News You Need To Know Before Money2020: Goldman & Apple Hit With CFPB Enforcement Actions
Open Banking Rule Already Faces Legal Challenge, Synapse Bankruptcy Update, SoLo Funds Hit With Putative Class Action Suit
Hey all, Jason here.
When this hits your inbox, I’ll presumably have already been awake for hours, thanks to the jet lag that comes with traveling from Amsterdam to Las Vegas.
Still, it’s worth it for the biggest event in US fintech, Money2020. I’ll be recording two live podcasts, one with Navan’s Michael Sindicich, Tuesday at 11:55am (details here), and the other with my podcasting partner-in-crime Alex Johnson, of Fintech Takes, Tuesday at 3:45pm (details here.)
Also looking forward to a slew of happy hours and dinners, including with my friends at Baselayer, Knot, Taktile, LoanPro, Sardine, Visa, Plaid, and numerous others — if you see me this week, feel free to say hello!
If you enjoy reading this newsletter each Sunday and find value in it, please consider supporting me (and finhealth non-profits!) by signing up for a paid subscription. It wouldn’t be possible to do what I do without the support of readers like you!Goldman And Apple To Pay Nearly $90 Million Combined In CFPB Consent Order
As Goldman Sachs continues to dismantle its consumer business, it will have to reckon with decisions and risks that, at the time, it must have deemed to be worth it.
Goldman took a hit of approximately $400 million on the sale of loan portfolios, comprised primarily of GM credit card loans, due to higher than excepted credit losses.
The GM loan book, though, is estimated at only approximately $2 billion.
That means that Goldman has about $18 billion in outstanding balances for its Apple Card program — and a 6.9% annualized net charge-off rate for its overall consumer loan book, per its third quarter earnings presentation.
The industry-wide charge off rate on credit card loans, according to Federal Reserve data, was 4.49% in Q2, the most recent data available.
This suggests any potential deal with JPMorgan Chase, who has been reported to be negotiating with Goldman and Apple to take over the program, may involve a significant write down on outstanding credit card receivables for Goldman.
Now, Goldman Sachs and its partner, Apple, have entered into consent orders with the CFPB over handling of customer disputes and deceptive practices related to the Apple Card Monthly Installments (ACMI) program.
Of the consent orders, CFPB Director Rohit Chopra said (emphasis added):
“Apple and Goldman Sachs illegally sidestepped their legal obligations for Apple Card borrowers. Big Tech companies and big Wall Street firms should not behave as if they are exempt from federal law. The CFPB is banning Goldman Sachs from offering a new consumer credit card unless it can demonstrate that it can actually follow the law.”
Specifically, the CFPB found that Goldman:
violated the Truth in Lending Act and Regulation Z by failing to send acknowledgement notices and resolution letters within the required periods;
making adverse reports to consumer reporting agencies regarding amounts disputed in billing error notices prior to completing the requirements for billing error resolution;
failing to conduct reasonable investigations for disputes that qualified as billing error notices;
and holding consumers liable for amounts at issue in claims of unauthorized use before conducting a reasonable investigation.
The CFPB further found that Goldman’s inadequate handling of consumer disputes violated the CFPA’s prohibition on unfair and deceptive acts or practices (UDAAPs).
Separately, the CFPB found that Goldman and Apple’s Apple Card Monthly Installments, which offered 0% APR financing on purchases of certain Apple devices with an Apple Card, misled consumers into believing they would automatically be enrolled in such plans, which was not the case.
The CFPB also found that Goldman misled consumers about how refunds for ACMI purchases would be applied in cases where a cardholder had both ACMI and non-ACMI balances.
The consent order requires Goldman to make approximately $19.8 million in redress to impacted consumers and pay a civil money penalty of $45 million.
Notably, the CFPB separately took action against Apple, which entered into a consent order with the Bureau, “for its role in marketing, offering, and servicing the Apple Card.”
According to the Apple consent order, the company “is a ‘service provider’ under the CFPA because it ‘provides a material service’ to Goldman ‘in connection with the offering or provision’ of Apple Card, and ‘participates in designing, operating, or maintaining’ Apple Card.”
Apple, which controls the Apple Card user interface via its iOS operating system and Wallet app, failed to consistently send proper billing error notices to Goldman, which meant, in those cases, Goldman did not investigate customers’ billing disputes or send legally required notices.
In cases where notice was not properly transmitted, cardholders did not receive credits for disputed transactions and may have had adverse information inappropriately reported to the credit bureaus.
In Apple’s role as service provider to Goldman, its failure to consistently and accurately transmit billing error disputes and the resulting consumer harm constitutes an unfair act or practice, the Bureau argues in the consent order.
