CFPB's Chopra on late fees, Big Tech and a looming Supreme Court case

July 20, 2023 12:11 AM

Rohit Chopra, the director of the Consumer Financial Protection Bureau, has racked up huge penalties against big banks and has his sights set on large technology companies. Despite the looming threat of a Supreme Court case that could result in the CFPB's funding being deemed unconstitutional, Chopra is optimistic about changes ahead that he thinks will provide more protection to consumers.

The Consumer Financial Protection Bureau celebrates its 12th anniversary on Friday, prompting Chopra to discuss the agency's work including a controversial proposal to set credit card late fees at $8.

Regulation and compliance

CFPB's Chopra: 'It's very profitable to have customers be late'

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In a wide-ranging interview with American Banker, Chopra discussed why banks are getting additional supervisory scrutiny for assessing multiple fees when consumers overdraw their bank accounts. He also discusses the bureau's plans for open banking that would help consumers more easily switch banks, and how the CFPB plans to create a more level playing field in the fast-changing world of real-time payments.

Here are five of the most important insights from the interview, which you can read in full here:

Consumer Financial Protection Bureau director Rohit Chopra defended the agency's proposal to cut credit card late fees to $8, saying the proposal was backed up by the agency's supervisory data and information from credit card issuers.

Bloomberg News

Where did the $8 credit card late fee come from?

The CFPB issued a proposal in February to slash credit card late fees to just $8 — down from the current $30 for a first offense and $41 for subsequent violations. Card issuers have balked at the CFPB's plan and have pledged to sue the bureau for failing to convene a small business panel to assess the impact on small credit unions and card issuers.

Chopra has further antagonized the credit card industry by claiming that late fees are a profit center for banks. The bureau's plan to cut late fees was more aggressive than anticipated.

Before the CFPB was created, the Federal Reserve Board oversaw credit card issuers and carved out a so-called immunity provision, also known as a safe harbor, that Chopra said was set at too high a level initially. The safe harbor level was able to go up every year in line with inflation. Issuers that set their late fees at or below the safe harbor level had immunity from being prosecuted by regulators under the Credit Card Accountability Responsibility and Disclosure Act of 2009. But Chopra said the CARD Act, which prohibited hidden fees and required clear disclosures on annual percentage rates paid by consumers, was never intended to allow issuers to reap huge profits.

"We do see that in some instances a card issuer can build a business model where it's very profitable to have customers be late and that's the sentiment that the CARD Act really sought to get out of the market," Chopra said. "The statute actually does not require that regulators provide any immunity whatsoever."

Chopra didn't directly answer how the CFPB came up with the $8 late fee amount, which he said emphatically is not a cap.

"The analysis of where we came up with that proposed [$8] figure really is laid out in the proposed rulemaking," he said. "It would be inaccurate to say that we have proposed a hard cap. What we proposed is to actually retain the immunity provision."

Card issuers that keep late fees under the $8 provision do not have to disclose their costs and losses associated with late payments. Chopra also said that card issuers should have been lowering fees because costs have gone down due to technology.

"We have seen market players embrace technology in extraordinary ways," he said. "Technology has driven down costs across the industry. Part of what our proposal asks is: Does it really make sense to just assume that those costs go up by inflation?"

More scrutiny coming of non sufficient funds fees

The CFPB ordered Bank of America to repay roughly $100 million in restitution to consumers and a $60 million fine for charging multiple non sufficient funds fees when customers overdrafted their account and didn't have enough money to cover a payment.

Chopra blasted BofA for what he called the bank's practice of "double-dipping on fees." He said the bureau is looking closely at other banks' practices as well. The CFPB alleged in the BofA order that charging multiple non sufficient funds fees amounted to an "unfair" practice violating the federal prohibition on "unfair, deceptive or abusive acts and practices."

"We've focused our supervision on the entities that are most dependent on charging lots of these fees," he said. "We're going to continue to undertake examinations where we think there may be some consumer harm. We have issued a number of guidance documents to be crystal clear about where we see those problematic practices."

Last year, Chopra announced a crackdown on so-called "junk fees," warning banks that surprise overdraft charges and other fees that customers cannot reasonably anticipate or avoid likely violate the Consumer Financial Protection Act. Chopra implied that more actions could be taken.

Bankers are flummoxed and angry that the CFPB has lumped overdraft and non sufficient funds fees together as "junk fees," given that bank fees are highly regulated and the fees are seen as a deterrent to paying late. Such fees are not a significant source of complaints from consumers either. Late fees were mentioned just once in a 76-page report that the CFPB released in March detailing the issues around the 1.3 million consumer complaints the agency received last year.

Yet Chopra also heaped praise on banks for making dramatic cuts to fees including slashing overdraft fees, eliminating non sufficient funds fees and reimbursing customers who ask for a fee to be removed.

"Where institutions have made some changes or acknowledged or self-reported issues, it hasn't always led to enforcement actions," he said. "I'm grateful that many in the industry are really working very constructively with this."

CFPB's open banking proposal is in the works

The CFPB is in the midst of writing a rule that is expected to be proposed in October that will lay the groundwork for the move to open banking, creating rules about how financial institutions make data available to consumers on request.

Banks are concerned that the data access rule, known for section 1033 in the Dodd-Frank Act, could result in consumers fleeing banks and moving instead to nonbanks that offer financial products and services. A key component of the rule is allowing consumers to easily switch providers and to notify a bank that they want their bank account transaction data shared with a third-party.

"I think we're going to be able to put out a framework that ultimately will put a lot more control in the hands of consumers," Chopra said. "It will inch it closer to more seamless switching, especially when it comes to getting a better deal on a deposit account, credit card, auto loan or mortgage."

