BPInsights: April 6, 2024

Fintechs, Nonbanks Trigger Majority of Consumer Complaints in Personal Loan Market

A study of consumer complaint data shows that banks provide superior customer service and trigger significantly fewer consumer complaints than fintechs and nonbank lenders. The BPI study examined Consumer Financial Protection Bureau complaint data from 2015 to 2022, with a focus on the personal loan market.

Why it matters: Regulated banks have lost personal loan market share to fintech lenders since 2015, driven by growing regulatory costs. This shift is leaving consumers worse off with significant disparities in customer service and the ability for consumers to seek remediation.

The key findings:

  • Almost half of the complaints concerning credit report disputes involve fintechs: Fintechs were the worst offenders regarding disputed information in credit reports, with complaints trending upwards since 2015.
  • Fintechs and nonbanks are slow to respond to complaints: Slow response times (within 60 days) are viewed with dismay by the CFPB, which expects them to be kept to an absolute minimum.
  • Banks are much more likely to work with consumers to find a solution: Banks have been more proactive in providing both monetary and non-monetary restitution to consumers compared to fintechs and other nonbank lenders.
  • Alleged deceptive practices are more prolific among fintechs and nonbanks: Fintechs and other nonbanks show a higher concentration of complaints related to alleged deceptive practices compared to banks.
  • Complaints against banks are becoming less frequent: Despite losing market share to fintechs and other nonbanks, banks have shown a decline in their share of complaints relative to their share of originations since 2015.

To access the full study, please click here.

Top Stories of the Week

Federal Reserve: 2 – Custodia Bank: 0

Custodia Bank’s aspirations to obtain a Federal Reserve master account were once again squashed on Friday — at least for now — when a federal judge affirmed that Federal Reserve regional banks have the authority and discretion to approve or deny applicants.

The allegations: The lawsuit, filed in 2022, argued that the Federal Reserve Bank of Kanas City improperly delayed a decision on Custodia’s master account application. Additionally, it accused the Federal Reserve Board of inappropriately interfering in the decision once the application was ultimately denied. U.S. District Court Judge Scott Skavdahl rejected these claims.

Congress’s role in the decision: A consequential factor leading to the decision was a law passed in 2022 that required the Federal Reserve to establish a directory of master account applications. The law mandated that the directory indicate the status of existing applications, including whether the applicant was approved or denied. In doing so, the Court determined that Congress explicitly granted the Federal Reserve authority to deny applicants.

Third time is the charm? Custodia is reportedly considering whether to appeal.

Judge Halts New Community Reinvestment Act Rule

Late last Friday night, Judge Kaczmarek in the U.S. District Court for the Northern District of Texas issued an opinion and order imposing a preliminary injunction against the federal banking regulators prohibiting them from enforcing the amended CRA rules approved earlier this year. In February, the American Bankers Association, the U.S. Chamber of Commerce, Independent Community Bankers of America, the Texas Bankers Association and others sued the federal banking agencies for exceeding their statutory authority and acting arbitrarily and capriciously in amending their CRA rules. The groups requested a preliminary injunction pausing the new rules while the court decides the merits of the case. In granting the preliminary injunction, Judge Kaczmarek determined the groups have a substantial likelihood of succeeding on the merits of their challenge. Specifically, the preliminary injunction ruling prohibits the banking agencies from enforcing the CRA regulations pending the resolution of the lawsuit. The rule’s effective date of April 1, 2024, along with all other implementation dates, will be extended, day-for-day, for each day the injunction remains in place.

Bowman Cautions on Regulatory Crackdown on M&A and De Novo Charters

Revisions to the regulatory and supervisory framework for bank M&A and de novo bank formation could “undermine the long-term viability of banks,” Fed Governor Bowman warned in a speech this week. Speaking at a Workshop on the Future of Banking hosted by the Federal Reserve Bank of Kansas City, Gov. Bowman expressed skepticism about some proposed regulatory and supervisory reforms being put forward following the March 2023 bank failures.

Wrong lessons: Bowman noted, “The long shadow of the bank failures continues to be a driving force for regulatory and supervisory reforms, even for reform proposals that have little relationship to the events surrounding the bank failures and ensuing banking system stress.” She continued, “I am concerned that the broad-based and insufficiently focused reform agenda has become a growing source of risk to the banking system, particularly due to the rushed nature of these reform efforts and the lack of research and understanding of the intended and unintended consequences of these proposals.”