Apple also was responsible for designing and implementing the advertising and user experience for Apple Card Monthly Installments, which “emphasized the ease and simplicity of Apple Card and the ACMI enrollment process.”
However, the checkout process did not clearly and adequately explain that consumers needed to affirmatively opt in to the ACMI offer, and, per the consent order, Apple’s “customer service representatives informed some consumers that iPhones purchased with an Apple Card would be automatically enrolled in ACMI.”
According to the consent order, Apple also unreasonably interfered with users’ ability to choose ACMI by not displaying it as an option on browsers other than Apple’s own Safari or Safari in “private” mode.
Apple’s actions regarding ACMI violate the CFPA’s prohibitions on UDAAP, the Bureau argues.
As part of the consent order, Apple will pay a $25 million civil money penalty.
CFPB Introduces Final Open Banking Rule; Big Bank Trade Group Immediately Sues To Block It
More or less exactly a year since CFPB Director Chopra introduced the proposed personal financial data rights rule at Money2020, he announced the final version at last week’s Philadelphia Federal Reserve 8th Annual Fintech Conference (which, sadly, I couldn’t make it to this year.)
The 594-page final rule, commonly known as “1033” in reference to the section of Dodd-Frank which created the consumer data right, is largely unchanged vs. last year’s proposed version.
Notable changes include exempting depository institutions with less than $850 million in assets from complying with the rule and an extended and tiered timeline for compliance by covered institutions. (For a fuller breakdown of the final rule, I recommend Alex Johnson’s analysis here.)
The final rule allows for limited secondary use of consumer permissioned data, something a variety of stakeholders, including academics and researchers, had pushed for. However, entities that access users’ data as permitted by the rule must obtain annual express reauthorization from consumers to continue accessing their data.
Still, some concern remains that data providers are permitted under the rule to reject third parties for a wide variety of risk management reasons, including for information security risks, and that they may do so inconsistently or for bad faith reasons.
Asked about this in a phone interview on Friday, CFPB Director Chopra said, “We are always worried about pretextual denials that create roadblocks for challengers.” Chopra continued to say, “We do expect there to be ongoing work in this area. It has been a topic of constant conversation between me and the other regulators. I do hope we will be able to provide even more information over time on this, to ensure we don’t have pretextual denials.”
In his remarks last week at the Philadelphia Federal Reserve, Director Chopra began by saying, “The rule will provide more freedom, promote decentralization, and spur greater competition.”
Chopra touted the potential for open banking to facilitate increased competition by making it easier for consumers to switch accounts, thereby earning higher rates of interest on their savings or switching to less expensive borrowing products, for example.
Director Chopra further touted the potential for open banking-enabled account-to-account payments, also referred to as pay-by-bank, to “make payment options like ACH and FedNow more mainstream,” thereby competing with omnipresent card networks. He also touted the potential for consumer-permissioned to “help supplement and improve the accuracy of traditional credit histories and help more people obtain credit on better terms.”
While these are possible outcomes from open banking, they are by no means guaranteed.
Comparison sites for savings rates and credit cards and loans have long existed — whether or not open banking eliminates or at least lowers the barriers to users switching to an economically more optimal product or service is far from a sure thing.
Other countries that have codified open banking regulations, or even gone further to promote account portability through current (checking) account switch services, have not necessarily seen meaningful changes in user behavior.
Even if users do opt to switch banks, there’s no guarantee that their behavior will promote a more “decentralized” financial system, as Chopra hopes it will.
Indeed, in the UK, according to statistics from the country’s current account switch service, large incumbents, like NatWest, Lloyds, and RBS were some of the biggest net gainers, while newer entrants, like Chase’s UK offering, Monzo, and Virgin Money were net losers.
In our interview on Friday, Director Chopra acknowledged the impacts on competitive dynamics would vary by product for deposits and payments vs. credit and lending, and emphasized that there is “no question that people will have more choices if they’re able to use their financial transaction data as part of their loan application. That will have a meaningful effect in how people are able not just to use that data with their existing deposit account provider or existing credit card provider, but really use it across the board.”
The US’s largest banks are far better equipped, with both funding and talent, to develop and execute on strategies that leverage open banking to benefit their bottom lines.
Mega regional PNC, which has resisted allowing aggregators like Plaid and Finicity to access its customers’ data, has said as much, with its CEO Bill Demchak remarking that PNC would “pull share out of smaller banks who won’t have the technology to be able to take advantage of open banks.”
Demchak added that all open banking regulation is “going to do is drain [small] banks of accounts, by big banks who have the technology.”
