From BNPL to Crypto, Former CFPB Official Says ‘Everything Viewed Suspiciously'

Nothing is as certain and death and taxes, they say.

And when it comes to payments and credit innovations experiencing explosive growth, particularly buy now, pay later (BNPL) — perhaps the certainty is that regulators will come knocking, at least when it comes to making sure that firms backing up their claims about what they innovate, and for whom.

Right now, one might say that Consumer Financial Protection Bureau (CFPB) is in a bit of a holding pattern, at least in terms of staff. After all, the Biden administration is still in its early stages, as Dave Uejio remains acting director. There continues to be debate about just how the CFPB, as an agency, should be structured.

But to get a sense of what lies on the horizon, it makes sense to get the perspective of someone who’s been on the ground, so to speak. Bryan A. Schneider, who last month joined Manatt, Phelps & Phillips LLP’s Manatt Financial Services as a partner in its consumer practice, previously served as associate director in CFPB’s Supervision, Enforcement and Fair Lending division.

And as he told Karen Webster in a recent interview — with the holistic view forged from having been on the regulatory side and now advising clients about the regulatory climate — the CFPB can be counted on to be, above everything else, very aggressive, even “aggressively pushing the limits of what their authority may be.”

“They’re beefing up staff and adding attorneys," he explained.

We’re already seeing a windup of action, of lawsuits and allegations of consumer harm — and claims that some financial innovations fall within CFPB’s jurisdiction. He pointed to the CFPB’s announcement just this month that income share agreements are, in fact, extensions of credit. Elsewhere, the CFPB has sued LendUp Loans, alleging that the online firm violated a 2016 consent order and deceived borrowers on the cost of loans.

Read Also: CFPB Sues LendUp Alleging Online Lender Broke Consent Order

Those types of actions, he said, show how the agency is thinking about innovative financial products — namely that the CFPB is going to get much more active in the consumer space.

Various claims will come under the microscope — such as whether tuition loans will be easier to carry because borrowers will make more money over time to pay down that debt with ease. BNPL providers, depending on where you look, may claim that paying for a hypothetical $200 blouse in four equal installments may be preferable to carrying credit card balances over the longer term. Those claims will have to be demonstrably backed up (with data), he said.

But for any of the firms under its regulatory gaze — those very same innovators — it’s imperative to prioritize innovation, yes, but also how to gauge how that innovation will be perceived not by the marketplace but by the regulator.

As he told Webster, the BNPL firms, the digital financial services (no matter the vertical) upstarts need to mull:

“How do you fit into this new world where everything is viewed a little suspiciously?”

That suspicion, a desire to get under the hood and see what’s not been working for large swathes of the population, will envelop credit reporting processes, said Schneider. The pandemic, and by extension, the CARES Act, has impacted how companies report payment information.

“Any aspect of [credit reporting] that touches on protected classes or an economically disadvantaged group of people is going to be seen with a particularly strong lens," he said.

 Slow Grind Toward New Laws 

That’s not to say that everything will turn on a dime.  Rulemaking can be a slow process — witness the fact that Section 1071, which under the Dodd-Frank Act mandates financial institutions (FIs) to collect data on minority and women-owned businesses in the service of small business lending, will take years to implement (small business lending is essentially consumer lending by another name, he said, and so falls under the CFPB’s oversight), primarily through the Equal Credit Opportunity Act (ECOA).

Eternal vigilance is critical, he said, and no matter what the firm does or where it operates, the CFPB will first be viewing them through the lens of COVID-19 and how they stack up in promoting financial inclusion and racial equity.

Those are the prisms through which the bureau will view corporate activities through the next 18 to 24 months, said Schneider, with particular focus on CARES Act violations (tied, for instance, to mortgage servicing or student loans, where moratoriums are expiring). He projected that roughly half of all supervisory resources are likely to expend on fair lending and fair loan servicing reviews.

For the traditional lenders and the FIs (payday lenders among those firms), the CFPB will be less willing to accept the argument that things are OK, simply due to the fact that certain lending activities are part and parcel of the way it’s always been done.

He said that stacking, whether done with traditional payday lenders or BNPL, will draw the Bureau’s attention.

So, too, will the actual footprints of banking branches in underserved communities.

Aggression vs. Innovation  

But he cautioned regulators must be wary of moving so aggressively that they kill innovation. Open banking is in its relatively embryonic stages here in the states, and the protections afforded to consumers as they permission their data to be shared (and how much liability the banks bear) will necessitate repeated discussions among banks, the Federal Trade Commission and other stakeholders.

Crypto? Well, that’s largely an arena in which the wealthier consumers and speculators play, maintained Schneider. At least right now, the CFPB is relatively more concerned with inequality, but it would be a mistake to think that crypto, though it may not be at the top of this list, won't draw attention (particularly as consumers, as detailed in PYMNTS research) want to use bitcoin and other cryptos in day-to-day commerce.

Read more: How Consumers Want To Use Crypto To Shop And Pay in 2021 And After

Asked by Webster whether the CFPB’s aggression might chill innovation, Schneider said, “I'm always concerned. I think that sometimes that is the hardest thing for any regulator to do, because you see harm in front of you — well, you want to prevent that you want to remediate it.”

In the current environment, he said of the CFPB, “they're prepared to opt more on the side of remediating what they’ve observed as a present or very likely harm than then on the side of, ‘well, we’ll let innovation play out a little bit.’ ”

See also: Nearly 60 Percent of Consumers Want To Buy Stuff With Crypto

The conventional wisdom may be that the big tech players — the Amazons, Apples and Googles and others might be at risk. After all, their new products and services are driven by artificial intelligence (AI) and machine learning (though regulators will look hard for biases in credit decisioning and other models).

Of those companies, he said, “I'd be concerned, I'd be vigilant,” he said, of the interactions with the CFPB.

“But I wouldn't back down, because this is the way of the future. It's not about fear — it's about vigilance and preparation,” he said.