Fintech Week Review – June 2021 # 2 | Perkins Coie


[co-author:  Samuel Klein, Summer Associate]

Weekly Fintech Focus

  • A company that buys now and pays later is the subject of a possible class action lawsuit, alleging that it has concealed the risk of NSF overdraft and fees from its users.
  • Leaders of the CFPB’s Fair Lending Office published an article encouraging the use of special purpose credit programs to achieve racial justice.
  • The FDIC is opening applications for a technology sprint to reach the unbanked.
  • FSB responds to comments on its recent discussion paper on Outsourcing and Third Party Service Providers.

Buy-Now Pay-Later company faces class action lawsuit alleging it hid overdraft fee risk

Immediate Redemption Company (BNPL) faces proposed class action lawsuit in California Federal District Court over undisclosed Insufficient Funds (NSF) charges the plaintiff incurred as a result of the automatic debit attempt of the applicant by the BNPL company bank account. Complainant Alleges Potential NSF and Overdraft Fees Charged by Complainant’s Bank Was Not Disclosed by BNPL Company in Violation of California’s Unfair Competition Law’s Prohibition Against Unfair Business Acts and Practices and fraudulent.

The complaint alleges that the BNPL company is “prominent” as a service that allows users to pay for purchases at a later date without “any interest, no fees and no hassle” when in reality there are “fees”. and huge, undisclosed interests. ”Associated with the use of its service. According to the complaint, these undisclosed charges include non-payment and overdraft charges, which the complainant argues are a “likely and devastating” consequence of BNPL’s service. BNPL’s service allows customers to reimburse the balance of their purchases by making four installments over six weeks.

The complainant asserts that she had no idea that small automatic refunds could lead to overdraft fees for her bank and that this risk was known to BNPL but omitted from its marketing. Although he acknowledges that the banks, and not BNPL, assess these charges, the complainant alleges that BNPL “distorts (and omits facts about)” its service, thus placing users “at extreme risk and not disclosed ‘expensive bank charges. In the principal applicant’s situation, BNPL had made a deduction of $ 15.47 from the applicant’s checking account as a partial reimbursement for one of the applicant’s purchases, resulting in an overdraft fee of $ 35.

CFPB seeks to encourage special purpose credit programs

Recently, in a journal devoted to research on poverty and racial and economic equity, two of the heads of the Equitable Loans Bureau of the Consumer Financial Protection Bureau (CFPB) published an article (p. 52) on the use of Special Purpose Credit Programs (SPCP) promote racial and economic equity. We discussed a recent CFPB advisory opinion in a blog post earlier this year, and this essay by CFPB members reiterates the CFPB’s encouragement for financial institutions and others to engage in the administration of SPCPs. The article is not a guide and does not have the force of law, but provides an overview of CFPB’s positions on SPCP, which the authors call “a central priority for CFPB’s efforts to” take bold action and rapids on racial equity ”.

Under the Equal Credit Opportunity Act (ECOA) and its Implementing Regulation B, a creditor cannot discriminate against a plaintiff, with respect to any aspect of a credit transaction on the subject. basis of race, color, religion, national origin, sex or marital status, or age. SPCPs constitute a kind of exception to this prohibition by allowing creditors to provide an SPCP to meet the particular social needs of a category of people and for the benefit of economically disadvantaged groups. To develop an SPCP, a creditor may consider prohibited bases when targeting these credit programs. In order to offer an SPCP, a for-profit creditor must establish and administer the program in accordance with a written plan that identifies the class of persons for whom the program is intended, and extend the credit to a class of persons who, by virtue of normal credit standards, would likely not have received credit, or would have received credit on less favorable terms than standard applicants. Nonprofit creditors offering SPCPs have slightly less stringent requirements for offering SPCP.

FDITECH launches Tech Sprint to reach the unbanked

Federal Deposit Insurance Corporation (FDIC) tech lab FDITECH is preparing to launch a tech sprint to challenge participants to identify and develop resources and tools to help banks integrate unbanked people into the banking system. The technology sprint is specifically focused on improving the capacity of community banks to reach the unbanked population. Interested participants should self-organize into teams before registering. The FDIC suggests that teams include skills such as design, technology, project management, financial services, financial education, and financial inclusion. Registration opens in early July 2021 and ends mid-July 2021. The FDIC will review submissions, with a final demonstration by the teams in mid-August 2021.

FSB publishes responses to working paper on Outsourcing and Third Party Relations

On June 14, 2021, the Financial Stability Board (FSB) published an overview of the comments it received in response to its discussion paper on regulatory and supervisory issues relating to outsourcing and third-party relations. . During the public comment period, the FSB received thirty-nine responses from a wide range of stakeholders including banks, insurers, asset managers, financial market infrastructures, third party service providers , professional associations, individuals and public authorities. The FSB also organized a virtual awareness meeting to gather additional feedback.

In general, respondents welcomed the discussion paper, seeing it as a timely and balanced overview of the challenges and issues arising from the outsourcing of financial institutions and dependencies on third parties. The discussion paper identified several challenges and issues, including: constraints on rights to access, verify and obtain information from third parties; the risks of concentration in the supply of certain services that are difficult to substitute; treatment of intra-group outsourcing; fragmentation of regulatory, supervisory and industry practices; restrictive data localization requirements; cybersecurity and data security; and resource constraints in financial institutions and supervisors.

Respondents proposed several measures to address these challenges and issues, which the FSB grouped into five categories:

  • Develop actionable global standards for financial institution outsourcing and third party relationships to build resilience and manage risk. Respondents noted that such global regulatory or industry standards should be principled, results-oriented, and proportionate to the complexity, size, nature and risk profile of a financial institution, as well as to the criticality of the functions, services or technologies provided or supported by third parties;
  • Clarify or improve existing definitions (including terms such as “outsourcing” and “relationships with third parties”) and criteria for “criticality / essential / materiality” to specify which activities fall within the scope of the regulation;
  • Use shared audits as a form of risk management that not only promotes a coherent approach to supervision, but also reduces the burden on relevant stakeholders. Pooled audits allow multiple financial institutions to conduct coordinated audits of third-party service providers that serve those financial institutions. Some respondents also suggested that supervisors develop and promote standardized certification and reporting for third party service providers to indicate compliance with internationally recognized standards;
  • Mapping of financial institution dependencies on third parties (for example by listing the services and technologies provided by third parties), as well as the strengthening of existing regulatory and prudential supervision (for example by periodically evaluating information received by third party service providers, regularly updating the skills and training of employees responsible for monitoring addictions and sharing employee experiences with supervisory authorities); and
  • Organization of an international forum or a global public-private working group with relevant stakeholders (e.g. supervisors, financial institutions and third-party service providers) to exchange views and best practices on cross-border issues related to outsourcing and relations with third parties.

Respondents also offered some lessons learned from the COVID-19 pandemic. While most respondents did not mention any significant issues regarding the outsourcing of financial institutions or relationships with third parties during the pandemic, they did highlight the benefits of outsourcing. In addition, respondents recognized that the pandemic has increased the dependence of financial institutions on third-party technologies and services, which underscored the need to integrate the risks associated with these dependencies into overall financial management frameworks. risks.

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