Bank Policy Institute, Kentucky Bankers Association, Forcht File Suit Challenging Rule
Although the rule is “final,” it still faces challenges: the same day Chopra introduced it, the Bank Policy Institute, together with the Kentucky Bankers Association and Forcht Bank, filed a legal challenge against it.
Their suit argues that the final rule, as written, requires no oversight of third parties using bank data, that the rule will increase the likelihood of fraud and scams, that it allows unsafe practices like screen scraping to persist, that it fails to hold third parties accountable, that it allows third parties to profit, at no cost, from systems built and maintained by banks, and that the rule has an unreasonable implementation timeline.
The plaintiffs argue that the CFPB’s proposed rule exceeds the statutory authority granted by 1033 and that the CFPB is “injecting itself into a developing, well-functioning ecosystem that is thriving under private initiatives,” which will “cut off that private development and replace it with a complicated, expensive, mandatory regulatory framework that Congress never authorized.”
The statutory authority that the BPI suit references, section 1033 of Dodd-Frank, comprises less than one page of the 2010 bill’s 849 pages, with the operative section amounting to little more than a sentence:
“Subject to rules prescribed by the Bureau, a covered person shall make available to a consumer, upon request, information in the control or possession of the covered person concerning the consumer financial product or service that the consumer obtained from such covered person, including information relating to any transaction, series of transactions, or to the account including costs, charges and usage data. The information shall be made available in an electronic form usable by consumers.”
In a post-Chevron world, and one in which, thanks to the Corner Post decision, timelines to challenge regulatory rulemakings are, essentially, infinite, it is difficult to predict what kind of reception BPI’s challenge to 1033 will get in the judiciary.
There is a certain amount of irony that BPI, which counts the nation’s largest banks, including Bank of America, Citibank, JPMorgan Chase, Wells Fargo, Truist, Capital One, and PNC as its members, is leading the charge to challenge open banking — when representatives of those same banks sit on the board of the Financial Data Exchange, seemingly the only body in contention to be certified as a standard setting organization under 1033.
Director Chopra was unable to comment on BPI’s suit, but regarding FDX, he acknowledged hearing “chatter” in the fintech community around concern about who controls any standard setting organizations, and that the Bureau takes those concerns “very seriously.” Regarding FDX’s application specifically, Chopra added, “There’s obviously a host of issues that we have to suss out with respect to this application.”
Unlicensed P2P Payday Lender SoLo Funds Faces Putative Class Action
SoLo Funds, an unlicensed peer-to-peer payday lender, has won plaudits from outlets as varied as American Banker, Fast Company, TechCrunch, and CNBC, even being named to the news site’s Disruptor 50 list in 2023.
The praise came despite long-standing, known, and well-documented risks in the company’s business model, including that it has operated without required licenses, may operate as an unlicensed and unregistered credit reporting agency, and leverages deceptive “dark patterns” to charge rates equivalent to APRs as high as 4,280%, even in states where such costly forms of credit are illegal.
The company has faced legal and regulatory challenges in numerous jurisdictions, including in Washington, DC, Connecticut, Minnesota, and California.
SoLo Funds is being sued by the CFPB for, the Bureau alleges, use of “dark patterns” to deceive borrowers about the total cost of credit.
SoLo Funds has said the CFPB’s suit is “selective” and that the company believes that “regulators have worked hard to stifle innovation and prevent underserved communities from accessing better financial products.”
Now, SoLo Funds is facing a putative class action suit, Danielle Cofield v. SoLo Funds, Inc., over similar issues, filed in US District Court for the Central District of California on October 16, 2024.
The suit alleges that “SoLo entices consumers to apply for loans through its platform by falsely representing in its advertisements that a consumer could obtain financing at zero interest,” when, in reality, the suit says, “[v]irtually all consumers who receive loans incur a tip fee, a donation fee, or both. These fees result in a cost of credit that is both unlawful, and not disclosed to the consumer.”
The putative class action suit alleges violations of the Truth in Lending Act, California’s Unfair Competition Law, California’s Consumer Legal Remedies Act, California’s False Advertising Law, and Ohio’s Consumer Sales Practices Act.
The plaintiff is seeking certification of class status, injunctive relief, disgorgement and restitution, attorneys’ fees and costs, and actual, consequential, punitive, statutory and treble damages.
Evolve’s End Game In Synapse Bankruptcy Comes Into Focus
Last week’s status hearing in the ongoing Synapse saga was disheartening, to say the least.
End users who dialed in to speak to the court are, understandably immensely frustrated; the Chapter 11 trustee, former FDIC Chair Jelena McWilliams, sounded resigned to the situation; and Judge Barash sounded defeated.
