CFPB Nonbank Supervision: A Power Grab or Much Needed Rule?
A House subcommittee held a hearing on possible regulation of payment aps
Are nonbank payment companies financial institutions that should be regulated by the Consumer Financial Protection Bureau, or are they technology companies that the agency should not attempt to regulate?
A subcommittee of the House Financial Services Committee struggled with that issue on Wednesday, and as the hearing ended, the panel and witnesses remained divided over the answer to that question.
The hearing was focused on a proposed rule, released by the CFPB last November, that would allow the agency to supervise large companies in the “general-use digital consumer payment application” industry. The CFPB proposed regulating nonbank companies with more than five million transactions each year.
The hearing was held by the Financial Services Committee’s Digital Assets, Financial Technology and Inclusion Subcommittee. Its chairman, Rep. French Hill, R-Ark., is opposed to this type of CFPB regulation. He said that CFPB Director Rohit Chopra “has decided, on a whim and, in my view, without justification, that technology companies pose a threat to consumers, and this rule should be viewed as a thinly veiled workaround to get CFPB supervision teams into these tech companies.”
On the opposing side, Rep. Brad Sherman, D-Calif., emphasized that funds deposited into payment aps are not federally insured, unlike credit union and bank funds. “It’s like loaning money to your brother-in-law if your brother-in-law was Sam Bankman-Fried,” he said, referring to the founder of the FTX cryptocurrency exchange who has been convicted of fraud and other financial crimes.
Commenting on the proposal when it was issued, America’s Credit Unions supported the rule and has pushed for it to be expanded. The group said that the rule would help level the playing field between banks and nonbanks and pushed for the agency to assert examination and supervision power over the companies regardless of the size.
Several witnesses testifying Wednesday said the rule is fatally flawed.
“The proposed rule does not identify an appropriate market, does not identify specific consumer harms in the market, and fails to properly conduct the required cost-benefit analysis,” said Carl Holshouser, executive vice president and corporate secretary at TechNet, a bipartisan network of technology CEOs and senior executives. “The CFPB should pause the rulemaking process, reconsider the proposed rule in its entirety, and conduct the analysis required by law.”
James Kim, head of the Fintech Industry Group at Troutman Pepper Hamilton Sanders, a law firm, agreed. He testified that the rule “fails to address how the CFPB’s examinations will add value beyond the examinations already being conducted by the federal prudential regulators and the states, while downplaying the significant additional costs resulting from the duplication.”
Christopher K. Odinet, a law professor at the University of Iowa, disagreed. He told the panel that, “the proposal moves in the right direction toward a system of supervision for these important consumer finance firms.”
He noted that consumer payment platforms have access to massive amounts of consumer data, and he agreed with America’s Credit Unions’ assertion that those companies should be regulated. “As an initial matter, CFPB supervision of nonbank digital consumer payment platforms would level the playing field between the way these platforms are regulated and the way banks—the undergirding firms of the U.S. payment system—are regulated,” he said.