{"id":11101,"date":"2024-01-04T21:21:31","date_gmt":"2024-01-04T21:21:31","guid":{"rendered":"https:\/\/www.americanconference.com\/fcpa-dc\/?page_id=11101"},"modified":"2024-01-23T22:07:32","modified_gmt":"2024-01-23T22:07:32","slug":"what-the-cfpbs-larger-participants-rule-means-for-fintech-firms","status":"publish","type":"page","link":"https:\/\/www.americanconference.com\/fcpa-dc\/what-the-cfpbs-larger-participants-rule-means-for-fintech-firms\/","title":{"rendered":"What the CFPB\u2019s \u2018Larger Participants\u2019 Rule Means for FinTech Firms"},"content":{"rendered":"
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By Jaclyn Jaeger\r\n<\/p>\r\n

Thursday, January 4, 2024<\/p>\r\n <\/div>\r\n\r\n

Certain financial technology (FinTech) firms will soon be subject to the Consumer Financial Protection Bureau\u2019s (CFPB) supervisory authority under the Consumer Financial Protection Act, and should be prepared accordingly.<\/p>\r\n \r\n

The CFPB\u2019s proposed rule<\/a>, published Nov. 17 in the Federal Register, would subject \u201clarger participant\u201d nonbank firms that offer \u2018\u2018general-use digital consumer payment applications,\u201d such as digital wallets and payment apps, to the same rules as large banks, credit unions, and other financial institutions that are already supervised by the CFPB.<\/p>\r\n\r\n

Regarding the need for the rule, the CFPB expressed concern that Big Tech and other nonbank firms operating in consumer finance markets blur the lines that traditionally separated banking and payments from commercial activities, putting consumers at risk. The CFPB noted in the proposed rule that it has \u201chas not previously had, inside many of these firms, examiners carefully scrutinizing their activities to ensure they are following the law and monitoring their executives.\u201d<\/p>\r\n\r\n

In a prepared statement, CFPB Director Rohit Chopra said the rule would ensure that \u201clarge technology firms and other nonbank payment companies are subject to appropriate oversight.\u201d<\/p>\r\n\r\n\"\"<\/a> \r\n \r\n

Scope of proposed rule<\/h5>\r\n\r\n

The rule proposes to apply to nonbank firms that handle at least five million \u201ccovered consumer payment\u201d transactions per calendar year, aggregated among affiliated companies. The proposed rule defines \u2018\u2018consumer payment transaction\u2019\u2019 as the transfer of funds in the form of digital assets \u201cby or on behalf of a consumer physically located in a state to another person primarily for personal, family, or household purposes.\u201d<\/p>\r\n\r\n

According to the CFPB, this definition would be satisfied when a consumer uses a general-use digital consumer payment application on a personal computing device or at a point of sale that is physically located in a state, within the jurisdiction of the United States. \u201cBy contrast, with this limitation, if a consumer is physically located outside of any state at the time of engaging in a payment transaction, then the payment transaction would not be a consumer payment transaction covered by the proposed rule,\u201d the CFPB said.<\/p>\r\n\r\n

The CFPB said it believes that the five million threshold is reasonable, in part, because it would enable the CFPB to cover in its nonbank supervision program both the very largest providers of general-use digital consumer payment applications, as well as a range of other providers of general-use digital consumer payment applications that play an important role in the marketplace.<\/p>\r\n \r\n

The CFPB estimates that the proposed threshold would bring within the CFPB\u2019s supervisory authority approximately 17 entities that constitute \u201clarger participants.\u201d The CFPB further estimated that these 17 entities collectively facilitated about 12.8 billion transactions in 2021, with a total dollar value of approximately $1.7 trillion, and are responsible for approximately 88 percent of known transactions in the nonbank market for general-use digital consumer payment applications.<\/p>\r\n\r\n

Some legal experts believe the CFPB\u2019s approximation of 17 entities that meet the proposed threshold is likely a significant underestimation, because of how it defines some of the terms in the proposed rule. For example, under proposed rule a \u201cqualified payment\u201d under the definition of \u201cfunds transfer functionality\u201d means \u201creceiving funds for the purpose of transmitting them,\u201d or \u201caccepting and transmitting payment instructions.\u201d<\/p>\r\n \r\n

Similarly, the proposed definition for \u201cwallet functionality\u201d is defined as a product or service that stores account or payment credentials, including in encrypted or tokenized form; and transmits, routes, or otherwise processes such stored account or payment credentials to facilitate a consumer payment transaction.<\/p> \r\n\r\n

In practical terms, this means \u201cyou don\u2019t even have to receive or transmit money if you are just merely directing traffic, which a lot of FinTechs do,\u201d said Keith Barnett, a partner at law firm Troutman Pepper, speaking on a podcast discussing the proposed rule. Moreover, for small to mid-sized FinTechs, the five million transaction threshold will be \u201cvery easy to hit,\u201d he added. \u201cThat is something that businesses need to look out for.\u201d<\/p>\r\n\r\n

Broad supervisory authority<\/h5>\r\n\r\n

The broader significance of the CFPB\u2019s proposed rule cannot be overstated, \u201cbecause being subject to CFPB supervision is an enormous sea change for an industry,\u201d said Chris Willis, co-leader of Troutman Pepper\u2019s Consumer Financial Services Regulatory Practice Group, who also spoke on the podcast.<\/p>\r\n\r\n

As the CFPB explained in the proposed rule, generally CFPB examiners will \u201ccontact the entity for an initial conference with management and often request records and other information. CFPB examiners ordinarily also review the components of the supervised entity\u2019s compliance management system.\u201d <\/p>\r\n\r\n

Based on these discussions and a preliminary review of the information received, examiners will then \u201cdetermine the scope of an on-site or remote examination and then coordinate with the entity to initiate this portion of the examination,\u201d the proposed rule states.<\/p>\r\n \r\n

Whether on-site or working remotely, examiners spend some time on the following:<\/p>\r\n\r\n