Barash and McWilliams are constrained it what they are empowered to do by the scope of the bankruptcy process, and those limitations have become increasingly clear.
McWilliams’ status report, filed in advance of the hearing, had scant new information.
Since the last report, Evolve distributed an additional approximately $169,575 in DDA funds; the remaining DDA funds Evolve holds are associated with fintech programs that the bank has been unable to establish communication with.
The remaining DDA funds Lineage holds, approximately $55,000, belong to fintech programs themselves, rather than end users.
A total of about $53.5 million in FBO funds, about $46.9 million of which are held by Evolve, remain to be distributed.
According to Evolve’s status report and its attorney’s statements in court, Evolve completed reconciliation on October 18th — though this did not yield the answers that end users expected it to, based on reactions during the status conference.
McWilliams cautioned that including Lineage’s and Evolve’s reports as appendices to her filing did not constitute an endorsement, writing that “[t]he inclusion of these reports as appendices is not an endorsement by the Trustee of positions taken by any particular Partner Bank and is solely for informational purposes.”
While many expected the completion of Evolve’s months-long reconciliation efforts to provide clarity about the size and cause of any shortfall, this turned out not to be the case.
Neither Evolve’s filing nor its counsel in the status hearing commented on the status of the approximately $35 million in reserves the bank holds, which it has previously said it would distribute to end users “if the reconciliation indicates” it is appropriate to do so.
Nor did Evolve comment in its filing or the hearing on allegations from former Synapse CEO Sankaet Pathak about various causes of the shortfall, though an FAQ on its site specifies it disputes Pathak’s allegations.
“The information shared by Evolve is the information they shared with us, we don’t have anything more than that” — Synapse Chapter 11 Bankruptcy Trustee, former FDIC Chair Jelena McWilliams, during last week’s status conference.
Rather, according to Evolve, the third-party consultant it hired, Ankura, calculated only users’ aggregate balances across all Synapse banks and the amount, if any, held at Evolve — but not specific amounts held at other banks, nor the size and cause of any shortfall.
Per an FAQ on its site, Ankura (emphasis added throughout) “reconstructed end user balances (i) at Evolve and (ii) across the entire Synapse ecosystem, regardless of which other ecosystem bank may hold their funds. Accordingly, for some end users, this second balance — the Synapse ecosystem balance — may be comprised of funds held at Evolve and at other institutions. The reconciliation did not subdivide the Synapse ecosystem balance by institution, with the exception of the Evolve balance, because Ankura did not have access to transaction-level data from other Synapse ecosystem banks.”
On its website for impacted end users, Evolve says that, on November 4th (the day before perhaps the most contentious election in modern American history), once authenticated, users will be able to access “their Synapse ecosystem balance as well as the amount of any of their funds that Evolve holds and will be disbursing to them.”
End users will then be able to select a payment method for how they’d like to receive their funds.
But, to reiterate: Evolve will tell end users their “total” balance that existed across all of Synapse partner banks and the “amount of any of their funds that Evolve holds” — but what happens if these amounts don’t match?
In the status conference, Evolve’s attorney referenced a process for end users to dispute the amounts Evolve has calculated but didn’t provided any additional detail about how that process would actually work or who would adjudicate the claims.
The FAQs on Evolve’s site don’t mention such a process, and representatives for Evolve did not respond to a request for additional explanation of how this process would work.
In an unrelated motion, Grabr, parent company to fintech program GrabrFi, requested that the court order Lineage to produce personnel for an oral examination and documents that speak to balance details, communications between Lineage and Synapse, reconciliation efforts, funds shortfalls, and related topics.
Judge Barash granted the motion but clarified, in response to questions from Lineage’s attorney during the hearing, that the bank can seek an order of protection that would effectively block the request.
FT Partners: September Saw $4.4B In Funding Across 322 Deals
The frothy days of 2021 are well behind us, but deals are still getting done.
Some investors are banking on AI to drive a “new beginning” for fintech, and, while you can always count on VCs to talk their own book, it remains far from certain that AI will significantly improve the prospects and profitability of certain fintech business models.
That said, based on a review of this week’s Money2020 agenda, AI hype promises to be inescapable — hopefully AI firms, flush with cash, and their deep-pocketed investors at least throw some good parties.
Other Good Reads
Are We Getting Steak or Sizzle from Government Actions on Payments Competition? (Matt Janiga for Open Banker)
Early Thoughts On The Final Open Banking Rule (Fintech Takes)
Consumer AI Agents in Fintech (Fintech Brainfood)
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