previous bureau attempts at rulemaking on the topic.
Specific recommendations
Preferably, interest rate caps should be eliminated entirely
States should reconsider, update, or eliminate usury laws as appropriate, recognizing the high costs they impose by denying valuable services to consumers who need them
Most shocking quote
“It is the Taskforce’s view that any ceiling will inevitably eliminate some potential borrowers from the market. For this reason, it urges states to exercise caution when setting interest rate caps and to consider the impact on credit availability”
SoFI Investor Deck Teardown
As has been widely reported, SoFI is going public via a Chamath Palihapitiya SPAC, valuing the fintech startup at $8.65 billion. I took a look at the investor deck and did a quick, ad hoc analysis in this Twitter thread:
A couple points I missed or wanted to clarify:
The slowdown in revenue growth in 2020 followed by a (likely) rebound in 2021 makes sense, given CARES Act paused government student loans with no interest, dampening demand for SoFI’s student loan refinance product, which should rebound when borrowers’ payments resume.
I say “likely” because any action by a Biden admin (and Democratically controlled Congress) to outright cancel student loan debt is bad news for SoFI, which is still primarily a student loan refinance and personal lending business.
Interestingly, no mention of crypto in the presentation, which SoFI does offer, and has become a major money maker for other fintechs like Cash App and Robinhood.
Also no mention of insurance, which SoFI offers via partners like Root, Lemonade, and Ladder. Presumably any referral fees SoFI is earning here are de minimis.
Shameless Plug: Fintech Growth Summit
I’ll be speaking at Mobile Growth Association’s Fintech Growth Summit on The Evolving Consumer Credit & Payments Landscape. Other speakers hail from Plaid, Credit Karma, Current, and Tally.
Use my code, MIKULA30, to get 30% off your registration.
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