Regulatory approvals: Inappropriately stringent regulatory approvals could lead to the growth of shadow banking, Bowman warned: “When we ‘raise the bar’ for banks to engage in certain activities in a way that is disproportionate to the risk of those activities, we create incentives for those activities to migrate to non-banks outside of the regulatory perimeter. We must understand whether the policy decisions embedded in the regulatory and supervisory framework are effective and complementary. If they are not, we must acknowledge the consequences of knowingly implementing conflicting policy choices.”

New banks: De novo bank formation has become “stagnant” Bowman stated: “The absence of de novo bank formation over the long run will create a void in the banking system, a void that may contribute to a decline in the availability of reliable and fairly priced credit, the absence of financial services in underserved markets, and the continued shift of banking activities beyond the regulatory perimeter.”

Rubber stamp canard: Bowman took issue with the “misconception that a lack of application denials implies that standards are simply not rigorous enough, that the regulatory approval process has become a rubber stamp.” She said, “This view ignores the reality of the filing process. These transactions require significant upfront and ongoing investment and commitment of resources. This is an expensive and reputationally risky process that bankers take extremely seriously. They do not make the decision to file an application lightly. Even for those institutions that decide to proceed with an application, success is not guaranteed, even in the absence of a regulatory denial.”

Regulator overreach: Bowman was wary of regulators going beyond what is allowable in statute. “The M&A process can be inappropriately influenced when regulators make demands on firms that are not squarely grounded in statutory approval requirements or based on safety and soundness considerations. During the application deliberation process, regulators can impose limitations or restrictions to address specific supervisory or policy concerns in the form of ‘conditions’ or ‘commitments’ on the approval. While this can be an important tool, it should not be used to replace rulemaking or existing regulations and statutes that guide regulatory action; we should not engage in ‘regulation by application.’ Conditions or commitments that impose obligations that are inconsistent with our existing regulatory framework raise issues of significant concern. In these circumstances, our existing rules and regulations are the most appropriate and effective tools to address concerns.”

Barr Comments on CRA, M&A, Basel and Climate Disclosure at NCRC Event

Vice Chair for Supervision Michael Barr sat down with Politico’s Victoria Guida at NCRC’s Just the Economy Conference for a wide-ranging discussion. Barr hit on many of today’s hot topics in the regulatory arena. Below are some highlights:

Community Reinvestment Act: Barr steered clear of commenting on pending CRA litigation but took the opportunity to defend the recent rules updates. In comments on what the new CRA updates mean, Barr stated, “It means providing greater clarity and transparency so both communities and banks can know what the expectations are. It means updating the rules so that you know what community development activities count for CRA consideration. It means making sure that banks are serving their entire communities, whether communities are near their bank branches or in other parts of the country where they’re doing lending and investment. So that kind of approach… really has the opportunity to make CRA vibrant for the next 25 -30 years.”

M&A: Guida asked Barr if the Fed would follow the OCC and FDIC’s lead in updating its M&A rules. Barr said, “We’re not currently planning to do that. We have, I think, a pretty robust process that follows our existing guidelines in this area. We are working with the other banking agencies and the Justice Department to see whether those should be updated. But that’s work that we’re thinking about on an interagency basis rather than just us doing something.”

Basel Endgame: Barr declined to provide a timeline for a final rule on the Basel proposal, but reiterated there would be changes. “I expect we’ll make adjustments to the final rule. I think it’ll be a good strong rule when it’s done, but we’re going to make changes along the way.”

Climate Change: Asked about the Fed’s involvement in climate change, Barr said they are acting within their “important” and “narrow” mandate and emphasized that they are “not making climate policy at the Federal Reserve.” Barr said, “Our job is financial stability.”

New BITS Report Examines Role of APIs in Data Security and Operational Efficiency

A new report published this week by BITS — the technology policy division of BPI — examines the fundamental role of Application Programming Interfaces in modern finance. APIs are the conduits to safely exchange data across systems, underpinning innovation in the marketplace and supporting the essential operations of financial institutions, including transaction processing, fraud detection and customer onboarding. This report outlines the fundamental architecture that security and operations teams should consider and offers leading practices to help the industry keep pace with technological advancements and emerging threats.