Chopra touted the concept that the 1033 rule would "lower barriers to entry," which he thinks will be a boon for consumers and businesses alike. But banks are concerned that the rule could be one-sided and anti-competitive given that banks hold data that consumers want access to but there are no specific requirements yet that would require nonbank financial firms such as mortgage lenders or buy now/pay later companies to provide the same data to banks if a consumer asked for data to flow the other way.

"We want to ensure that no single company has the ability to take a lot of control of the ecosystem," he said of the rulemaking. "We don't want there to be choke points or middlemen who create a system that makes it harder to get in the game."

Consumers have little or no understanding of the way bank account transaction data is accessed by scraping the information with a consumer's login credentials, data experts say. Millions of consumers have already provided third-party firms access to their bank account transaction data that banks and credit unions say puts them in a bind. Although the Gramm-Leach-Bliley Act allows consumers to opt out of having their data shared, experts say consumers rarely read the small print buried in agreements with fintechs and data aggregators. The CFPB has suggested that it could set a specific date beyond which screen-scraping would be banned.

Banks also want clear guidelines around which entity is responsible if a consumer suffers any loss or harm when they ask for their bank data to be shared with another company. Liability should travel with the data, many argue, to ensure that third-party technology companies are responsible for any crime, hack or other loss to consumers.

"We want an ecosystem where people can securely make payments and ultimately, getting at a competitive payment system and a safe, real time payment system is just so critical for open banking writ large," he said. "You'll be hearing more from the CFPB about some of the issues when it comes to Big Tech in payments and in open banking in general."

More action coming on Big Tech

Chopra has already distinguished himself as a federal regulator with a laser-focus on Big Tech. The first action he took in late 2021 after taking the reins of the CFPB, was to order Amazon, Apple, Alphabet's Google, Meta's Facebook, PayPal and Square to turn over details about their payments businesses.

Big Tech firms, Chopra has warned, could use data on individual product purchases to shut out banks from competing. Last month, the CFPB announced plans to issue a larger participant rule that would allow the bureau to conduct oversight of Big Tech companies.

"We hear time and time again from mortgage market players, auto lenders and others about anti-competitive practices," among Big Tech firms, he said.

Under the Dodd-Frank Act, the CFPB can designate so-called "larger participants," in a specific market, allowing the agency to conduct supervisory exams and test for compliance with federal consumer protection laws. The rule would set specific parameters defining which entities the agency will have authority over.

"Right now we do observe that big companies are expanding their reach into consumer financial services, and they've long played a big role in harvesting consumer data," Chopra said. "For example, many banks cannot offer their own payment app that utilizes a mobile device's Near Field Communication feature. Many people know that as the Tap feature."

Near Field Communication has existed for years and is the technology that enables most smart phones to communicate with external terminals. The Tap to Pay enables smartphones to accept and make payments, which is a big step because it allows small businesses to use their own smartphones to accept payments without adding hardware like Square's original product.

While the Federal Trade Commission's mandate is more focused on consumer data and privacy issues unrelated specifically to banking, Chopra said the CFPB is "looking closely" at some of the FTC's proposed rules on commercial surveillance that may ultimately be enforceable by the bureau as well.

Chopra routinely criticized the business practices of Facebook, Amazon and others when he served in the Trump administration as a Democratic member of the FTC. The CFPB has collected payments-related information from the largest tech companies, which also have come under scrutiny and public pressure in Congress, but with little regulation to show for it. The technology industry has pushed back heavily against anti-trust regulations by the FTC and recently has won in court.

"You'll be hearing more from the CFPB about some of the issues when it comes to Big Tech in payments," Chopra said.

CFPB is "no stranger" to the Supreme Court

The biggest threat to the CFPB comes from the Supreme Court, which agreed in February to hear a case challenging whether the bureau's funding through the Federal Reserve System is constitutional.

The high court is expected to hear oral arguments in the case in October and may rule by July, just before the presidential election. The CFPB had petitioned the court in November to review a decision by the U.S. Court of Appeals for the Fifth Circuit. A three-judge panel of the Fifth Circuit found that the CFPB's funding through the Federal Reserve Board — and not through annual congressional appropriations — violates the Constitution's Appropriations Clause. The Fifth Circuit panel had invalidated part of the CFPB's 2017 payday lending rule by claiming the bureau was unconstitutionally funded when the rule was issued.

"The CFPB is certainly no stranger to these types of challenges," Chopra said. "My top priority is to really think hard about all of the uncertainty that could be created by this. We hear across the board from the mortgage market players and others, what will it mean and how chaotic will it be if many of the rules that the CFPB has put in place, sometimes over a decade ago, does that create chaos?"

The Supreme Court already ruled in 2020 that the CFPB's single-director structure was unconstitutional, but stopped short of disbanding the agency altogether or invalidating the Dodd-Frank Act that created it. Chief Justice John Roberts, in a 5-4 ruling, found that the agency's structure vested too much power in the hands of one person, and that the president has broad authority to appoint and remove agency heads. That ruling gave the sitting president the ability to fire a CFPB director without cause.

The latest challenge to the CFPB's structure could reverberate throughout the financial regulatory landscape. Chopra honed in on the similarity between the CFPB's funding and that of the Federal Reserve Board, which are both funded by assessments on the Federal Reserve Banks.

"I think there's also a very real concern about what does this really mean for not just the CFPB but the entire Federal Reserve System?" he said. "Both the Federal Reserve Board and the CFPB get its funding from the same source, the Federal Reserve Banks. But also there are many other agencies in the bank regulatory system. In fact, every single one of them funds its operations through fees or assessments. We need to make sure that uncertainty does not create chaos."