In Case You Missed It

The Crypto Ledger

  • Tether and Russia: Tether has become “the world’s default black-market payment method,” according to a new Wall Street Journal report. The article examines how Russia relies on Tether as an “indispensable” tool for evading U.S. sanctions and furthering its war efforts.
  • Google Sues Crypto Scammers: More than 100,000 people were defrauded by a group of crypto scammers who uploaded fraudulent crypto exchange apps to the Google Play store, according to a new lawsuit filed by Google.
  • Another Attempted Rug Pull: Faruk Özer, CEO of Turkish crypto exchange Thodex, was­­­ caught in Albania after fleeing Turkey in 2021 with the crypto exchange’s thumb drive, rumored to be worth over $2 billion. He was sentenced to prison for 11,196 years, the longest sentence in Turkey’s history, according to Wired.
  • FT Alphaville Celebrates 2nd Anniversary of U.K.’s Journey to Becoming a “Global Crypto Hub”: Two years after U.K. Prime Minister Rishi Sunak pledged to transform Britain into a global hub for crypto, little progress has been made. FT Alphaville’s cheeky homage summarizes the transformation to date.
  • FTX Black Hole: Former FTX customers continue to face uncertainty on whether they’ll ever be made whole as they wait for the bankruptcy courts to sort out the failed crypto exchange. Many have resorted to selling the rights to their frozen accounts to hedge funds to get a fraction of their holdings back, reported the WSJ.

CFPB Oversteps Authority with Proposal on Discretionary Overdraft Products

BPI argued in comments to the Consumer Financial Protection Bureau this week that the Bureau’s proposal to substantively regulate discretionary overdraft products exceeds the Bureau’s legal authority. The proposal imposes de facto limits on the price and specific terms of offering these products. The letter argues that the proposed rule seeks to reverse over five decades of agency interpretation and, if finalized, risks being deemed arbitrary and capricious under the Administrative Procedures Act.

Congressional Review Act Resolution Targets CFPB Late Fee Rule

Congress is undertaking efforts to invalidate the Consumer Financial Protection Bureau’s recently finalized credit card late fee rule, with the most recent challenge introduced this week by Representative Andy Barr (R-KY). Rep. Barr and Senator Tim Scott (R-SC) have championed this cause, arguing that the CFPB’s arbitrary limit on late fees encourages delinquencies and will ultimately harm consumers by decreasing credit availability. The CFPB’s rule, which is also facing legal challenges, was finalized on March 5.

CFTC Proposes Operational Resilience Rules

The Commodity Futures Trading Commission is proposing new operational resilience requirements for futures commission merchants, swap dealers and major swap participants. In a comment letter submitted earlier this week, BPI supported the CFTC’s focus in this area but recommended greater harmonization with existing prudential requirements on which the proposal is based. While the proposal reveals an intent to align with the existing prudential framework, changes are needed to avoid regulatory conflicts and inefficiencies. In addition, BPI urged the CFTC to align the proposed incident reporting requirements with the prudential regulators’ Computer- Security Incident Notification Rule and, for non-U.S. entities, to adopt a strong substituted compliance framework.

Project Agorá Explores Feasibility of Tokenizing Cross-Border Payments

The Bank of International Settlements, in collaboration with seven central banks and private industry, announced the launch of a new effort named “Project Agorá” aimed at determining whether wholesale cross-border transactions could be facilitated via a blockchain network to address legal, regulatory and efficiency challenges. Project participants include the Bank of France, Bank of Japan, Bank of Korea, Bank of Mexico, Swiss National Bank, Bank of England, the Federal Reserve Bank of New York and the Institute of International Finance on behalf of their members.

RTP Network Sees Record Growth and Uptake for Instant Payments

The RTP Network, one of the primary instant payment platforms in the United States, processed over 76 million transactions valued at over $42 billion in the first quarter of 2024, a new quarterly record for the network. RTP continues to experience rapid growth driven by demand among businesses and consumers for faster payments.

FinCEN Seeks Feedback from Business’s Corporate Transparency Act Compliance

The Financial Crimes Enforcement Network is soliciting information from private industry to better understand the time and resources required to adhere to the Corporate Transparency Act. BPI supports FinCEN’s efforts to simplify compliance but stated in a letter this week that estimating those requirements may be unfeasible because industry still needs instructions on how to report before it can estimate the time and resources that reporting would require. Instead, BPI recommends that FinCEN revisit its effort once more information is known so that the estimates are accurate.

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The views expressed do not necessarily reflect those of the Bank Policy Institute’s member banks, and are not intended to be, and should not be construed as, legal advice of any kind.